By some estimates up to 70% of employers are in violation of some provision of the Fair Labor Standards Act (FLSA). Misclassifying of employees as exempt is one of the most common violations and can be the most costly.

Why is misclassification so common? Because the rules surrounding who is exempt are some of the most misunderstood in all of HR compliance, even among the most seasoned HR professionals. But, it doesn’t have to be this way.

Keep it simple. Exempt is the exception, not the rule. Most employees are non-exempt employees. Non-exempt employees are subject to the minimum wage and overtime provisions of the FLSA. Some jobs are considered exempt by definition under the law, but most jobs are only found to be exempt after meeting two requirements: salary and job responsibilities. The latter of these two requirements is where most people go astray.

The Salary Test

There is a minimum pay threshold for an employee to be considered exempt. Employees making a salary over this threshold may be exempt is certain circumstances (see job duties test). Employees making a salary under this threshold are non-exempt and entitled to overtime regardless of their job duties (with one exception, discussed below).

To meet this requirement, employees must be paid at least $23,660 per year. That comes out to $455 per week or (approximately) $1,971 per month. Additionally, employees must be paid on a salary basis. This means they must receive a predetermined amount of compensation each pay period that is not reduced by variations in the quality or quantity of the employee’s work. In other words, the employee makes the same weekly salary whether they work 25 hours, 40 hours, or 60 hours.

This requirement is usually fairly easy to meet. It is the job duties test where things start to get complicated.

The Job Duties Test

Once an employer has determined that an employee has met (or exceeded) the salary test, they must look to the job responsibilities of that employee to determine whether they are exempt from the overtime requirements of the FLSA.

There are seven classes of potentially exempt employees outlined in the FLSA: executive, administrative, learned professionals, creative professionals, computer, outside sales, and highly compensated. Each class has its own requirements that must be met in order to be deemed exempt. Some are very straight forward, others are less so.

Executive Employeesunemployment insurance help nae

To qualify under this exemption, an employee must meet all of the following requirements:

  1. The employee’s primary duty is management of the enterprise.
  2. The employee must manage the work or at least two other employees.
  3. The employee must have the authority to hire, promote, or fire others, or have his or her suggestions be given “particular weight” in those decisions.

Confusion with this exemption often surrounds the phrase “management of the enterprise,” but it’s meaning is fairly simple. Management of the enterprise (or a customarily recognized department or subdivision thereof) refers to activities such as: interviewing, selecting, and training employees; disciplining employees; appraising and/or directing the work of employees; planning and controlling the budget; and determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold. If these types of activities account for the majority of an employee’s day-to-day responsibilities, they are likely exempt.

It is important to remember that a job title is not determinative. Someone with “manager” or “executive” in his or her job title, but with none of the responsibilities will not be exempt.

Administrative Employees

To qualify under this exemption, an employee must meet all of the following requirements:

  1. The employee primarily performs office or non-manual work related to the management or general business operations of the company.
  2. The employee is empowered to exercise discretion and independent judgment with respect to matters of significance.

This exemption is the most misapplied of all the exemptions listed. It is easy to see why.

While there isn’t much guidance from the Department of Labor, what is clear is that someone who is exempt under this class must be empowered to make important decisions regarding how the business is run. The more discretion the employee has or the more independent judgment the employee can exercise in their day-to-day duties, the more likely it is that they are exempt. Employees who fall into this exemption have authority to make decisions without direct guidance or approval of another party. Something more than just being in an administrative role is required to trigger this exemption.

With this exemption especially—when in doubt, err on the side of caution.

Learned Professionals

To qualify under this exemption, an employee must meet all of the following requirements:

  1. The employee primarily performs work that requires advanced knowledge or that is intellectual in nature.
  2. The employee’s expertise is in a field of science or learning requiring a prolonged course of study.

This exemption most commonly applies to those working in the fields of law, medicine, and education, but applies to other similar occupations that have a recognized professional status. The key here is that the employee is working in a field where specialized training is a standard prerequisite for entering the profession. While certain skilled “blue collar” trades go through a period of apprenticeship, they are generally not covered by this exemption.

Nevada law specifically delineates which professions are exempt from overtime. If there is ever a doubt as to whether an employee is exempt, look to the professions outlined in NRS 608.0116 for guidance.

Creative Professionals

To qualify under this exemption, an employee must meet all of the following requirements:

  1. The employee must perform work that requires invention, imagination, originality, or talent in the arts or a creative field.

This exemption applies to those working in the fields of music, writing, acting, and graphic arts and who are granted creative license in their work. What does that mean? To fall within this exemption, an artist must have the ability to inject some individuality into the work they are creating for their employer. By way of example, a cartoonist who is told the underlying concept of a cartoon, but must reply on his/her own creative ability to express the concept would fall under this exemption.

Computer Employees

To qualify under this exemption, an employee must meet all of the following requirements:

  1. The employee must be employed as a computer systems analyst, programmer, software engineer, or similarly skilled position.
  2. The employee’s primary duties must consist of system analysis, design or development of computer systems or programs, or any combination thereof.

As you may have guessed, just having “computer” in the job title is not going to be sufficient to meet the requirements of this exemption. In fact, this exemption specifically excludes computer manufacturing and computer repair from exemption. Further, even though the FLSA specifically delineates certain positions in this exemption, job titles are not determinative. Employers must look to the primary duties the computer employee is performing to determine whether this exemption applies or not.

Outside Sales Employees

Unlike the other exemptions, outside sales employees do not have a minimum salary requirement. Even if the employee makes less than the established salary threshold, they might be exempted by their job duties.

To qualify under this exemption, an employee must meet all of the following requirements:

  1. The employee’s primary job duties are trying to make sales or secure contracts.
  2. The employee is regularly off-premises as part of the performance of his or her job duties.

This exemption applies to sales employees who spend 50% or more of their working hours away from their employer’s premises. This exemption can apply to drivers who sell in certain circumstances. This exemption does not apply to sale employees who work remotely from home. While they are away from the employer’s premises, they are at a fixed location used as a headquarters for their work.

Highly Compensated Employees

To qualify for this exemption, an employee must meet all of the following requirements:

  1. The employee must earn $100,000 or more annually.
  2. The employee primarily performs office or non-manual work.
  3. The employee customarily and regularly performs at least one of the exempt duties of an exempt executive, administrative, or professional employee.

The total annual compensation for highly compensated employees can include salary, commissioner, nondiscretionary bonuses, and other nondiscretionary compensation. However, expense reimbursements, lodging, contributions to retirement plans or insurance are not included.

A high level of compensation is a strong indicator of an employee’s exempt status, thereby eliminating the need for a detailed analysis of the employee’s job duties. However, this exemption only applies to employees who primarily perform office or non-manual work.

Remember—determining whether an employee is exempt from the overtime provisions of the FLSA is a two-step process. Do not stop once you determine the employee meets (or exceeds) the salary threshold. Do not assume the employee is exempt based on his or her job title. Look at the employee’s day-to-day responsibilities.

NAE provides its members with a checklist, available for download from our Member Portal, to help determine an employee’s exempt status under the FLSA.

And as always, err on the side of caution when there is any doubt as to how to classify an employee. Don’t be afraid to seek guidance from a trust adviser or legal counsel.