Employee Classifications: Exempt Vs. Non-Exempt
Many employment law attorneys and human resource professionals believe that under the Obama Administration wage and hour claims under the Fair Labor Standards Act (“FLSA”) will receive more attention and will be pursued more aggressively than under the Bush Administration. The same professionals believe that the Obama Administration will place a greater emphasis on claims involving employers incorrectly classifying employees as exempt under FLSA; “exempt” meaning the employer is not required to pay the employee minimum wage or overtime. To reduce liability, a prudent employer should review its employment classifications to ensure compliance with FLSA.
As a general rule, all employees and employers are subject to the requirements of FLSA (i.e., an employee entitled to minimum wage and overtime) unless exempt from FLSA requirements. It is the employer’s burden to prove that a specific exemption applies under FLSA. Generally, job titles and job descriptions are insufficient to exempt an employee from FLSA. Paying an employee a salary alone is insufficient to exempt an employee from FLSA. Industry practice and customs do not make an employee exempt from FLSA. Only executive, administrative and professional employees (along with other specifically designated employees set forth in FLSA) are exempt from FLSA. If the employee does not meet the specific requirements of an executive, administrative or professional employee, or some other exemption, the employee is not exempt under FLSA and the employer is required to pay minimum wage and overtime. Obviously, a failure to correctly classify an employee or group of employees could result in a claim in excess of thousands, if not hundreds of thousands, of dollars.
Determining whether an employee meets the executive exception, professional exception or administrative exception to FLSA can be tricky. To meet the executive exception, the employee must be paid a salary of at least $455.00 per week; the employee’s primary duty is management of the enterprise or recognized department or subdivision of the enterprise; the employee customarily and regularly directs the work of two or more other fulltime employees or their equivalent; and, the employee must have the authority to hire and fire other employees or the suggestions or recommendations as to hiring, firing, advancing or promoting, and other change of employment status that is given particular weight.
To determine if an employee meets the administrative exception, the employee must be paid a minimum salary of at least $455.00 per week; the employee’s primary duty is the performance of office or non‑manual work directly related to the management or general business operations of the employer or its customers; and, the employee’s particular duties include the exercise or discretion and independent judgment with respect to matters of significance. Management or general business operations means that the work is directly related to assisting or running or servicing of the business and does not include working on a manufacturing or production line, or selling products in retail or service establishment.
Discretion and independent judgment means the comparison and evaluation of possible courses of conduct and acting or making a decision after the possibilities have been considered. Matters of significance refers to levels of importance of the work performed. Independent judgment and discretion generally means authority to formulate, effect or interpret management policies or operating procedures; carrying-out major assignments and conducting operations; performing work affecting the business operations to a substantial degree; and authority to commit the employer in matters that have significant financial impact.
To determine if an employee meets the professional exemption requirements, the employee must be paid a salary of at least $455.00 per week; the primary duty is the performance of work which requires advance knowledge in a field of science or learning customarily acquired by prolonged, specialized, intellectual instruction or requiring innovation, imagination, originality or talent in a recognized field of artistic or creative endeavor.
The failure to correctly categorize employees under FLSA can result in claims for unpaid wages and/or overtime by an employee, a group of employees or by the Department of Labor. Such claims can quickly escalate into hundreds of thousands of dollars, in addition to legal costs incurred by the employee and legal costs incurred by the employer in defense of the claim, not to mention interest owed on amounts found owing to an employee. Because the risk with misclassifying employees under FLSA is high, employers should use special care to make sure that their employees are correctly categorized under FLSA and being paid a minimum wage and overtime if not exempt from the requirements of FLSA.