How to classify employees as exempt or nonexempt?

Classifying employees as exempt or nonexempt is crucial for compliance with wage and hour laws, primarily dictated by the Fair Labor Standards Act (FLSA) at the federal level and various state laws. The distinction determines eligibility for minimum wage, overtime pay, and other protections.

Understanding Exempt vs. Nonexempt Classification

The classification of an employee as exempt or nonexempt hinges on their eligibility for federal and state minimum wage and overtime pay requirements.

• Nonexempt employees are covered by the FLSA and state wage and hour laws, meaning they are entitled to receive at least the minimum wage and overtime pay (typically time and a half their regular rate for hours worked over 40 in a workweek). Most employees are considered nonexempt unless they specifically meet all the requirements for an exemption.
• Exempt employees are not subject to the FLSA's minimum wage and overtime requirements. This means they are generally paid a fixed salary regardless of the number of hours worked and do not receive overtime pay.

Criteria for Exempt Classification

To qualify as exempt, an employee must generally meet three specific tests under the FLSA:

1. The Salary Basis Test: The employee must be paid a predetermined, fixed salary that does not fluctuate with the quality or quantity of work performed. This salary must be paid in full for any week in which the employee performs any work, regardless of the number of days or hours worked. There are limited exceptions for legitimate deductions.
2. The Salary Level Test: The amount of salary paid must meet a specific minimum threshold. As of January 1, 2020, the federal minimum salary threshold for most exemptions is \$684 per week (equivalent to \$35,568 per year). Many states, including California, have higher thresholds. For example, in California, exempt employees generally must earn a minimum monthly salary of no less than two times the state minimum wage for full-time employment.
3. The Duties Test: The employee's primary job duties must involve executive, administrative, or professional functions, as defined by the FLSA. There are also specific exemptions for highly compensated employees, outside sales employees, and certain computer professionals.

Deconstructing the Duties Tests

Meeting the duties test is often the most complex part of classification, as it requires a detailed analysis of the employee's actual responsibilities and how they spend their time.

Executive Exemption

For an employee to qualify for the executive exemption, their primary duty must be managing the enterprise or a customarily recognized department or subdivision. They must also regularly direct the work of two or more other full-time employees or their equivalent, and have the authority to hire or fire other employees, or their suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.

Administrative Exemption

The administrative exemption applies to employees whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers. Additionally, their primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. This typically involves making important decisions without immediate supervision on a regular basis.

Professional Exemption

The professional exemption is divided into learned professionals and creative professionals.

• Learned Professional: Requires primary duty to be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction (e.g., doctors, lawyers, teachers).
• Creative Professional: Applies to employees whose primary duty is the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor (e.g., writers, musicians, actors).

Other Common Exemptions

• Outside Sales Exemption: Applies to employees whose primary duty is making sales or obtaining orders or contracts for services or facilities, and who customarily and regularly engage in such activities away from the employer’s place or places of business. This exemption does not have a salary basis or salary level requirement.
• Computer Employee Exemption: Applies to certain computer systems analysts, programmers, software engineers, or other similarly skilled workers. They must be paid on a salary or fee basis of at least the federal minimum salary level, or on an hourly basis of at least \$27.63 per hour. Their primary duties must involve specific high-level computer-related tasks.
• Highly Compensated Employee (HCE) Exemption: For employees who perform office or non-manual work and are paid total annual compensation of \$107,432 or more (as of January 1, 2020), which includes at least the federal minimum weekly salary amount. Their primary duty must include performing office or non-manual work, and they must customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.

Who is Nonexempt?

All employees who do not meet all the requirements for an exemption under federal and state law are considered nonexempt. This includes most hourly employees, manual laborers, and employees whose primary duties do not fall under the specific exemptions, regardless of their title or how they are paid. Simply paying an employee a salary does not automatically make them exempt, nor does it alter any requirements for compliance with wage and hour laws.

Why Proper Classification Matters

Misclassifying employees can lead to significant legal and financial repercussions for employers. These include:

• Back pay for unpaid overtime and minimum wages: This can accrue rapidly, especially with large numbers of misclassified employees.
• Penalties and fines: Federal and state labor departments can impose substantial penalties for violations.
• Liquidated damages: Often, employers are required to pay an additional amount equal to the back wages owed as liquidated damages.
• Attorney's fees and litigation costs: Lawsuits can be costly, even if settled.
• Reputational damage: Misclassification can harm an employer's public image and make it difficult to attract and retain talent.

For detailed information, employers should consult the U.S. Department of Labor's Wage and Hour Division and their respective state labor departments.