All too often employees are misclassified as exempt but maybe should be nonexempt; and these days, it’s more important than ever to ensure that employees are classified correctly under the Fair Labor Standards Act (FLSA).
An article by the Economic Policy Institute cited an estimated “10-30 percent of employers may misclassify their workers.” When those employees bring these issues to court, they quite often win, and hundreds of millions of dollars are paid out every year to those employees that are misclassified as exempt.
Is An Employee Exempt or Nonexempt?
All the relevant information for employee classification may be found in the Code of Federal Regulations, Title 29 “Labor,” Chapter 5 “Wage and Hour Division, Department of Labor,” Part 541 (29 CFR 541).
The term “exempt” simply means an employee cannot earn overtime for hours worked beyond 40 in a workweek. If an employee is to be properly classified as exempt, they must pass two tests: the “Salary Test” and the “Duties Test.”
Salary Test
The “Salary Test” is simple, and requires answering three “Yes” or “No” questions. Quite often, an employee may be determined to be nonexempt with only this test. To determine if an employee is exempt, they must pass this test and the following “Duties Test” as well.
| Salary Test “Yes” answer to ANY of these questions = Move on to the “Duties Test” below “No” to ALL of these questions = The employee is nonexempt |
| 1. Does the employee earn $684/week or more, paid by the week regardless of how many hours/days they worked within that timeframe? 2. Is the employee an “Outside Sales Employee”? (There is no compensation threshold for this type of employee.) 3. Is the employee a “Computer Professional” who earns at least $27.63 per hour? |
Duties Test
The employee’s job title plays no role in determining if they are exempt or nonexempt. If an employee passed the “Salary Test,” they must also have job duties that fit into at least one of the following six possible categories of exemptions, described below:
| Executive Exemption “Yes” to ALL THREE of the questions = Exempt “No” to ANY of the questions = Nonexempt for the Executive Exemption |
| 1. Is the employee’s primary duty the management of the enterprise or a recognized department or subdivision? 2. Does the employee customarily and regularly direct the work of two or more other employees? 3. Does the employee have the authority to hire or fire other employees (or whose recommendation for hiring, firing, promotion, or other change of status of other employees is given particular weight)? |
| Administrative Exemption “Yes” to BOTH of the questions = Exempt “No” to EITHER of the questions = Nonexempt for the Administrative Exemption |
| 1. Does the employee’s primary duty include performing office or nonmanual work directly related to the management or general business operations of the employer or employer’s customers? 2. Does the employee’s primary duty include exercising discretion and independent judgment with respect to matters of significance? * |
* We get a lot of questions about what does and does not qualify as “discretion and independent judgment with respect to matters of significance,” so here’s the description from 29 CFR 541.202:
● “The phrase “discretion and independent judgment” must be applied in the light of all the facts involved in the particular employment situation in which the question arises. Factors to consider when determining whether an employee exercises discretion and independent judgment with respect to matters of significance include, but are not limited to: whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business; whether the employee has authority to commit the employer in matters that have significant financial impact; whether the employee has authority to waive or deviate from established policies and procedures without prior approval; whether the employee has authority to negotiate and bind the company on significant matters; whether the employee provides consultation or expert advice to management; whether the employee is involved in planning long- or short-term business objectives; whether the employee investigates and resolves matters of significance on behalf of management; and whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances.”
● “An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly. For example, a messenger who is entrusted with carrying large sums of money does not exercise discretion and independent judgment with respect to matters of significance even though serious consequences may flow from the employee’s neglect. Similarly, an employee who operates very expensive equipment does not exercise discretion and independent judgment with respect to matters of significance merely because improper performance of the employee’s duties may cause serious financial loss to the employer.”
| Learned Professional Exemption “Yes” = Exempt “No” = Nonexempt for the Learned Professional Exemption |
| 1. Does the employee’s primary duty include performing work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction? |
| Creative Professional Exemption “Yes” = Exempt “No” = Nonexempt for the Creative Professional Exemption |
| 1. Does the employee’s primary duty include performing work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor? |
| Computer Professional Exemption “Yes” to BOTH of the numbered questions = Exempt “No” to EITHER of the numbered questions = Nonexempt for the Computer Professional Exemption |
| 1. Does the employee’s primary duty include one or more of the following? ● Application of systems analysis techniques and procedures, including consulting with users to determine hardware, software, or system functional applications; or ● Design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or ● 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. 2. Is the employee a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field? |
| Outside Sales Exemption “Yes” to BOTH of the questions = Exempt “No” to EITHER of the questions = Nonexempt for the Outside Sales Exemption |
| 1. Does the employee’s primary duty include making sales (includes the sale, exchange, contract to sell, and/or consignment for sale) 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. Is the employee customarily and regularly engaged away from the employer’s place or places of business? |
Highly Compensated Employees Test
If an employee earns more than $107,432 per year, they are classified as exempt if they’ve met ALL THREE of the following qualifications:
1. Pass the “Salary Test” described above.
2. Customarily and regularly performs any one or more of the exempt duties or responsibilities of an Executive, Administrative, or Professional employee, described above.
3. Has the primary duty of performing office or nonmanual work.
Summary
It’s important to remember that the “Salary Test” and the “Duties Test” are not independent of each other; an employee must pass both the “Salary Test” and “Duties Test” to be classified as exempt.
While the information described above is not all-encompassing and does not include possible applicable state/regional laws, it serves as a launching pad to begin evaluating the classifications of your organization’s employees.
The FLSA’s guidelines for classification may seem overwhelming, but it is entirely possible to navigate them to reduce employer liability and ensure employees are being paid correctly.
For additional information regarding classifying employees using the FLSA guidelines, please contact us at www.newfocushr.com.
Updated by: Jason Love, SHRM-CP, CLSSGB
HR Consultant
4/4/2023
