Employee taxonomy – exempt or non-exempt

July 31st, 2019 by Meghan Hill, Jill Kirila and Shennan Harris at Squire Patton Boggs


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Determining white-collar exemptions

To be entitled to the white-collar exemptions, an employer must be able to demonstrate that an employee meets the specific terms of one of the white-collar exemptions.

Salary requirements

To qualify for the white-collar exemptions under the FLSA, an employer generally must demonstrate the employee is paid on a salary basis and not on an hourly basis. Salaried employees are not automatically exempt. Payment on a salary basis is necessary for exemption as an executive, professional, administrative or highly compensated employee, but payment by salary is not by itself sufficient to qualify for any exemption.  Note: The salary requirements (including salary docking requirements) do not apply to outside sales employees, lawyers, physicians or teachers. Further, qualifying computer employees may be paid on an hourly basis if the hourly rate exceeds $27.63 per hour.

Definition of “salary basis”

Employees paid on a salary basis regularly receive a predetermined amount for their compensation in each pay period. This predetermined amount must not vary based upon hours worked. Subject to limited exceptions, exempt employees must receive their full salary for any week in which they perform any work regardless of the number of days or hours the employees actually worked. 

For instance, if an employee worked on Monday and took a half day off for personal reasons on Tuesday, he or she must receive his or her full salary for the entire week.  Additionally, if the company does not have enough work for the employee for a workweek, the employee must still be paid his or her full salary. If the employee performs no work at all during a week, however, he or she need not be paid for the week.

Prohibited docking

Certain general docking from an employee’s salary will negate the exemption; this means the employee will be eligible for overtime and must be paid the minimum hourly wage.  These prohibited dockings include:

  • deductions for absences of less than a whole day
  • deductions for absences caused by the employer, such as when work is not available
  • deductions for jury duty, attendance as a witness or temporary military leave (except to the extent the employer offsets fees from these activities against the salary). For instance, if the court pays jurors $50 per day for jury service, the employer may deduct this amount from the employee’s salary.

Permitted docking

A few types of reductions from an employee’s salary are permitted without affecting the exemption.

  • Exempt employees need not be paid for any week in which they perform no work, regardless of the reason for the absence.
  • Absences in the initial or final week of employment can be docked. Because an employer need only pay for the time an exempt employee actually worked during the first and last week of employment, an employer may deduct for full or partial days of absence in those weeks.
  • An employer may deduct a proportionate amount from the pay of an exempt employee who takes intermittent or reduced schedule leave under the Family and Medical Leave Act (FMLA). The deduction may be made for full or partial days missed. Note: The deduction can be made in the smallest unit of time used for regular payroll purposes.

Docking is also permitted for other absences of less than a week caused by the employee, including:

  • full-day absences due to personal reasons other than sickness or accident
  • full-day absences due to sickness or disability (when the employer has an established policy or plan covering the same) for one or more full days
  • full-day unpaid disciplinary suspensions Note: An employer may suspend an exempt employee without pay for one or more full days as discipline for an infraction of workplace conduct rules, if the suspension is in good faith, a written policy provides for such suspensions and the workplace conduct rule involves serious misconduct (such as harassment, workplace violence, drug or alcohol violations or violations of state or federal laws), but not for performance or attendance problems.
  • reductions as penalties for violations of safety rules of major significance. Note: An employer may deduct any amount from an exempt employee’s pay (including an amount that would be equivalent to a partial day of pay) as a penalty imposed in good faith for a violation of a safety rule of major significance (defined as a rule regarding the prevention of serious danger in the workplace or to other employees). Examples are rules prohibiting smoking in explosives plants, oil refineries and coalmines.

The DOL takes the position that requiring an employee to use paid leave time for absences of less than a day does not terminate the employee’s exempt status because the salary actually received remains unreturned. Several courts, although not all, have also adopted this position.

Payroll deductions for items other than taxes or benefits can also be improper salary docking and jeopardize an employee’s exemption. Employers should consult with an attorney before making any payroll deductions for exempt employees for items such as credit card charges, lost equipment, etc.

“Window of correction”

DOL regulations provide a window of correction for an employer who incorrectly or inadvertently docks pay from salaried employees. The employer does not lose the white‑collar exemption for its employees if a timely correction is made by following through with both of the following: 

  • repaying the employees
  • promising to comply with the FLSA in the future.

Employees should be repaid as soon as possible after the improper pay deduction is discovered. Employers are not allowed to take advantage of the window of correction if they deducted the pay because of a lack of work. Deductions made when no work is available result in the employees’ losing salaried status.

The FLSA regulations adopt the Supreme Court’s ruling that exempt employees must be subject to impermissible docks or partial week suspensions “as a practical matter” before their exempt status is jeopardized. This appears to mean that the mere possibility of an impermissible pay reduction is not enough. The noncompliant policy must clearly be applied to exempt employees, or several actual improper deductions or suspensions must have been imposed against exempt employees for exempt status to be jeopardized.

Employers may take advantage of the window of correction even if the impermissible deductions were made under a settled company policy. The employer should repay the employees and change its policy so that the pay of salaried exempt employees is no longer subject to deduction. 

The DOL provides the following sample salary-basis policy on its website at: 

  • www.dol.gov/whd/regs/compliance/fairpay/modelPolicy_PF.htm

Consequences of improper docking

An employee whose salaried status is negated through prohibited deductions can sue to recover back wages and overtime for at least a two-year period and probably a three-year period. See Chapter 14, Enforcement. Prohibited deductions may damage the salaried status of all exempt employees “subject to” the deduction, not just those employees whose pay was improperly docked.

Employees are considered subject to deductions when they are covered by a policy that permits disciplinary or other deductions in pay as a practical matter. In other words, the employee is subject to deductions if there is an actual practice of making such deductions or an employment policy that creates a significant likelihood of such deductions.

Example

An employment manual is given to all company employees. The manual contains a provision subjecting employees to a three‑day suspension if they make too many production errors. This policy would not create a significant likelihood that a plant manager’s pay would be docked where the manager is not involved in the production process. The plant manager is not “subject to” deductions and retains his exempt status.

On the other hand, if a policy provides for a three‑day suspension for misuse of a company credit card and the manager has such a card, his or her pay would be considered “subject to” deduction. This policy creates a significant likelihood the plant manager’s pay would be docked for a disciplinary violation. The plant manager is “subject to” deductions and loses his exempt status.

Fee basis as an exception to the salary-basis requirement 

One exception to the salary-basis requirement of the white-collar exemption is for administrative and professional employees paid on a fee basis. Employees paid on a fee basis receive a fixed sum for a given task regardless of the time required to complete it. There are two conditions that must both be met:

  1. Payments made on a fee basis must be based upon completion of a task rather than on the number of hours or days worked.
  2. Consider the time worked on the job and determine whether the fee payment is at a rate that would amount to at least $455 if the employee worked a 40-hour workweek. For instance, a musician receiving $100 for a four-hour program would clearly meet this requirement because the musician would earn $1,000 if 40 hours were worked.

Permitted additions to salary

Paying certain “extras” on top of a minimum guaranteed salary does not jeopardize an employee’s exempt status. An example of a permitted extra on top of salary would be payment to a branch manager of a percentage of branch sales in addition to his or her fixed salary.

A salaried employee also may be paid on a daily or shift basis as long as the employee receives a minimum guaranteed salary of at least $455 for each week in which the employee performs any work. The guaranteed salary however may not be so far below the total amount the employee is paid so that the employee appears nonexempt and the employer appears to be avoiding paying overtime under the FLSA.

The more the extra compensation looks like payment based upon an hourly rate, the less likely courts are to find the employee exempt. Courts are likely to conclude employees are not paid on a salary basis if the “salary” portion is low and the “overtime” comprises a significant portion of their compensation.

Example 1

An employer pays the store manager a salary of $950 per week but pays the manager $30-per-hour overtime for all hours more than 40. The employer knows the manager regularly works at least 50 hours per week, and so the supervisor regularly earns at least $300 per week in overtime. Because a significant portion of the manager’s total pay each week is comprised of the overtime, a court could find the employee is not paid on a salary basis.

Example 2

An employer pays the store manager $950 per week salary, but also pays the manager $20-per-hour overtime for all hours more than 50. The manager only has to work more than 50 hours during busy periods such as holidays, and so the overtime is not a significant portion of his compensation.

Exemption classifications

The short tests that determine an employee’s status under the white-collar exemptions, applicable to employees paid a salary of at least $455 per week, are broadly outlined below. There are many cases and administrative rulings that apply to these deceptively simple-looking tests. Employers should consult with knowledgeable legal counsel when there is any question about an employee’s exempt status.

Executive 

Primary duty

An employee’s primary duty must consist of managing the enterprise in which he or she is employed or managing a customarily recognized department or subdivision of the enterprise (the general rule for determining a “primary duty” is a duty occupying at least 50% of an employee’s time, but numerous facts and circumstances can enter into this determination).

“Managing” includes such duties as:

  • directing the work of other employees
  • interviewing, selecting, training, evaluating, disciplining and firing employees
  • handling employee complaints and grievances planning and apportioning work
  • determining work techniques
  • determining appropriate levels of supplies and merchandise.

Direction of work

The employee customarily and regularly directs the work of two or more employees. (“Two or more employees” means two or more full‑time employees or their equivalent. For instance, an employee could meet this requirement by supervising one full‑time employee and two part‑time employees, one who works mornings and one who works afternoons.)

Minimum salary

The employee is paid a salary of at least $455 per week. 

Professional 

The professional exemption, which includes both “learned professionals” and “creative professionals,” applies to an employee who is paid $455 per week on a “salary basis” or a “fee basis” who meets the following criteria. Note: The duties, not the title, determine whether an employee is exempt.

Learned professionals

Primary duty

Perform work:

  • requiring advanced knowledge in a field of science or learning
  • customarily acquired by a prolonged course of specialized intellectual instruction (Note: usually is four years or more)

Discretion

Consistently exercises discretion and independent judgment in performance, which implies that the employee has authority to make an independent choice, free from immediate direction or supervision. 

  • Intellectual

Performs work that is predominantly intellectual and varied in character and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time.

  • Minimum salary

The employee is paid a salary of at least $455 per week.  Examples of learned professionals:

  • registered or certified medical technologists
  • registered nurses
  • physician assistants
  • certified public accountants
  • culinary school graduate chefs
  • certified athletic trainers
  • funeral directors or embalmers

Note: Teachers, lawyers and physicians are exempted from the salary requirement and have their own duty requirements for this exemption.

Creative professionals

Primary duty

Performs work requiring invention, imagination originality or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical or physical work. Creative professionals perform work in creative fields including music, writing, acting and the graphic arts.

Administrative 

Primary duty

The employee’s primary duty consists of the performance of office or non‑manual work directly related to policies or general business operations of the employer or the employer’s customers.

Exercises discretion

The employee customarily and regularly exercises discretion and independent judgment with respect to matters of significance.

Minimum salary

The employee is paid a salary of at least $455 per week. 

Work that qualifies for the administrative exemption must be of substantial importance to the management or operation of the business and may not be of a routine or clerical nature. For instance, bank tellers, receiving and shipping clerks, bookkeepers and secretaries are examples of employees not exempt under the administrative exemption. Staff employees, who act as advisory specialists to management, often fall under the administrative exemption. Typical examples of these employees include:

  • certain financial services employees
  • tax experts
  • insurance experts
  • sales research experts
  • investment consultants.

Staff employees in charge of so‑called functional departments also may be exempt. These employees may include:

  • credit managers
  • purchasing agents
  • buyers
  • personnel directors
  • labor relations directors.

Administrative assistants/executive secretaries

In large businesses, employees exempt as administrators may assist an executive but do not necessarily have executive authority themselves. For instance, an executive secretary or assistant to the general manager could be exempt where the executive’s duties are such that some must be delegated to the assistant.

Computer employees 

Computer systems analysts, computer programmers, software engineers and other similarly skilled workers paid a salary of at least $455 per week or hourly at a rate of at least $27.63 per hour are exempt as “computer professionals” if their primary duty meets any one of the following criteria:

  • application of systems analysis techniques and procedures including consulting with users to determine hardware and software specifications
  • design, development, documentation, testing or modifying computer systems or programs based on user or design specifications or machine operating systems
  • a combination of such duties requiring the same level of skills.

Employees whose primary duty is performing lower‑skilled computer functions such as “help-desk” troubleshooting or installing software are generally nonexempt employees.

Outside salespersons 

Salespersons are exempt if they meet both of the following criteria:

  1. The employee’s primary duty is making sales (which includes any sale, exchange, contract to sell, consignment for sales, shipment for sale or other disposition; the transfer of title to tangible property and in certain cases, of tangible and valuable evidences of intangible property) or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer. 
  2. The employee must be customarily and regularly engaged away from the employer’s place or places of business.  (Note: for home-based salespersons, away from there.)

There is no minimum salary requirement applicable to exempt outside salespersons.

Work incidental to sales such as writing sales reports, planning an itinerary, attendance at sales conferences and occasional deliveries and collections is treated as exempt work for purposes of determining whether this exemption applies. Inside sales and clerical warehouse activities are not treated as exempt work.

Highly compensated employee 

Under the exemption for highly compensated employees, an employee with total annual compensation of at least $100,000 is considered exempt if he or she meets all of the following criteria:

  • The employee is paid on a salary or fee basis at a rate of at least $455 per week.
  • The employee’s total annual compensation is at least $100,000. 
  • The employee’s primary duty includes performing office or non‑manual work.
  • The employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.

Combination 

Work exempt under one exemption may be “tacked” to work exempt under another exemption when determining if an employee’s primary duty is to perform exempt work. For example, an employee whose primary duty involves a combination of exempt administrative and exempt executive work may qualify for exemption. Employees who meet the primary duty test as a result of “tacking” or combining exempt work must also meet the other requirements of the exemption (such as the salary basis test).

Example

An outside salesperson who also is in charge of the company’s outside sales function is exempt where the salesperson spends 45% of time making sales calls, 45% of his or her time supervising and directing the sales activities of others and 10% of his or her time performing miscellaneous clerical work such as verifying shipments.

White-collar exemptions chart

Exemption

Primary duty

 

Other duties

 

Compensation

Executive

Employee’s primary duty (generally at least 50%) consists of managing the enterprise or managing a department or subdivision of the enterprise.

 

&

Employee customarily and regularly directs work of two or more employees.

&

Employee paid a salary of at least $455 per week.

Professional

Employee’s primary duty (generally at least 50%) consists of either:

    • ¥ work of advanced type in field of science or learning;
    • ¥ work that is original and creative in a recognized artistic field; or
    • ¥ teaching in an educational institution.
    • ¥

&

Employee customarily exercises discretion and independent judgment (except artistic professionals).

&

Employee paid a salary of at least $455 per week (except lawyers, physicians and teachers).

Administrative

Employee’s primary duty (generally at least 50%) consists of performing office work related to the employer’s policies or business operations.

&

Employee customarily and regularly exercises discretion independent judgment with respect to matters of significance.

&

Employee paid a salary of at least $455 per week.

Computer employees

Employee’s primary duty (generally at least 50%) is application of systems analysis techniques and procedures including consulting with users to determine hardware and software specifications.

 

or

Employee’s primary duty (generally at least 50%) is design, development, documentation, testing or modifying computer systems or programs based on user or design specifications or machine operating systems or a combination of such duties requiring the same level of skills.

&

Employee paid a salary of at least $455 per week 

or 

hourly rate of at least $27.63 per hour.

Outside salespersons

Employee’s primary duty (generally at least 50%) is making sales (which includes any sale, exchange, contract to sell, consignment for sales, shipment for sale or other disposition; the transfer of title to tangible property and in certain cases, of tangible and valuable evidences of intangible property) or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer.

&

Employee must be customarily and regularly engaged away from the employer’s place or places of business. 

&

No salary requirement for outside salespersons.

Highly compensated employees

Employee’s primary duty includes performing office or non‑manual work.

&

Employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.

&

Employee’s total annual compensation is at least $100,000 and the employee is  paid a salary of at least $455 per week.

 

Questions and answers

Q. Does an employer have to pay overtime to salaried (nonexempt) employees?

A. Yes. Payment of a salary does not relieve an employer of overtime obligations unless the salaried employee’s duties qualify for one of the white-collar exemptions. Nonexempt employees are entitled to overtime compensation unless the employee is exempt from only the overtime provisions of the FLSA. See Chapter 9, Overtime compensation – nonexempt employees.

Q. May an employer choose to pay overtime to exempt employees?

A. While this practice does not itself violate the FLSA, it may increase the risk that the employees would be classified as nonexempt because their compensation is directly linked to hours worked.

Q. May exempt employees be docked?

A. In most cases, an employee’s salaried status, and thus the employee’s exemption, is lost if an employer docks the salary of an exempt employee. The only exceptions are deductions for an entire week when the employee has performed no work that week, deductions for a proportionate amount for intermittent or reduced schedule FMLA leave, full-day absences for personal reasons, deductions for absences of more than a day under the employer’s sickness or disability leave policy and deductions for violations of major safety rules and full-day deductions for violations pursuant to written work policy.

Q. So long as a maintenance foreman supervises even one employee and is paid on a salary basis, is he exempt as an executive or administrative for purposes of FLSA?

A. Merely because an employee supervises one or more employees does not necessarily make the employee exempt from overtime requirements. Likewise, the fact that an employee who is paid a salary, rather than hourly wages, will not automatically qualify him or her as exempt. To be exempt, the employee must meet all the tests of one of the exemptions.

Q. Is a four-year college degree always necessary for an employee to be considered an exempt professional?

A. No. Generally, employees who are exempt as “learned professionals” are engaged in professions that require at least a four‑year college degree, such as law, medicine, teaching, accounting or the sciences. These employees are exempt because they gained advanced knowledge from a prolonged course of specialized study. However, registered nurses and registered medical technologists are covered under the professional exemption, although they may not have four‑year college degrees. Those employees exempt as “artistic” professionals need not have a college degree.

Q. Is a salaried foreman who is excluded from a bargaining unit as a supervisor automatically exempt from overtime as an executive employee?

A. Whether an employee is a supervisor for purposes of collective bargaining does not automatically affect the determination of exempt status. The FLSA specifically requires that a supervisor’s primary duty is management in order to meet the test for minimum wage and overtime exemptions.

Q. If an office manager is paid on a salaried basis and spends most of her time directing bookkeeping and other clerical employees, hiring employees and managing the business, is she entitled to overtime compensation when the rest of her work time is spent doing the same thing as those hourly employees in the office whom she supervises?

A. No. The office manager is not entitled to overtime so long as he or she earns a salary of at least $455 per week. The executive exemption applies even though the manager performs clerical duties because his or her primary duty is performing exempt management duties.

Q. A salesperson works one day a week in the office and four days on the road selling his employer’s product. Must he be paid overtime?

A. No. An outside salesperson qualifies for the exemption and need not be paid overtime so long as he is customarily and regularly engaged away from the employer’s place or places of business. It is clear all his time spent “on the road” is away from the employer’s place of business and is a regular activity. 

Q. Could an exempt employee wishing to earn extra money volunteer for a project that is nonexempt and pays the minimum wage?

A. It depends. A close examination of the specific facts would be required before deciding if this practice was permissible or potentially destructive of the employee’s exempt status. In general, the “volunteer” work should be completely unrelated to the employee’s regular work. For example, it might be permissible for an accountant to do janitorial work at night earning minimum wage. Conversely, the accountant’s professional exemption could be lost if he volunteered to do billing or data entry for an entire workweek.

Q. If an exempt managerial employee needs to take unpaid intermittent leave under the Family and Medical Leave Act (FMLA), may the employee deduct hourly amounts from his or her salary to reflect the unpaid leave time? Or would this constitute an impermissible deduction for absences of less than a day which would destroy the employee’s exemption?

A. Under special regulations, an employer may make deductions from an exempt employee’s salary for any hours taken as intermittent or reduced FMLA leave without affecting the exempt status of the employee. The employer may deduct down to the hour if that is a unit of time used for payroll purposes.

Q. In order to save money, can a company make an exempt employee take an unpaid leave? To help the employee, can the company spread this out over one day off every pay period?

A. Yes and no. You may force an exempt employee to take an unpaid leave of absence, but you must do so for an entire workweek and not a partial workweek (unless paid time off is available and is required to cover the forced absence).

 

This blog is an excerpt from our Wages and Hours - An Employer's Guide which was authored by Meghan HillJill Kirila and Shennan Harris at Squire Patton Boggs. You can find their Employment Law Worldview on their website.





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