Classifying employees as either exempt or nonexempt presents a common dilemma for employers, especially with the rise in wage and hour claims and the potentially onerous penalties for misclassifying an employee.
Determining whether an employee is exempt vs nonexempt is seemingly fairly straightforward. Under the Fair Labor Standards Act (FLSA), in order for an employee to be exempt from minimum wage and overtime requirements, the employee must satisfy a two-part test.
First, the employee must meet the salary basis test. This means that the employee must be paid on a salary basis and receive a minimum salary of $455 per week. Exempt employees must generally be paid a predetermined amount each pay period, regardless of any variation in the quality or quantity of their work. With limited exceptions, exempt employees must receive their full salary for any week in which they perform any work, without regard to the number of days or hours worked. However, the employees need not be paid for any workweek in which they perform no work.
The next part of the exemption test is the duties test. This is a little more complicated as there are several categories of exempt employees: administrative; executive, professional; outside sales; and computer specialists (who may be paid hourly if the rate is at least $27.63 per hour). Each category has its own set of required duties.
Once the employer determines that an employee comes within the duties of a particular exemption and meets the salary requirements, the employee should be considered exempt. Simple, right? Not quite. Problems can arise in a number of situations. For example, an employer may want to pay overtime to an otherwise exempt employee who has put in long hours on a particular project. However, when the overtime is based on the number of hours worked, the employee is no longer being paid on a salary basis and the exempt status is jeopardized.
Not only can paying salary plus overtime to exempt employees be problematic, impermissibly deducting from an exempt employee's pay can also result in the loss of exempt status. The Department of Labor has stringent (and sometimes confusing) rules regarding deductions from exempt employees' salaries.
Another issue is outdated job descriptions or classifications. In the exempt vs. non-exempt analysis, it's what employees actually do that counts, not how their jobs are labeled. So, if an employer has a large number of employees in one job category and the duties for that job have changed over time, the employees may be misclassified. Employees previously classified as exempt may, in fact, be nonexempt leaving the employer liable for considerable overtime pay, not to mention other penalties under the FLSA.
To complicate matters further, state law may affect the exempt vs nonexempt analysis with additional rules and regulations.
More Resources for Determining FLSA Exemption Status