Wage and Hour: Back to the Basics

by Jim Spencer

Earlier this month I wrote a blog regarding when it’s appropriate to pay overtime. In the blog, I had mentioned making sure your employees were properly classified into exempt and non-exempt categories in accordance with Fair Labor Standard Act (FLSA) rules. Since that blog was posted, we have received a lot of questions regarding classifications. So I thought it would be a great idea to return to the basics — the basics of wage and hour.

First, we’ll look at the difference between exempt and non-exempt; then the importance of job descriptions; and finally the penalties for non-compliance. Before I begin, I want to stress the fact that just because an employee is paid a salary does not make them an exempt employee. The FLSA has laid the rules out to help employers determine if an employee is exempt. Let’s begin there.

What exactly does exempt mean? Exempt generally means the employee is exempt from overtime pay. Although there are many exemptions, the most common are the “white-collar exemptions” which are executives, professionals, administrative, outside sales, computer professionals and highly compensated employees. Be careful here. Just because your employee has the word “professional” or “administrative” in their job title or description does not necessarily mean they are exempt from overtime. It will be the employee’s actual duties that primarily classify them as exempt or non-exempt. In addition to the duties test, the employee must pass a salary level test. They must be paid a salary not less than $23,600 per year ($455 per week). Last year that salary level was the subject of much debate as a proposed increase to the minimum salary requirement stalled in the courts. Employers may have breathed a sigh of relief when the proposed increase failed, but their obligation to comply with the already-existing FLSA overtime provisions remains. So let’s take a look at those white-collar exemptions.

Executives: To qualify for this exemption, the employee must be compensated on the minimum salary basis ($455 per week). Their primary duties must consist of managing the enterprise or managing a customarily recognized department or subdivision of the enterprise. They must also possess the authority to hire/fire employees and advancement, promotion or any change of status of other employees must be given particular weight. An example of this would be a Vice President, or Plant Manager.

Administrative: To qualify for this exemption, the employee must be compensated on the minimum salary basis ($455 per week). The employee’s primary duties 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. Also, the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. An example of this might be a Controller or Purchasing Agent.

Professional: This exemption applies only to employees with a learned profession. These employees must be compensated on a salary or fee basis at a rate of at least $455 per week with the exception of certain professions like lawyers and teachers. The employee’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 judgement. The advanced knowledge must be in the field of science or learning and must be customarily acquired by a prolonged course of specialized intellectual instructions. An example of this would be a doctor or a teacher. There’s also a creative professional that would qualify for exemption so long as the employee met the above criteria and also their work performance must consist of invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. An example of this would be a Human Resource Manager.

Computer Employee Exemption: This employee must be compensated either on a salary or fee basis at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour. The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly-skilled worker in the computer field. The employee’s primary duties 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. This exemption does not include a technician that simply helps employees with computer issues.

Outside Sales Exemption: The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer. The employee must be customarily and regularly engaged away from the employer’s place or places of business (including a home office).

Highly Compensated Employee: This exemption applies to office employees doing non-manual work that are paid a total compensation of $100,000 or more if they customarily and regular perform at least one of the duties of an exempt executive, administrative, or professional employee, as identified above. This would not include non-management production line workers, non-management employees in maintenance, construction, and similar occupations such as carpenters, electricians, plumbers, etc.

If your employee does not fall into one of the above exemptions, chances are they should be classified as a non-exempt employee and will be entitled to overtime. For more information on that, I would recommend reading my blog from last week, How to Calculate Overtime Correctly.

Please also note that the exemptions above are exemptions under federal law. Even if an employee fits into one of the exempt categories above, they must also be exempt from overtime under state law. For instance, in Pennsylvania there is no exemption for computer or highly compensated employees. Therefore, a computer programmer in Pennsylvania would have to fit into the Administrate or Executive exemption to be exempt from overtime pay.

Now that there’s an understanding of an exempt and a non-exempt employee, the most crucial step in the process is to have good, clear and concise job descriptions for all positions within your company. If you’re ever in a meeting with the Department of Labor (DOL) on an FLSA audit, you can best believe the first thing requested along with payroll records is your job descriptions. Having your employees properly classified in your job descriptions can be the difference between no fine and a huge penalty including back pay to employees.

A key to remember when creating your job description is job title alone is insufficient to establish the FLSA exempt status of an employee. Rather, the DOL has said exempt or non-exempt status of any particular employee must be determined on the basis of whether the employee’s salary and duties meet the requirements of the law. Just because you give a janitor a title of VP of Sanitation does not mean the employee will be exempt. The same is true of an Administrative or Executive Assistant. Whether these jobs are exempt from overtime will be determined by their job functions and salary. The best way to avoid any FLSA issues is to ensure that your job descriptions accurately reflect the actual job being done, then have the professionals at East Coast Risk Management review your job descriptions to make sure they are sufficient and classify each position as exempt or non-exempt. Errors on these classifications can cost your business big time because you will owe back pay for any overtime not paid, as well as other damages.

In my last blog, I listed the top 5 industries that are at risk for wage and hour violations and also at a serious risk of the dreaded DOL audit. As a quick review they were: Accommodation & Food Services, Healthcare and Social Assistance, Retail, Construction, and Manufacturing. One of the top risks for wage and hour liability is classifying a non-exempt employee as exempt from overtime pay when they are not. Some of the penalties include back pay for up to three years of unpaid wages and overtime owed but not paid, liquidate damages up to two times the original amount owed, attorney’s fees, court cost, and as an added kicker, most insurance policies do not cover these types of losses or claims!

I cannot stress enough how important it is to properly classify your employees through job descriptions. If you are unsure, don’t risk it. The HR professionals at East Coast Risk Management are here to help. Give us a call.  Employers can reach us by calling (724) 864-8745.

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