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Exempt Versus NonExempt: Why You Need to Know the Difference

Misclassifying could cost your business megabucks

Back Web Only Nov 6, 2015 By Frank  Radoslovich

You have 10 seconds to name the key differences that determine if an employee is exempt or nonexempt. Ready, set, go.

Oh, you couldn’t do it? Color me surprised.

Whether you’re an employer or an employee, not knowing the difference between the two is doing yourself a huge disservice, and, as an employer, can land you in some hot – scalding hot – water.

“Exempt” and “nonexempt” are vague terms employers often throw around (and confuse regularly) that refer to an employee’s eligibility for overtime pay and other legal rights, such as meal and rest periods.

At the federal level, these terms are derived from and outlined in the Fair Labor Standards Act. It’s a piece of legislation designed to protect employees from having their time taken advantage of, or screw over employers or supervisors who neglect to properly recognize these statuses — out of misunderstanding, ignorance or intentional evasion of the law (and if the latter is the case, shame on you).

At this point in my law career, while nothing should shock me, the pervasiveness of cases of this nature is astounding. Oftentimes, with some early education and sometimes legal intervention, the issues would have easily been solved without becoming cases. What’s even more surprising is what cases like this can cost employers. We’re talking legal fees and settlement amounts with a lot of zeros – amounts that could put a business under, since it could also entail liability for back wages, taxes and interest, too.

There are two main areas of criteria for determining if someone is exempt or nonexempt: wages and duties. Unless you’re 100 percent positive that all of your employees are classified correctly, it would behoove you to read on.

Wage

An easy qualifier to gauge if an employee should be exempt or nonexempt is how they are compensated for their job and by how much — but it’s not the only factor. In California, if an employee makes a minimum monthly salary less than two times the state minimum wage for full-time employment, they are nonexempt employees, no exceptions.  Currently the minimum wage in California is $9 per hour (although it will bump to $10 per hour in January 2016) so that would mean that a full-time worker would have to earn more than $800 per week as a regular salary before the wage factor is even considered in determining exempt or nonexempt status.  

It should also be noted that an exempt, salaried employee’s hours worked won’t necessarily correspond with the pay received.  A salaried employee receives the same predetermined pay each pay period, and it cannot legally be reduced because of the quality or the quantity of work performed.  Meaning that if an exempt employee works less than 40 hours per week, you can’t reduce their pay. That said, you don’t have to track exempt employees’ hours or pay them overtime either, no matter how many hours they work.

But don’t be fooled. Paying an employee a salary does not make them exempt, nor does it change any requirements for compliance with wage and hour laws. Pay is an integral factor in determining employee status, but it is not the only one, their duties must be taken into consideration as well.

Duties

Whether an employee should be exempt or nonexempt is also partly determined by their duties. But I’d be lying if I didn’t say that the definition of which duties fall in what category, especially under the FLSA, is somewhat murky. The FLSA contains dozens of exemptions under which certain types of employers and employees are considered exempt from overtime restrictions. At the most basic level, it comes down to this:  If an employee is able to exercise discretion and make independent judgments on a regular basis, they’re more oftentimes than not going to be classified as exempt. I could bore you with an explanation of what all of the various exemptions are, but I won’t. Instead, once you’ve determined that your employee makes more than twice the minimum wage in California and routinely exercises discretion in decision making, take my quiz to see if you’ve properly labeled him or her as exempt.

Are they:

- In a management role, meaning that they regularly supervise at least two or more employees and have input into other employees’ job status?

- A professional employee in a job that requires a degree and intellect, such as teaching, architecture or medicine?

- In a role that supports a business’ function, such as human resources staff, public relations, or payroll and accounting?

If you answered “yes” to any of the above questions, the employee likely falls into one of the three exempt categories: executive, professional or administrative. That third category is where most employers make the mistake of misclassifying an employee, which highlights the importance of classifying employees not by a job’s title but, rather, its tasks.

Properly classifying an employee is a serious matter that will almost always result in legal intervention if not done correctly. Something else that’s important to note (trust me, you’ll thank me later) is to make a point to annually review predetermined salary ranges for positions, so that when minimum wage changes take place, you are still in compliance with the salary component of wage and hour laws as they pertain to exempt classifications.

If you’ve been nonchalant in classifying an employee, you need to act now. Whether you recognize and wish to rectify the situation, or even if you need help making the determination of which category an employee falls under in the first place, get legal help before it’s too late. After all, as a business owner, you have far better things to spend all those extra zeros on.   

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