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Column by Nancy Cooper
Who's Exempt From Overtime?
Misclassifying a worker can cost employers years of unpaid overtime, on top of extra working hours for meals and breaks -- and it's a very easy mistake.
One of the simplest mistakes employers can make is in how their employees get paid. Many employers are easily confused about the proper classifications of salaried and hourly-wage workers, and whether of not they're entitled to overtime pay. You might believe all your employment practices are solidly in place when suddenly you're facing a lawsuit from a recently fired salaried employee for failure to pay overtime. But salaried workers aren't entitled to overtime, right? Well, that depends.
Under the Fair Labor Standards Act, only certain employees are exempt from being paid overtime. Simply paying an employee a salary is not enough to make the employee exempt from overtime. Above all, an exempt employee must be paid on a regular and predictable basis in an amount of at least $455 per week. Yet meeting this test alone is still not enough to render the employee exempt. In order to properly classify the employee as exempt, there are two tests that need to be met -- the salary basis test and the duties test.
Under the duties test, there are four basic types of exemption from overtime:
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Executive
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Administrative
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Professional/Creative Professional
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Outside Sales
Under the executive exemption, an employee's primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise. The employee must also customarily and regularly direct the work of at least two or more other full-time employees or their equivalent, and have the authority to hire or fire other employees or have particular weight in hiring, firing, advancement, promotion or any other personnel decision.
The administrative exemption requires that the employee'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. As such, this includes the exercise of discretion and independent judgment with respect to matters of significance.
The professional exemption requires that the employee's primary duty must be the performance of work requiring advanced knowledge, defined as work that is predominantly intellectual in character and that includes work requiring the consistent exercise of discretion and judgment. Advanced knowledge must be in a field of science or learning, and be customarily acquired by a prolonged course of specialized intellectual instruction. The creative professional exemption requires that the employee's primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
In order to qualify for the outside sales exemption, the employee's primary duty must be making sales (as defined in the FLSA), 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. The employee must also be customarily and regularly engaged away from the employer's place or places of business.
These classifications aren't as straightforward as they may seem. Each term has its own special meaning, and in the end there is no simple, clear-cut definition. Determining if your employees are appropriately classified depends a lot on individual duties and job performance. It is a very fact-specific determination that may change over the years, depending on how the job evolves.
So why should you care? Misclassifying an employee can get very expensive, very quickly. An employee classified as exempt who is later determined to be non-exempt can potentially be owed two or even three years of past overtime. In addition, in states where wage laws require non-exempt employees to be provided meals and breaks, that extra time can be added to total working hours and generally regarded as overtime.
Beyond overtime wages, employers could also potentially face fines and penalties for not following the wage and hour laws. In other words, a simple, but honest mistake can very rapidly become a costly one. It is in every employer's interest to take the time to make sure your employees are properly classified.
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