What is an “Exempt” Employee?

by | Apr 2, 2013 | Summer Murshid, Wage and Hour Law

Is your employer required to pay you overtime when you work more than 40 hours a week? Or is your job exempt from overtime due to the nature of your work? What is an “exempt” employee anyways?

One of the most common issues in employment law arises from incorrectly determining that an employee is not entitled to overtime pay. This is due to common misclassification. Many employees wonder if employers pay them unfairly, but they find the laws surrounding overtime confusing and remain unaware for years. Examining the law can help you determine whether your job classification for overtime exemption is correct.

THE FAIR LABOR STANDARDS ACT (FLSA)

The Fair Labor Standards Act (FLSA) specifies what employers must do regarding compensation requirements. Many people consider this law the “federal minimum wage and overtime law,” but the FLSA goes much further. Employers must comply with many provisions of the FLSA when establishing and implementing pay practices and policies for employees.

One of the key questions determining whether an employee is entitled to overtime wages is whether the employee is considered “exempt”. So what is an “exempt” employee? Under the FLSA, an exempt employee is one who meets two requirements:

(1) Paid a minimum salary set by the FLSA; and

(2) Performs work that is considered a function of one of the FLSA exempt job categories or industries.

When employees properly classify an employee as exempt, they do not have to pay overtime wages.

THE MINIMUM SALARY REQUIREMENT

As an exempt employee, you receive a fixed salary no matter how many hours you work. In other words, your salary remains the same whether you work 50 or 32 hours a week.

The FLSA sets a minimum salary for exempt employees. To properly classify employees as exempt, most job categories require employers to pay a minimum weekly salary of $684. Exempt computer employees must be paid either $684 per week or at least $17.10 per hour in a 40-hour work week.

THE JOB CATEGORY REQUIREMENT

The FLSA uses two methods of classification to determine whether or not an employee is considered exempt. Their first method requires an employee’s job to fit in one of the following categories:

  • Executive Employees
  • Administrative Employees
  • Professional Employees
  • Computer Employees
  • Outside Sales Employees

The FLSA also establishes other statutory exemptions for specific types of workers based on their industry or specific duties. For example, employees who drive trucks over 10,000 pounds are exempt from overtime wages. This exemption also applies to railroad employees, air transportation employees, and taxicab drivers. Local delivery drivers and domestic servants who live with their clients are also exempt. Additionally, motion picture theater employees and those working for amusement parks are excluded from overtime pay. Agricultural worker wages are also heavily regulated by the FLSA. For purposes of this article, we will examine the Executive, Administrative, Professional, Computer, and Outside Sales Exemptions.

FIVE PRIMARY EXEMPTION CATEGORIES

The Executive Exemption

Under the FLSA, you are exempt under the Executive exemption if your job duties meet the following criteria:

1. Your primary duty is managing the company for which you work or a department or subdivision of that company.

If management is your primary duty, you spend the majority of your work hours performing management activities, such as…

  • interviewing, selecting and training employees
  • setting and adjusting employee rates of pay and hours of work
  • directing employees work
  • appraising performance for purposes of recommending promotions
  • handling employee complaints
  • imposing employee discipline
  • apportioning work among employees
  • providing for employee safety
  • budget planning
  • monitoring legal compliance

This list is not exhaustive, and employees need not exercise all of these functions in order to be considered exempt. You may still be considered exempt under this section if you perform some non-exempt duties. However, this is only as long as your exempt duties are relatively more important and you spend more time on those duties than on the non-exempt work.

2. You regularly direct the work of two or more employees.

This requirement means you instruct two or more full time employees in their work on a regular basis.

3. You have the authority to hire and fire other employees or make suggestions to hire and fire other employees.

Under this requirement, you must have the authority to make or significantly contribute to decisions regarding hiring, firing or change of status.

The Administrative Exemption

To qualify as an exempt Administrative employee, your job duties must meet the following requirements.

1. You have the primary duty of performing “office or non-manual” work;

This does not mean it is your ONLY duty to perform “office or manual” work. If you perform some manual work (operating a machine in a factory 1 day out of 5 per week) but primarily perform non-manual work in an office, you likely meet this requirement.

2. The “office or non-manual work” is directly related to the management or general business operations of the employer;

This requirement is where many employers lose the administrative exemption. In order to be administratively exempt, the employee has to perform work directly related to assisting with the running or servicing of the business. For example, working on the production line or working as a sales clerk does not satisfy this requirement. Performing work such as finance, accounting, budgeting, auditing, advertising, labor relations, human resources or personnel management is the type of work most often directly related to the management or general business operations of the employer. Think of the person who runs the business (office manager) as administratively exempt and the person who carries out day-to-day affairs (sales clerk) as non-exempt.

3. You have a primary duty that includes the exercise of independent judgment with respect to matters of significance.

This requirement considers both the type and importance of work the employee performs. Whether an employee exercises independent judgment depends on whether the employee has the authority to make independent choices without direction from a supervisor. Even if the employee is subject to review at a higher level, if they can make a decision without seeking permission, this satisfies the independent judgment requirement.

Whether something is a matter of significance refers to the importance of the employee’s work. This is not a question of whether an employee’s actions cause financial loss. It’s a question of how integral the employee’s work is to the business operations of the employer.

The Professional Exemption

You will be considered a professionally exempt employee if your job duties meet the following requirements:

1. Your primary duties involve advanced knowledge which requires the constant exercise of discretion and judgment.

This requirement distinguishes between intellectual work and manual labor. Work performed by these Professional employees is different than work involving types of work performed by non-exempt employees. The advanced knowledge required to perform such work can’t be obtained at the high school level and requires additional education or training.

“Use of discretion and judgment” is not a bright-line rule but rather a guideline by which the professional exemption is examined. Generally, employees who are on “auto-pilot” and carry out their duties the same way every day do not meet this requirement. Constantly exercising discretion and judgment means decisions are made based on the circumstances presented in a way that requires a course of action be determined based on the particular circumstance.

2. Your advanced knowledge is in a field of science or learning.

This requirement is met by fields such as law, medicine, theology, accounting, actuarial computing, engineering, architecture, teaching, physical, chemical, biological sciences, and pharmacy. Employers may also classify certain creative professionals in music, writing, acting, or graphic arts as exempt professionals if their primary duties require invention, imagination, originality, or talent in that particular field.

3. Your advanced knowledge was acquired through a prolonged course of education or specialized instruction.

You must acquire an advanced degree through specialized education or through a combination of work experience and instruction to meet this requirement.

Computer Employee Exemption

To be classified as an exempt computer employee, you must meet the following requirements:

1. You are employed as one of the following:
  • Computer systems analyst
  • Computer programmer
  • Software engineer
  • Other similarly skilled worker in the computer field performing the duties described below
2. Your primary duties (more than 50% of work time) consist of one or more of the following:
  • The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications.
  • Designing, development, documenting, analyzing, creating, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications.
  • The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or a combination of the aforementioned duties, the performance of which requires the same level of skills.

Courts have examined specific job duties of computer employees and determined that the following IT/computer employees are NOT exempt and MUST be paid overtime for hours worked over 40 include:

  • Certain IT Help Desk Support Employees
  • Employees who manufacture or repair computer hardware and related equipment.
  • Those who rely heavily on computers and software programs (e.g., engineers and drafters skilled in computer-aided design) but are not primarily involved in computer systems analysis and programming.
  • Employees who install and upgrade hardware and software
  • Those who configure desktop computers and applications
  • Employees who analyze, test, and troubleshoot equipment, applications and/or networks
  • Those who fix hardware and software problems or handle network connectivity issues
  • Employees who install and maintain telecommunications systems

Outside Sales Exemption

In order to be exempt from overtime pay, an outside sales employee must meet the following requirements:

1. You must “make sales.”

Regulations define “making sales” as sales, exchanges, contracts for sale, shipment for sale or other disposition. Though it seems simple, this aspect of the outside sales exemption often causes confusion for both employees and employers.

For example, the Supreme Court deemed that pharmaceutical sales representatives are exempt as outside sales employees even though money is not exchanged. Pharmaceutical representatives don’t actually sell pharmaceuticals. They “provide medical professionals who prescribe pharmaceuticals with the ‘details’ of pharmaceutical products, seeking to educate the prescribers with the ultimate goal of influencing their prescribing decisions. The Court found that because direct sales of pharmaceuticals by pharmaceutical representatives to patients are prohibited by health industry regulations, representatives came as close to “making sales” as was contemplated by the FLSA. As such, and because they met the other requirements, they are exempt as outside sales employees.

In another example, a court found that “field representatives” who recruit students to attend private universities were also exempt from overtime as outside sales employees. According to the court, students were purchasing a product by enrolling in the university and because the recruiters were involved with students from recruitment through tuition payments, that was sufficient for the court to find that the recruiters were consummating sales.

In contrast, residential solicitors of charitable donations are not exempt from overtime pay as outside sales employees because soliciting promises of donations or “selling the concept of donating to charity” is not a “sale” within the meaning of the regulations.

2. You must make sales customarily and regularly “away from the Employer’s place(s) of business.”

Employees must make sales away from the employer’s business to be exempt. Sales made by mail, telephone or the internet do not fall under the outside sales exemption. Furthermore, sales made from a fixed site, home or office used by the employee as a “headquarters” or site for telephone sales are not “outside sales.” In contrast, sales made by a “traveling salesman” from a hotel room while the employee is traveling or at a trade show may be considered outside sales.

For example, the Department of Labor issued an opinion letter explaining mortgage loan officers are exempt as outside sales employees because they spend a significant amount of time away from the employer’s office selling loan products. The time was spent in the office, or in the home office, doing paperwork or making phone calls was only incidental to the outside sales activities they perform.

CONCLUSION

Knowingly or not, employers sometimes apply the above exemption standards incorrectly. Instead of consulting the law on exempt employee status, they decide on their own, incorporating their financial bias in the process. As a result, employers sometimes deny pay to employees who are legally entitled to overtime wages. When employees learn they’ve been paid unfairly, they are entitled to seek redress payment for unpaid wages due to them.

If you believe you are improperly classified as an exempt employee and should receive overtime pay, consulting an employment attorney can help you sort out the facts and determine your legal position.

If you have questions about exemptions or other issues relating to these wages, contact an attorney at Hawks Quindel for a free, no-obligation conversation about your situation. Call us at (414) 271-8650 or contact us via email.

Summer Murshid
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