FLSA: Exempt or Not Exempt? That is the Question!

Application of the Fair Labor Standards Act (FLSA) and the issue of whether an employer must pay overtime to certain employees who work beyond their normal work schedule can, at times, be uncertain and extremely complicated.  For purposes of this article we will assume the FLSA applies to your company because your business and its employees are engaged in commerce or the production of goods in commerce.  Understanding that there are many unique jobs that are specifically excluded from the Act’s coverage, such as agricultural laborers, outside sales persons, movie theater employees and news carriers, this article will focus on the sometimes daunting task of deciding whether an employee is exempt from the Act’s minimum wage and overtime requirements either as an Executive, Administrator, Professional or Computer employee.

The most common exemption from the Act’s overtime requirement is known as the “white-collar exemption” for employees who engage in executive or administrative level duties or job duties normally considered to be professional in nature. Whether this exemption applies depends on how much the employee is paid, the method of payment, and the nature of the duties actually performed.

Since 2004, the executive, administrative and professional exemptions generally require that the employee be paid a salary of at least $455 on a weekly basis or $23,660 annually. Employees who are paid less than these amounts will be nonexempt unless they qualify under some other category. (Employees who earn more than $100,000 per year may also be exempt as long as they perform office or non-manual work.) To qualify, the employee must also be paid on a “salary basis.” Salary basis can be established if the employee regularly receives on a weekly or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation which is not subject to reduction based on variations in the quality or quantity of work performed. Typically, when an employee’s base pay is computed using an annual figure divided by the number of paydays in a year, payment on a salary basis exists. You should consult with your legal counsel if there is any question whether this test is satisfied. Also, some jobs are exempt notwithstanding the method of payment, such as doctors, attorneys and teachers.

Once these salary level and salary basis requirements are met the employee must perform certain job duties in order to qualify for the white collar exemption. It is important to note that job titles or position descriptions are not in and of themselves determinative of exempt status, but rather, it is the nature of the job duties actually performed. Therefore, you must evaluate the actual job tasks that are performed, and how those particular job duties are a part of the company’s overall operations.

Bona fide Executive employees are those who have as their primary duty the management of the business entity or a department or subdivision, who regularly supervise two or more other employees, and also have the authority to hire, fire, promote, assign or affect the status of other employees, or to effectively suggest or recommend such action.  Whether an individual’s primary duty is the management of the business is determined on a case-by-case basis based on the totality of the circumstances which include the importance of the duties performed, the time needed to perform those duties, the authority to act independently without supervision in the performance of those duties and the compensation received.

In addition to the supervision of employees, typical management duties delineated in the FLSA Regulations include: interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees’ productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures.

It is important to note that having supervisory and management responsibilities does not preclude nor prohibit an exempt Executive employee from performing other duties performed by non-exempt employees as long as the primary duty is and remains supervisory in nature.

An exempt Administrative employee is one whose job duties include office or non-manual work which is directly related to the management or general business operations of the employer or the employer’s customers, and
which involves as a primary component the exercise of independent judgment and discretion with respect to matters of significance.

These administrative employees are normally considered high-level or management level employees whose purpose is to operate the business. Administrative functions include such things as overseeing human resources and labor relations, financial planning, budget and benefits management and payroll, records maintenance, accounting, marketing and advertising, public relations, legal and regulatory compliance, and quality control. While clerical employees also perform office or non-manual support work they are typically not exempt because they do not exercise independent judgment on matters of significance. Always keep in mind that administratively exempt work typically involves the exercise of discretion and judgment, including the authority to make independent decisions on matters which affect the business as a whole or a significant part of it.

An exempt Professional employee is one whose duties include the performance of work requiring advance knowledge in a field of science or learning customarily acquired through a prolonged course of specialized intellectual instruction. Professionals typically include lawyers, doctors, dentists, teachers, architects and clergy. It may also include registered nurses, accountants, engineers, scientists, pharmacists, and other employees who perform work requiring “advanced knowledge” similar to that historically associated with the traditional learned professions.  It also includes employees whose primary duty is the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor such as musicians, composers, actors, writers, visual or graphic artists, and journalists..

Keep in mind, however, that the performance of lower level duties that are primarily clerical in nature or subject to direct oversight and supervision will not qualify for this exemption. Professionally exempt work is that which is predominantly intellectual, requires specialized education, and involves the exercise of discretion and judgment. The level and type of education required to meet job qualifications is also a factor to be considered.  While some educational training provides technical skills necessary to obtain a certain level of job responsibility, it may not rise to the level of professional employee.

Lastly, an exempt computer professional is one who is paid at least $455 a week or, if paid on an hourly basis, at least $27.63 per hour, and is either a computer systems analyst, programmer or software engineer whose primary duty consists of applying computer systems analysis techniques and procedures to determine what software, hardware or systems should be used; designing, creating and testing such systems; designing, creating and testing computer programs; or any combination of the foregoing.  A distinction must be made between such professional and someone who acts as a computer technician under the direction of another and who simply installs hardware and software, maintains an already existing computer system, or addresses common technical problems encountered in the normal operation of the computer system.  Such individuals may not qualify as exempt.

The above analysis is the tip of the iceberg.  If there is any uncertainty as to the exempt status of one of your employees you should seek immediate legal advice to avoid potential back pay claims and penalties that could be imposed by the Department of Labor for failing to pay overtime to employees mistakenly thought to be exempt.

For further information, contact Michael L. Brungo, Esquire and the HR professionals at Maiello, Brungo & Maiello, LLP at 412-242-4400.