The Employer's Legal Resource: Overview of Non-Exempt Versus Exempt

07.01.16

In the June ELR, we reported the news - the Department of Labor had issued new regulations as to the minimum salary level for employees to qualify for the white collar exemptions. Those regulations go into effect December 1, 2016. However, the "news" is but a small part of each employer's obligation. This month, we wanted to go deep into the abyss; how does an employer determine if a position is exempt?

No article can answer all your questions, but we are hoping to give you an overview of the most common concepts and questions you will face as you (hopefully) look at your positions between now and December 1, 2016.

First, the Department of Labor starts with the presumption that all positions are non-exempt. You should too. If you want to pay every person in your organization as a non-exempt, you can. Practically speaking, your company probably does not want to do that. Non-exempt positions must be paid no less than minimum wage and must be paid 1.5 times their "regular rate of pay" for all time worked over 40 hours in a single work week. (Note: This series of articles is based upon federal and Oklahoma law. If your employee is in another state, you will need to check that law as well.)

What does "exempt" mean? It means the position is exempt from the requirement to pay overtime.

If an employer believes a position is "exempt," it is the employer's responsibility to prove the position is exempt from the requirement to pay overtime. While there are actually several exemptions, many are rarely used (e.g., employees of amusement or recreational establishments, certain fishermen, etc.). The primary exemptions--often referred to as the white-collar exemption--are: executive, administrative, professional, computer, outside sales.

As an employer has the burden of proving a position is exempt, it is important to understand each of these exemptions. Each has different rules, standards, and tests which must be met. It is not a mix and match proposition.

Below is a primer on the white-collar exemptions--this is not an exhaustive description. Within each, there is guidance as to various terms and concepts too detailed for this article.

Executive Exemption: To qualify for the executive exemption, the position must meet all of the following:

  1. the position must be compensated on a salary basis (discussed in next article);
  2. the position's primary duty must be managing the enterprise or managing a recognized department or division of the enterprise;
  3. the position must customarily and regularly direct the work of at least two (2) other full-time employees or FTEs; and
  4. the position must have the authority to hire or fire others; or the position's suggestions and recommendations as to hiring, firing, advancement, promotion of other employees must be given particular weight

The position must be examined to determine if it meets all four tests before it can be treated as exempt. (Note: There is a special rule under this exemption for persons who actually own 20% or more of the equity of the business and actively engage in its management.)

Administrative Exemption: To qualify for this exemption, the position must meet all of the following:

  1. the position must be compensated on a salary basis (discussed in next article);
  2. the position's primary duty must be 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; and
  3. the position's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

This is the most difficult exemption to apply. To satisfy this exemption, this position must perform the work supporting the business as opposed to the work the business does to generate revenue. Then, there is the question of what is required to constitute "matters of significance."

Professional Exemption: The Professional Exemption is broken down into two subcategories: the learned professional and the creative professional. We will address each.

To qualify for the Learned Professional exemption, the position must meet all of the following:

  1. the position must be compensated on a salary basis* (discussed in next article) (*note: doctors, lawyers, and teachers are not required to be compensated on a salary basis);
  2. the position's primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character, which includes work requiring consistent exercise of discretion and judgment;
  3. the advanced knowledge must be in a field of science or learning; and
  4. the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Generally speaking, this includes doctors, lawyers, most RNs, licensed architects; positions of those types. However, it does not include, for example, a LPN or an ultrasound technologist. There are lists of professions addressed in the DOL's regulations and additional cases addressing other professions.

To qualify for the Creative Professional exemption, the position must meet the following:

  1. the position must be compensated on a salary basis (discussed in next article);
  2. the position's primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Generally speaking, this would include actors, musicians, composers, cartoonists, novelists, and the like.

Computer Employee Exemption: To qualify for this relatively new exemption, the position must meet all of the following:

  1. a. the position is compensated on a salary basis (discussed in next article) or
    b. the position is compensated on an hourly basis at a rate not less than $27.63 an hour;
  2. the position must be employed as a computer system analyst, computer programmer, software engineer or other similarly skilled worker in the field performing the duties described below;
  3. the position's primary duty must consist of:
    a. the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
    b. the 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;
    c. the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
    d. a combination of the aforementioned duties, the performance of which requires the same level of skills.

The Computer Employee exemption is odd in that you can qualify either with the traditional salary basis payment or you can pay on an hourly basis provided you pay every hour not less than $27.63 per hour. Assuming 2,000 hours worked, that would be $55,260 annually. Paying hourly (and at this rate) applies only to the computer employee exemption--no other.

The other trick to this exemption is not to assume that every employee who works with a computer will qualify. There is a list of positions that do not qualify. Employees who manufacture or repair computers do not fit within this exemption. Employees whose work is highly dependent upon computers (e.g., computer-aided design) do not fit within this exemption.

Outside Sales: To qualify for this exemption, the position must meet the following:

  1. The position's primary duty must be making sales, 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; and
  2. the position must be customarily and regularly engaged away from the employer's place or places of business.

As you see, the Outside Sales exemption does not require the employer to pay on the salary basis.

The biggest issue with this exemption is the definition of "sales." Promotional work, customer service, etc., is not sales. To qualify, the employee's primary duty must be to make sales or obtain orders/contract for sales.

As you can see, determining whether an employee is exempt involves a myriad of questions. Read on for more information.

By Kristen Brightmire, KBrightmire@dsda.com

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Rebecca D. Bullard

Rebecca D. Bullard

Rebecca represents clients primarily in labor and employment
litigation and counsels clients regarding everyday employment matters. 

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