Exempt versus Nonexempt: FLSA Overtime Guidelines You Need to Know

Executive Summary The federal Fair Labor Standards Act (FLSA) is a comprehensive employment law and much of it is fairly straightforward.

But the part that’s most complicated – and most misunderstood – is the section detailing the rules on how employers must categorize employees for the purpose of deciding who’s eligible for overtime pay – called “nonexempt” employees – and who isn’t – called “exempt” employees. A survey of employers by one Washington, DC-based law firm revealed that a majority of employers were unknowingly in violation of some parts of the FLSA. Of course, the real problem occurs when an employee believes that misclassification under FLSA is more than a “mistake” – that the employer is purposely skirting the law. Then you’re dealing with a lawsuit and a possible Department of Labor audit. Of course you want to avoid all that, especially because: Violations are expensive. A pay error of a few hundred dollars could mushroom into thousands of dollars in legal fees and penalties – which could have been avoided with proper procedure in the first place. The law, and each employer, is under a microscope. When the FLSA was passed, labor groups charged that it was too business-friendly, so the government takes every opportunity to prove it goes tough on violators.

Included in this Executive Report:

The basics of FLSA.

• First and foremost, according to the law, the burden of proof on whether or not an employee is eligible for overtime pay falls on the employer. It’s not up to the employee to prove the case; it’s up to the employer. That means all employees are considered eligible for OT pay until the employer shows otherwise.
• Employees who are eligible for OT pay don’t need authorization or permission to work overtime and get paid for it. Simply put, anytime an eligible employee works more than 40 hours in a week, that employee must receive 11/2 times his or her normal hourly pay. It’s not enough for an employer to say: “I never OK’d you to work overtime, so you’re not getting paid for it.
• The “primary duties” test for employees who are exempt from overtime. FLSA lays out a set of tasks that determine whether an employee falls into the exempt category. The general, loose rule is that an employee is exempt if he or she spends more than 50% of the workweek on those tasks. But it’s not always that simple. Sometimes the scope or influence of a person’s job, or the potential responsibilities – such as standing in for a regular manager who’s absent – will carry more weight than the 50% rule.

The “primary duties” test for employees who are exempt from overtime.

• FLSA lays out a set of tasks that determine whether an employee falls into the exempt category. The general, loose rule is that an employee is exempt if he or she spends more than 50% of the workweek on those tasks. But it’s not always that simple. Sometimes the scope or influence of a person’s job, or the potential responsibilities – such as standing in for a regular manager who’s absent – will carry more weight than the 50% rule.

Categories of exemptions.

• Pay. Exempt employees must make at least $455 a week, or $23,360 a year.
• Executive. An employee meets the exempt standards when the primary duties consist of:
  • managing an enterprise or a department or subdivision
  • regularly directing the work of two or more employees
  • having the authority to hire and fire or to make recommendations about an employee’s work status
• Administrative. An employee meets the exempt standards when the primary duties consist of:
  • nonmanual work directly related to management or general business
  • exercising discretion or independent judgment on significant matters, such as policy or finance
• Professional. An employee meets the exempt standard by having:
  • advanced knowledge in a field of science or learning
  • knowledge acquired by a prolonged specialized instruction
• Computer professional. An employee meets the exempt standards when the primary duties consist of working with computer systems for the purposes of:
  • analysis
  • design
  • creation and modification
  • development of documentation
  • repair specialists
  • help-desk personnel
  • Web-page designers
• Outside sales. An employee meets the exempt standards when the primary duties consist of:
  • working outside the employer’s normal place of business
  • making sales and obtaining orders
• Highly compensated. An employee meets the exempt standards if:
  • the employee’s total annual compensation is at least $100,000 annually, $23,660 of which is salary
  • the employee performs some type of nonmanual work
  • the employee performs at least one of the primary duties listed under the executive, administrative or professional exempt
• Using the job description as the building block. Properly classifying employees and avoiding problems start with building the right job descriptions.
  • Have supervisors review the descriptions and match them against actual duties.
  • Revise descriptions as needed, noting responsibilities and authorities that had been “understood” but not documented.
  • Reclassify as needed, especially when there’s a broad reorganization and duties change.
• Pay deductions. The law allows or bars certain types of pay deductions for exempt employees. For instance, you can’t make deductions based on the quality or quantity of an exempt’s work. However, you can make deductions for:
  • Full-day’s absence for personal reasons when the employee has no leave to cover the absence
  • Amounts equal to what the employee receives for jury duty, witness fees or military service
  • Full or partial days for major safety violations
  • Full-day’s absence for unpaid FMLA leave and partial days for unpaid intermittent FMLA leave
  • Full-day’s absence for personal reasons when the employee has no leave to cover the absence
  • Full days for conduct violations, such as sexual harassment or violence.
• Calculating hours worked. FLSA sets rules on how hours must be calculated for employees who receive OT pay:
  • Nonexempt “on-call” employees who are free to carry on normal activities outside the workplace generally are not considered to be working while waiting to be called.
  • Nonexempt employees in training should be considered working when the training is mandated by the employer.
  • Nonexempt employees in travel status should be considered “on the clock” when:
    • they’re actually doing work, no matter the time or place.
    • they’re traveling during normal business hours, even if they’re not performing work
    • for all hours of travel when they’re doing same-day travel
• ‘Safe harbor’ provision. Employers who mistakenly deduct from an exempt employee’s pay can avoid some penalties by:
  • Communicating to employees the policy on deductions
  • Having a procedure for dealing with employee complaints
  • Promptly reimbursing employees for mistakes
  • Making good-faith efforts to comply with the law
• Recordkeeping. As with most areas of employment law, good documentation is always important for supporting your case when classifying an employee.
  • Keep accurate, comprehensive records regarding hours worked and pay issued.
  • Make sure the recordkeeping is current and ongoing. Courts look unfavorably on trying to do “make-up” or after-the-fact recordkeeping.

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