Exempt vs. Nonexempt

Where do you fit?

Paul Falcone, “Exempt vs. Nonexempt”, HR Magazine, June 2000, Vol. 45, No. 6, pp. 207-214.

Falcone references issues concerning line managers and the need to understand and monitor the classifications of employees who are classified either exempt or nonexempt.  If these managers do not have a full understanding of the wage and hour regulations, then they may be opening themselves and their company for an investigation by the Department of Labor.  It appears that line managers feel that the implementation and knowledge of the wage and hour regulations are the sole responsibility of the Human Resource Department.  It is not the sole responsibility of HR to classify specific employees as exempt or nonexempt since it is the line managers who must incorporate these specifics into their budgets.  The line managers make the determination of whether an employee should be classified as exempt or nonexempt and with this, they make the decision of whether they would qualify for any overtime pay. With this responsibility, they also decide the duties and functions of their employees, which comprise their positions (the employee’s) as either exempt or nonexempt.

Falcone mentions an interesting situation in which a nonexempt secretary would be promoted by a line manager to an exempt-level coordinator.  With this, the line manager feels that the employee’s new and higher salary has been justified within his budget proposals.  Unfortunately, this is not always the truism and the line manager at this point might need to be able to justify this promotion by other means.  What can occur is if a disgruntled employee feels that this promotion for the other employee is unjustified due to no change in the type or amount of work being completed, they might feel the need to discuss the issue with the HR Department, or even go further as to contact the Department of Labor.  Generally what would also occur is that the HR Department would not have known about this promotion in that the employee went from a nonexempt position to an exempt position.

It is mentioned above that the line managers’ budgets are a part of the issue concerning the monies spent for exempt and nonexempt positions.  With this in mind, the line manager needs to realize that their budgets may actually be on the line if at any time a wage and hour audit becomes warranted.  Falcone brings out that these manager's may have not realized that their budgets might be on the line if the Department of Labor were to require an audit.  First, if there was a proven misclassification of an employee’s “status”, the company would then be penalized.  One example would be if a position was misclassified and the employee should have been maintained in a nonexempt position, the employer would be required to pay the overtime back to the employee.  If this was found to be over a few years, the monetary impact on the company, including the line manager’s budget, would be quite damaging (costly).

Falcone mentions a brief listing of questions that might be asked to an employee, based on a requested audit by the Department of Labor:  “Have you ever worked through your lunches or breaks?  Have you ever worked overtime without getting paid time-and-a-half?  Have you ever taken lunch at your desk and answered the phone?  Have your co-workers ever done the same things, and how many of them are there?”  Interestingly enough, these questions could be answered “yes” by many employees, both exempt and nonexempt.  What these answers might do is trigger the Department of Labor to conduct an audit on the company, which in turn could result in a class action wage and hour suit.  This could become a costly event for any company if they could not justify their classifications of specific jobs.  Falcone notes that if the plaintiff’s attorney has proven successfully that the employer has violated the wage and hour provisions, then the plaintiff and their attorney will have, together with the Department of Labor, the right to have two years of the company’s payroll records audited.  It is also noted, that if it is found that the employer willingly violated these provisions, then the DOL can audit three years. 

The objective is to know how the line manager can protect their companies, and themselves.  There is a need to understand the “mechanics of overtime”.  In order to understand these mechanics, there is a need to know how overtime impact payroll administration in regards to the nonexempt employee.  If looking at the exempt employee, this signifies that the employee is “exempt from the overtime provisions” of the Fair Labor Standards Act.  In simpler terms, there are no overtime rules that actually govern the exempt employee.  Such employees who would fall into the exempt category would be doctors, lawyers, sales people, those who would typically receive no premium pay for working longer hours including weekends and holidays.

On the other hand, the nonexempt employee is fully protected by the Fair Labor Standards Act.  Falcone notes that the nonexempt employee should receive better treatment when it comes to their working conditions.  With this, many of the states present this in the form of regular breaks and lunch breaks, but they also include with this the payment of overtime for hours worked over the regularly scheduled 40-hour week (for full-time employees).  Each state can vary on their requirements for these breaks, yet the managers should be responsible for setting the estimated times for these breaks, including the employees’ lunch break.  Yet, Falcone does mention that this can become a bit tricky in that there are times that a nonexempt employee might need to take lunch at their desk or even skip their breaks.  But, what could result in a problem with continued practice of this would be if an employee relayed same to the Department of Labor or to a plaintiff’s attorney.  If this type of practice were continual, then the employer would be viewed as “willfully” acting by the law.  It is recommended to avoid this type of investigation, that the managers review their policies and be sure to have the employees adhere to their specified breaks and lunch times.  If there is to be overtime involved, then the managers should relay to the employees that all overtime be approved.

Falcone emphasizes that along with the failure of paying the correct amount of overtime to nonexempt employees, managers/employers can routinely misclassify the exempt employees.  With this, what occurs is that the employees who have been classified as exempt employees, may in reality be nonexempt.  In general, employees may be exempt from overtime requirements if they fall within these general categories:  professional, executive or administrative capacities, or “outside” sales.  Falcone references that the specific rules for these categories are extensive, and that it is recommended to consult with qualified compensation consultants or labor attorneys so a to be sure that their positions are correctly categorized. 

In general, executives are exempt from the overtime requirements if they regularly direct the work of two or more employees.  With this, the Department of Labor, under 541.1 (section of the Federal Law that deals with executives), explains when an employee will qualify as an executive, previously mentioned.  The employees that are being supervised are to be employed by the actual department that the executive is managing.  Another example of an executive would be an employee who has the authority over others and who is also paid a salary (not paid an hourly rate).

The professional would be an individual whose work is based on an advanced degree (lawyer, doctor).  This type of employee is noted as being the easiest to understand.  As a professional, the general duties evolve around specialized and advanced knowledge of specific areas.  These individuals are exempt from the overtime requirements of the FLSA.

Lastly, the administrative categories are generally the most vague when it comes to defining the qualifiers.  This category is the most abused when assigning exempt status.  General requirements include, but are not limited to:  “customarily and regularly exercises discretion and independent judgment; performs specialized or technical wok requiring special training, experience or knowledge; must devote the majority of his/her time to such activities; and earns at least $250 a week on a salary basis.” 

Falcone reiterates the necessity for employers to be sure to conduct analysis on positions for which they classify as either exempt or nonexempt.  The above mention some of the requirements and these requirements can easily be adapted into systematic tools for the employer to conduct analysis of their various positions.  With the continued analysis and keeping managers’ in tune with the wage and hour requirements, companies can prevent the misclassification of their employees.  It is always more efficient for the companies to occasionally conduct this type of analysis rather than fall into the situation of an employee making the call to the Department of Labor and having an audit occur.  In conclusion, the costs involved in the occasional analysis done by the company will outweigh the costs of an audit which may result in class action suits, lump-sum pay back of monies to employees, penalties and legal fees.