Employee classification basics

This article provides an overview of some of the basic considerations an employer should review when determining whether to classify employees as “non-exempt” – and thus eligible for overtime pay – or as “exempt” from the laws requiring overtime pay.

What is an “exempt” employee?

Under the federal Fair Labor Standards Act (as well as many state wage and hour laws), an “exempt” employee is an employee, that under the law, is not required to be paid overtime pay for hours worked beyond 40 in a given workweek.[1] In order to be classified as exempt from overtime pay, employees must satisfy both a minimum salary threshold test and a “duties” test. The federal minimum salary threshold is $684 per week.[2] Employees who perform manual labor, maintenance, construction, and other work that requires repetitive operations with their hands, physical skill, and energy, typically do not meet the duties test.

What are examples of exempt employees?

The three most common categories of exempt employee classifications, each of which has its own duties test, are: (i) executive employees; (ii) administrative employees; and (iii) professional employees. There are also exemptions for outside sales persons, teachers, and academic administrative personnel, as well as highly compensated employees—those whose annual compensation exceeds $107,432.[3] In addition to the requirements above, to be properly classified under any of the exemptions, the employee must meet all requirements of the applicable exemption.

Executive/managerial exemption

• The employee’s duties and responsibilities involve the management of the enterprise in which the employee is employed, or of a customarily recognized department or subdivision of the enterprise.
• The employee customarily and regularly directs the work of two or more other employees.
• The employee has the authority to hire or fire other employees, or the employee’s suggestions and recommendations for hiring, firing, advancement and promotion, or any other change of status of other employees is given particular weight.
• The employee customarily and regularly exercises discretion and independent judgment in performing his or her duties.

Administrative exemption

• The employee’s primary duties consist of performing office or non-manual work directly related to management policies or general business operations for the employer.
• The employee customarily and regularly exercises discretion and independent judgment in carrying out job duties as to matters significant to the employer’s business.
• The employee regularly and directly assists an employer, or an employee employed in a bona fide executive or administrative capacity (eg, employment as an administrative assistant), or who performs, under only general supervision, work along specialized or technical lines requiring special training, experience or knowledge.

Professional exemption

• The employee’s primary duties consist of the performance of work (i) requiring knowledge of an advanced type in a field of science or learning, customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education and from an apprenticeship, and from training in the performance of routine mental, manual or physical processes, or (ii) original and creative in character in a recognized field of artistic endeavor (as opposed to work which can be produced by a person endowed with general manual or intellectual ability and training), and the result of which depends primarily on the invention, imagination or talent of the employee.
• The employee’s work (i) requires the consistent exercise of discretion and judgment in its performance, or (ii) is predominantly intellectual and varied in character (as opposed to routine mental, manual, mechanical or physical work) and is of such a character that the output produced or the result accomplished cannot be standardized in relation to a given period of time.

What happens if a company misclassifies its employee?

Failure to correctly classify and pay employees is a mistake that can trigger many types of liability and penalties, including a possible misdemeanor for failure to pay proper wages owed. If the failure to properly classify employees results in significant monetary liability and penalties, that liability can also create concern for prospective investors and acquirers in an acquisition. As a result, a company’s proper classification of its employees is often a matter of diligence in a company’s financing or acquisition.

Having the right team in place can be the key to a company’s success. However, a company must be aware of how it is classifying its employees and ensure that all classifications are based on employees’ actual duties and responsibilities. These classifications need to be made accurately, without regard to what the job description may say, whether or not competitors classify employees similarly or what the employee’s desires may be. Otherwise, a company may find itself facing an unexpected and potentially significant liability.

 

_{[1] Some state wage and hour laws have additional rules regarding overtime pay, such as “daily” overtime pay for hours worked beyond a certain threshold in a given workday.
[2] In many states, including New York and California, the salary thresholds are much higher.
[3] Employees whose salaries exceed $107,432 annually and whose primary duty includes performing office or non-manual work, and who customarily and regularly direct the work of two or more other employees, do not need to meet all of the requirements for the executive employee duties test.}