Exempt vs. Nonexempt
Where do you fit?
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Paul Falcone, “Exempt vs. Nonexempt”,
HR Magazine, June 2000, Vol. 45, No. 6, pp. 207-214.
HR Magazine
Falcone references issues concerning
line managers and the need to understand and monitor the classifications
of employees who are classified either exempt or nonexempt.
If these managers do not have a full understanding of the wage and
hour regulations, then they may be opening themselves and their company
for an investigation by the Department of Labor.
It appears that line managers feel that the implementation and
knowledge of the wage and hour
regulations are the sole responsibility of the Human Resource Department.
It is not the sole responsibility of HR to classify specific
employees as exempt or nonexempt since it is the line managers who must
incorporate these specifics into their budgets.
The line managers make the determination of whether an employee
should be classified as exempt or nonexempt and with this, they make the
decision of whether they would qualify for any overtime pay. With this
responsibility, they also decide the duties and functions of their
employees, which comprise their positions (the employee’s) as either
exempt or nonexempt.
Falcone mentions an interesting
situation in which a nonexempt secretary would be promoted by a line
manager to an exempt-level coordinator.
With this, the line manager feels that the employee’s new and
higher salary has been
justified within his budget proposals.
Unfortunately, this is not always the truism and the line manager
at this point might need to be able to justify this promotion by other
means. What can occur is if a
disgruntled employee feels that this promotion for the other employee is
unjustified due to no change in the type or amount of work being
completed, they might feel the need to discuss the issue with the HR
Department, or even go further as to contact the Department of Labor.
Generally what would also occur is that the HR Department would not
have known about this promotion in that the employee went from a nonexempt
position to an exempt position.
It is mentioned above that the line
managers’ budgets are a part of the issue concerning the monies spent
for exempt and nonexempt positions. With
this in mind, the line manager needs to realize that their budgets may
actually be on the line if at any time a wage and hour audit becomes
warranted. Falcone brings out that these manager's may have not realized
that their budgets might be on the line if the Department of Labor were to
require an audit. First, if
there was
a proven misclassification of an employee’s “status”, the company
would then be penalized. One
example would be if a position was misclassified and the employee should
have been maintained in a nonexempt position, the employer would be
required to pay the overtime back to the employee.
If this was found to be over a few years, the monetary impact on
the company, including the line manager’s budget, would be quite
damaging (costly).
Falcone mentions a brief listing of
questions that might be asked to an employee, based on a requested audit
by the Department of Labor: “Have
you ever worked through your lunches or breaks?
Have you ever worked overtime without getting paid time-and-a-half? Have you ever taken lunch at your desk and answered the
phone? Have your co-workers
ever done the same things, and how many of them are there?” Interestingly enough, these questions could be answered “yes”
by many employees, both exempt and nonexempt.
What these answers might do is trigger the Department of Labor to
conduct an audit on the company, which in turn could result in a class
action wage and hour suit. This
could become a costly event for any company if they could not justify
their classifications of specific jobs.
Falcone notes that if the plaintiff’s attorney has proven
successfully that the employer has violated the wage and hour provisions,
then the plaintiff and their attorney will have, together with the
Department of Labor, the right to have two years of the company’s
payroll records audited. It
is also noted, that if it is found that the employer willingly violated
these provisions, then the DOL can audit three years.
The objective is to know how the line
manager can protect their companies, and themselves.
There is a need to understand the “mechanics of overtime”. In order to understand these mechanics, there is a need to
know how overtime impact payroll administration in regards to the
nonexempt employee. If
looking at the exempt employee, this signifies that the employee is “exempt
from the overtime provisions” of the Fair Labor Standards Act.
In simpler terms, there are no overtime rules that actually govern
the exempt employee. Such
employees who would fall into the exempt category would be doctors,
lawyers, sales people, those who would typically receive no premium pay
for working longer hours including weekends and holidays.
On the other hand, the nonexempt
employee is fully protected by the Fair Labor Standards Act.
Falcone notes that the nonexempt employee should receive better
treatment when it comes to their working conditions. With this, many of the states present this in the form of
regular breaks and lunch breaks, but they also include with this the
payment of overtime for hours worked over the regularly scheduled 40-hour
week (for full-time employees). Each
state can vary on their requirements for these breaks, yet the managers
should be responsible for setting the estimated times for these breaks,
including the employees’ lunch break.
Yet, Falcone does mention that this can become a bit tricky in that
there are times that a nonexempt employee might need to take lunch at
their desk or even skip their breaks.
But, what could result in a problem with continued practice of this
would be if an employee relayed same to the Department of Labor or to a
plaintiff’s attorney. If this type of practice were continual, then the employer
would be viewed as “willfully” acting by the law.
It is recommended to avoid this type of investigation, that the
managers review their policies and be sure to have the employees adhere to
their specified breaks and lunch times.
If there is to be overtime involved, then the managers should relay
to the employees that all overtime be approved.
Falcone emphasizes that along with the
failure of paying the correct amount of overtime to nonexempt employees,
managers/employers can routinely misclassify the exempt employees.
With this, what occurs is that the employees who have been
classified as exempt employees, may in reality be nonexempt.
In general, employees may be exempt from overtime requirements if
they fall within these general categories:
professional, executive or administrative capacities, or “outside”
sales. Falcone references
that the specific rules for these categories are extensive, and that it is
recommended to consult with qualified compensation consultants or labor
attorneys so a to be sure that their positions are correctly categorized.
In general, executives are exempt from
the overtime requirements if they regularly direct the work of two or more
employees. With this, the
Department of Labor, under 541.1 (section of the Federal Law that deals
with executives), explains when an employee will qualify as an executive,
previously mentioned. The
employees that are being supervised are to be employed by the actual
department that the executive is managing.
Another example of an executive would be an employee who has the
authority over others and who is also paid a salary (not paid an hourly
rate).
The professional would be an
individual whose work is based on an advanced degree (lawyer, doctor).
This type of employee is noted as being the easiest to understand.
As a professional, the general duties evolve around specialized
and advanced knowledge of specific areas.
These individuals are exempt from the overtime requirements of the
FLSA.
Lastly, the administrative categories
are generally the most vague when it comes to defining the qualifiers. This category
is the most abused when assigning exempt status.
General requirements include, but are not limited to:
“customarily and regularly exercises discretion and independent
judgment; performs specialized or technical wok requiring special
training, experience or knowledge; must devote the majority of his/her
time to such activities; and earns at least $250 a week on a salary basis.”
Falcone reiterates the necessity for
employers to be sure to conduct analysis on positions for which they
classify as either exempt or nonexempt.
The above mention some of the requirements and these requirements
can easily be adapted into systematic tools for the employer to conduct
analysis of their various positions.
With the continued analysis and keeping managers’ in tune with
the wage and hour requirements, companies can prevent the
misclassification of their employees.
It is always more efficient for the companies to occasionally
conduct this type of analysis rather than fall into the situation of an
employee making the call to the Department of Labor and having an audit
occur. In conclusion, the
costs involved in the occasional analysis done by the company will
outweigh the costs of an audit which may result in class action suits,
lump-sum pay back of monies to employees, penalties and legal fees.
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