Exempt or Nonexempt? That is the question.

     ​Did you know that every employee in the United States is classified as either exempt or nonexempt? Given that there are an estimated 157 million workers in the United States, it is shocking the lack of understanding surrounding these important but complex classifications and their implications. However, if you are confused, you are not alone. The topic is riddled with misconceptions, complex definitions and expensive lessons when mistakes are made. This article will cover the basic overview of what exactly people are “exempt” from, the basic definitions of exempt and nonexempt and the three requirements to properly classify someone as exempt. In general, exempt employees are often managers, executives, professionals and important decision makers in the company versus non-exempt employees, who tend to be involved in production, “line work”, manual labor or tasks that are more routine in nature. Employers typically prefer the exempt classification, when possible. It eliminates timekeeping requirements along with the premium costs associated with overtime payments. Employees often prefer it as well, as it often dictates a higher level of pay and tends to indicate a professional level position.
     Exempt or nonexempt? What do these terms even mean? For a long time, I had a hard time differentiating between these two terms. If you do too, this will help. When someone is exempt, it means they are exempt from, or not subject to, some of the specific provisions of the FLSA, or Fair Labor Standards Act. The most significant provisions they are exempt from are minimum wage requirements, overtime pay and meal and rest breaks. Conversely, a non-exempt employee must be paid minimum wage, overtime and must be provided with lunch and rest breaks as required by the law.
     A lot of employers think that the terms Exempt and Salaried mean the same thing and are interchangeable. That is not the case. Exempt employees are usually required to be paid on a salaried basis (exceptions to this will be discussed in a future article). However, you can also have nonexempt employees who are paid on a salaried basis. When this is the case the nonexempt employee is still entitled to overtime and subject to the other compliance requirements mentioned above. Sometimes employers will say “Oh, he’s exempt. I never give him any direction.” Deep breath. In addition to not being a recommended management technique, this complete lack of direction does not make your employee exempt.
     Ok, so we cleared up those few confusing items. Now let’s try to establish a basic understanding of the requirements to be property classified as an exempt employee. First, it’s important to mention that your default classification should be hire employees as hourly, non-exempt employee unless you are certain their position meets are the requirements to be classified as exempt. If you are unsure if your employee meets the all three prongs of the exemption, you should err on the side of caution and use the non-exempt classification. There are 3 requirements for an employee to be properly classified on an exempt basis under the “White Collar Exemptions”, (executive, administrative and professional). First, they must be paid on a salaried basis. Second, they must meet the minimum salary requirements. Lastly, they must pass the duties test. Let’s take a closer look at each of these requirements.
     When an employee is paid on a salaried basis it means he regularly receives the same, predetermined amount of compensation each pay period. This fixed compensation amount cannot be reduced because of variations in the quality or quantity of work performed by the employee and the full amount must be paid that amount for any workweek in which he performs any work (with limited exceptions), even if the employee works less than full days or full time hours for that workweek. Therefore, say an employer has a seasonal business and business is slow for a particular week, and the employee works half what they would normally work. In this example the employer cannot reduce the employee’s weekly salary based on this reduction in work output. In the event that an employee does not work any hours in a given workweek, the employee may be unpaid for that workweek.  
     The second requirement to properly classify an employee under one of the white collar exemptions is that they be paid at least the minimum salary. On January 1st, 2020, for the first time in over 15 years, the federal salary threshold was increased to $35,568 per year ($684 dollars per week). Some states and local jurisdictions require higher minimum salary requirements in order to meet the minimum salary requirement for exemption (check your department of labor to confirm your state requirements). Most notably is California. In California, the minimum salary is tied directly to the hourly minimum wage. An exempt employee must receive a salary of twice the minimum wage of a full time hourly worker. California currently has 2 state minimum wages ($12 and $13 an hour) based on the company’s employee count. Therefore, California’s minimum salary amounts for 2020 are $49,920 for employers 25 of fewer employees or $54,080 for employers with 26 or more employees. California’s minimum wage continues to climb through 2023 and will eventually push the minimum salaried number for exempt employees to $62,400. If an employee is paid on a salaried basis, but that salary is under the required minimum salary, they automatically fail this part of the exemption test and must be classified as a nonexempt employee. 
     The final requirement is the duties test. This is the hardest prong and most misunderstood of the three requirements. Each of the 3 white collar exemptions has different duties test requirements. Broadly speaking, exempt duties are duties that require a high level of intellectual effort and importance and are not routine, or production oriented in nature. Here are a few examples:

• analyzing 3 different inventory management systems the company is considering
• designing the process flow of a new incoming customer order
• determining how the company should adjust to an unexpected surge in business
• managing a staff of 11 employees including hiring, coaching and training, and termination decisions  

Employers often think that employees working in an office or administrative capacity meet the administrative exemption. However, this is often not the case. For example, a bookkeepers functions are generally routine in nature rather than requiring high levels of discretion and independent judgement. Many jobs require a worker to handle both exempt and nonexempt duties at different times in their workweek. Another component of the duties test is that the employee needs to perform exempt type duties more than periodically. The Federal and California requirements are slightly different here. Federal uses the “Primary Duty Test”. This means that the exempt functions need to be one of the principal, main, or most important duties that the employee performs. The California standard is even tougher, requiring the employee to be “primarily engaged” in exempt duties. This standard means that the employee spends more than half of the time doing exempt duties. This is a substantial amount of time and can be a challenging standard to meet. By way of example, consider a Store Manager in a small shoe store chain located in a shopping mall. In our example, the manager is responsible for profit and loss goals, hiring and training, employee discipline and terminations and other similar exempt managerial duties. However, the staff consists of a small number of employees on shift at any given time. As a result, the manager rings up customers, answers questions, stock shelves, handles phone inquiries, and cleans the store (all nonexempt duties) a majority of the time. This is an example where the employee might be considered exempt under the federal standard but not under the California requirement.  
     News stories about expensive misclassification lawsuits are common. Every employee who is classified as exempt should be classified under one of the specific available exemptions. Employers should review and periodically audit positions they treat as exempt to verify they continue to meet all three of the requirements to be classified as exempt. This is a broad overview of a very complex topic. If you are not sure if your staff members have been properly classified, consider one of these two possible courses of action. Either pay them as an hourly, nonexempt employee or reach out to an expert on the topic to analyze the position.