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Exempt or non-exempt? That is the question!

January 1, 2009

The Fair Labor Standards Act (FLSA) sets the parameters by which you determine whether or not a position is exempt or non-exempt from overtime.

But how do you make that determination? Well, contrary to popular belief, a position’s title does not determine whether or not a position is exempt or non-exempt. Rather, it is the position’s responsibilities, level of decision making, and other factors which are the criteria.

There are five categories by which a position can be considered exempt from overtime:

Highly

Compensated

Executive

 

Administrative

Professional

 

Computer

All criteria, not just a majority, must be met in order for a position to be considered exempt. Following are the exemption categories and their related criteria.

Highly Compensated Exemption

A highly compensated employee in this category performs office or non-manual work. Their annual salary is $100,000 or more, (which must include at least $455 per week paid on a salary or fee basis); and they must customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee.

All of the following exemptions require the employee to be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week ($23,660 per year).

Executive Exemption

In order to qualify for this exemption, the employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise. They 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 the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

An example of this Exemption would be an Education Director who oversees an Education Department. Their responsibilities would include, but not be limited to, overseeing two or more full time staff, developing and implementing courses, collaborating with instructions on course development, determining course schedules, locations, logistics, pricing, and managing the budget. While the AE always has the final decision regarding an employee’s hiring, salary increases, promotions, terminations, etc., the Director would provide the AE with their recommendations.

Administrative Exemption

Like the Executive Exemption, 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; and this duty includes the exercise of discretion and independent judgment with respect to matters of significance.

One example of an Administrative Exemption would be an Association’s Editor whose role is to oversee the production of the Association’s major publication. Their role would be to work with freelance writers, vendors, publishers, establish and adhere to the publishing schedule and manage the budget.

Professional Exemption

There are two subcategories under the professional exemption which are the Learned or Creative Professional. The Learned Professional’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment. The criteria also require advanced knowledge in a field of science or learning; and must be customarily acquired by a prolonged course of specialized intellectual instruction. Positions in this category would include attorneys, CPAs, etc.

The Creative Professional’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. A graphic designer would be an example of a Creative Professional.

Computer Exemption

The Computer Exemption is the only exemption which allows for the $455 per week payment or for employees to be paid at a rate of $27.63 per hour. Employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below:

The employee’s primary duty must consist of:

1) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;

2) The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;

3) The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or

4) A combination of the aforementioned duties, the performance of which requires the same level of skills.

One key factor for determining whether or not an employee working in the technology is exempt from overtime is whether or not there is a “guide” to assist them in doing their work. For example, when an employee is programming something new for your association, he or she must know the computer language in order to program the user’s needs. However, a helpdesk person may have manuals, procedures, or a vendor who they can call to assist them with their problem. Therefore, a helpdesk person would not be considered exempt.

Job Descriptions are Crucial

I know you’ve heard my mantra before, but creating the job description is always the best way to document a position’s responsibilities and to help you assess a positions’ “primary duty”. As stated in the Department of Labor’s Rules and Regulations, “’it may be taken as a good rule of thumb that primary duty means the major part, or over 50 percent, of the employee’s time’ but that “’time alone, however, is not the sole test.’” For example, a manager may spend less than 50% of their time conducting managerial-type duties, however, management is still their primary duty and, therefore, the position would be considered exempt.

I prepared an FLSA checklist for you to use when reviewing your job descriptions to help you determine whether or not a position is exempt. I would highly recommend that you attach the checklist to the job description so that if you are ever audited, you can at least show that you made a good faith effort to classify your positions correctly.

Not sure whether a position is exempt from overtime or are there some gray areas where a position could easily fall into either category? Well, then your best bet would be to categorize the position as non-exempt and pay the overtime to be on the safe side.

Calculating Overtime

As a reminder, effective July 24, 2009, the Federal Minimum Wage increased to $7.25 per hour. You can download the new poster at www.dol.gov and type in “poster” in the search field.

Non-exempt employees are paid at a rate of 1.5 times their hourly rate for hours worked over 40 in one week. It’s always recommended that employees not work overtime unless they receive prior approval from their supervisor. However, if an employee does work without receiving prior approval, they must still be paid.

Here are some samples of how to calculate overtime. Let’s assume your Association has a standard 37.5 hour work week.

Example 1:

Employee takes 1 vacation day on Monday and works 9 hours on Friday

Hours worked:

Monday 0 (1 vacation day 7.5 hours)

Tuesday 7.5

Wednesday 7.5

Thursday 7.5

Friday 9

Total hours worked: 31.5

Total hours to be paid: 39

No overtime pay is due

Example 2:

Employee works 10 hours on Monday and Friday. The employee’s hourly rate is $10 per hour

Hours worked:

Monday 10

Tuesday 7.5

Wednesday 7.5

Thursday 7.5

Friday

10

Total hours worked: 42.5

Pay 40 hours at $10 per hour and 2.5 hours OT at $15 per hour

Non-exempt Employee Travel

Whether or not a non-exempt employee should be paid for their travel time depends on the purpose of the travel. For example, an employee’s ordinary commute time to and from work is not compensable (although it may be compensable in certain emergency situations). Employees who regularly work in one city and then are sent to another city to work and return home the same day must be paid for their travel time. However, you may deduct the employee’s normal commute time from the total hours worked. For example, if the employee worked a 12 hour day but typically spends two hours commuting, then you would only need to pay them for 10 hours. In all honesty, however, administratively it’s much easier to pay them for the full 12 hours.

Non-exempt employees who travel out of town overnight on business should be paid for the total hours worked. This includes any travel time that cuts across the employee’s normal working hours, regardless of what day of the week the travel happens. For example, if an employee regularly works from 9 a.m. to 5 p.m., any out-of-town travel time on an overnight trip that occurs between 9 a.m. and 5 p.m. must be paid – even if it is on a Saturday or Sunday. However, the Department of Labor does not consider the time an employee spends, outside of his or her normal working hours, as a passenger on an airplane, train, boat, bus or automobile as compensable. On the other hand, if the employee is driving to the location or is a passenger and doing work while traveling, then they must be paid for that time.

Remember, you can always be more generous than the law requires and pay the employee for their travel time, which might be administratively easier.

Rest and meal periods

Rest and meal periods are not required by Federal law, although many state laws require them. Federal law does, however, dictate when breaks must be paid and when they can be unpaid. A rest period of 20 minutes or less must be paid. Some associations offer employees two ten minute breaks (one in the morning and one in the afternoon). Employees typically are not allowed to add the break time onto the lunch break. Meal periods of 30 minutes or more do not have to be paid. Be wary, however, if your non-exempt employee is taking a “working lunch”, that is, they continue to work while eating at their desk. Should this occur, your employees must be paid for that time. Similarly, if the employee’s break is susceptible to interruption with work responsibilities – such as an employee who eats lunch at her desk but frequently answers the phone when it rings during lunch – the entire break time must be paid. It’s important to ensure that your staff takes time away from their work area for their lunch break and that they are completely relieved from duty throughout the break.

Docking an Exempt Employee’s Pay

One key determinant of exempt v. non-exempt employees is that exempt employees are paid on a salary basis, regardless of the number of hours worked. Proceed with caution, however, when your exempt employee takes less than a full day off of work because the manner in which you treat this absence may lead you to lose the exemption status for that employee if not handled properly.

Exempt employees can only be docked in full day increments, if the company does not have some other type of paid time off to fill the gap. If your exempt employee takes 1.5 days off but no longer has vacation (or other paid time off) remaining for the calendar year, then only one full day is to be unpaid. If, however, the employee still has a half vacation day remaining, then they would be paid a half vacation day and one full day would be unpaid.

Employer’s Safe Harbor from Improper Deductions

You can limit the liability for inadvertent improper deductions and not lose an employee’s exemption status if you notify your employees that you have a policy in place which prohibits improper deductions, a method by which employees can notify you if they notice an improper deduction, and your policy indicates that any improper deduction will be investigated and rectified promptly. A sample policy is here:

SAMPLE LANGUAGE –

Payroll Deductions

The Association will not make deductions from your paycheck unless you authorize it to do so in writing (for example, with an automatic deposit) or unless it is required by law. If you feel that the Association has inadvertently made an inappropriate deduction from your paycheck, immediately contact Human Resources. If, after further investigation, the Association determines that it has erroneously made a deduction from your paycheck, you will be reimbursed for the improper deduction.

It is our policy and practice to accurately compensate employees and to do so in compliance with all applicable state and federal laws. To ensure that you are paid properly for all time worked and that no improper deductions are made, you must record correctly all work time and review your paychecks promptly to identify and to report all errors. You also must not engage in off-the-clock or unrecorded work.

A. Review Your Pay Stub

We make every effort to ensure our employees are paid correctly. Occasionally, however, inadvertent mistakes can happen. When mistakes do happen and are called to our attention, we promptly will make any correction that is necessary. Please review your pay stub when you receive it to make sure it is correct. If you believe a mistake has occurred or if you have any question, please use the reporting procedure outlined below.

B. Non-exempt Employees

If you are eligible for overtime pay or extra pay (including pay due under our handbook or a collective bargaining agreement), you must maintain a record of the total hours you work each day. These hours must be accurately recorded on a time card that will be provided to you. Each employee must sign his or her time card to verify that the reported hours worked are complete and accurate (and that there is no unrecorded or “off-the-clock” work). Your time card must accurately reflect all regular and overtime hours worked, any absences, early or late arrivals, early or late departures and meal breaks. At the end of each week, you should submit your completed time card for verification and approval. When you receive each pay check, please verify immediately that you were paid correctly for all regular and overtime hours worked each workweek.

C. Exempt Employees

If you are classified as an exempt salaried employee, you will receive a salary which is intended to compensate you for all hours that you may work for the Company. This salary will be established at the time of hire or when you become classified as an exempt employee. While it may be subject to review and modification from time to time, such as during salary review times, the salary will be a predetermined amount that will not be subject to deductions for variations in the quantity or quality of the work you perform.

You will receive your full salary for any workweek in which work is performed. However, under federal law, your salary is subject to certain deductions. For example, absent contrary state law requirements, your salary can be reduced for the following reasons in a workweek in which work was performed:

· Full day absences for personal reasons, including vacation.
· Full day absences for sickness or disability, if applicable.
· Full day disciplinary suspensions for infractions of safety rules of major significance (including those that could cause serious harm to others).
· Family and Medical Leave absences (either full or partial day absences), if applicable.
· To offset amounts received as payment for jury and witness fees or military pay.
· Unpaid disciplinary suspensions of one or more full days for significant infractions of major workplace conduct rules set forth in written policies.
· The first or last week of employment in the event you work less than a full week.

Your salary also may be reduced for certain types of deductions, such as: your portion of health, dental or life insurance premiums; state, federal or local taxes, social security; or voluntary contributions to a 401(k) or pension plan. In any workweek in which you performed any work, your salary will not be reduced for any of the following reasons:

· Partial day absences for personal reasons, sickness or disability.
· Your absence because the facility is closed on a scheduled work day.
· Absences for jury duty, attendance as a witness, or military leave in any week in which you have performed any work.
· Any other deductions prohibited by state or federal law.

Please note: You will be required to use accrued vacation, personal or other forms of paid time off for full or partial day absences for personal reasons, sickness or disability. However, your salary will not be reduced for partial day absences if you do not have accrued paid time off.

D. To Report Violations of This Policy, Communicate Concerns, or Obtain More

Information

It is a violation of the Company’s policy for any employee to falsify a time card, or to alter another employee’s time card. It is also a serious violation of Company policy for any employee or manager to instruct another employee to incorrectly or falsely report hours worked or alter another employee’s time card to under- or over-report hours worked. If any manager or employee instructs you to (1) incorrectly or falsely under- or over-report your hours worked, (2) alter another employee’s time records to inaccurately or falsely report that employee’s hours worked, or (3) conceal any falsification of time records or to violate this policy, do not do so. Instead, report it immediately to Human Resources.

You should not work any hours outside of your scheduled work day unless your supervisor has authorized the unscheduled work in advance. Do not start work early, finish work late, work during a meal break or perform any other extra or overtime work unless you are authorized to do so and that time is recorded on your time card. Employees are prohibited from performing any “off-the-clock” work. “Off-the-clock” work means work you may perform but fail to report on your time card. Any employee who fails to report or inaccurately reports any hours worked will be subject to disciplinary action, up to and including discharge.

If you have questions about deductions from your pay, please contact Human Resources immediately. If you believe your wages have been subject to any improper deductions or your pay does not accurately reflect all hours worked, you should report your concerns to a supervisor immediately. If a supervisor is unavailable or if you believe it would be inappropriate to contact that person (or if you have not received a prompt and fully acceptable reply within three business days), you should immediately contact Human Resources. If you have not received a satisfactory response within five business days after reporting your concern to Human Resources and you are unsure who to contact to correct the problem, please immediately contact your EVP/CEO.

Every report will be fully investigated and corrective action will be taken, up to and including discharge of any employee(s) who violates this policy.

In addition, the Company will not allow any form of retaliation against individuals who report alleged violations of this policy or who cooperate in the Company’s investigation of such reports. Retaliation is unacceptable. Any form of retaliation in violation of this policy will result in disciplinary action, up to and including discharge.

 


Adherence to Association’s Work Hours

Even though exempt employees are salaried doesn’t mean that they can arrive to work and leave at a whim. They must still adhere to your hours of operation. Enforcing employees to adhere to a work schedule does not take away the exemption status.

Check State Law

As always, check your state law to determine what your state’s overtime and exemption rules are. There are some states whose regulations require that overtime be calculated based on the number of hours worked per day, rather than per week. Other states, such as Illinois, follow the old exemption standards. Where Federal and State laws differ, the employee is entitled to the law that would be more generous.

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