Can Employees Be Paid Salary to Avoid Paying Overtime?
This is a common question employers have – and not understanding the rules regarding exempt and non-exempt status, established by the federal Fair Labor Standards Act (FLSA), can land employers in hot water if employees are misclassified.
With the impending changes to the minimum salary threshold for exempt employees (Read more about that here!), this is a great opportunity for employers to review all current exempt and salary employees to make sure they are properly classified.
By default, the FLSA assumes that all employees are non-exempt, meaning they are entitled to receive overtime pay for all hours over 40 worked in a workweek.
There are two criteria that must be met in order for an employee to be considered exempt from overtime:
- They must be paid a minimum salary per week (currently this minimum is $455 but is set to increase to $913 on December 1, 2016).
- They must meet certain tests regarding their job duties to qualify for an exemption from the FLSA (such as bona fide executive, administrative, professional, computer and outside sales employees).
While the minimum salary threshold is easy to understand, there is a lot of misunderstanding regarding the job duties criteria.
An employee’s job title alone does not determine exempt status. Rather, the employer must evaluate the job description and primary duties performed by each employee to determine if they qualify as exempt.
Below is a brief summary of each of the exemptions provided by the FLSA. It is important to note that for these exemptions to hold true, ALL criteria listed beneath the exemption must be met.
Executive Exemption (i.e., Corporate Executive, HR Manager, General Manager):
- Primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
- The employee must “customarily and regularly” direct the work of at least 2 or more other full-time employees; AND
- The employee must 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.
Administrative Exemption (i.e., Office Manager):
- 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
- The employee’s primary duty must include the authority to exercise discretion and independent judgment to make decisions in respect to matters of significance.
Professional Exemption (i.e., Medical Professionals, Accountant, Engineer:
- Primary duty must be the performance of work requiring advanced knowledge (work which is predominantly intellectual in character which includes work requiring the consistent exercise of discretion and judgment; AND
- Advanced knowledge must be in a field of science or learning (such as law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy) which traditionally is acquired through specialized academic training.
Creative Professional Exemption (i.e., Actors, Musicians, Writers)
- Primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor (including music, writing, acting and the graphic arts)
Computer Employee Exemption (i.e., Computer Programmer, Software Engineer)
- The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the following duties:
- Application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
- 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;
- The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
- A combination of the aforementioned duties, the performance of which requires the same level of skills.
Outside Sales Exemption (i.e., Outside Sales Representative, Account Manager)
- Primary duty must be making sales or obtaining orders or contracts for services for which a consideration will e paid by the client or customer; AND
- The employee must be “customarily and regularly” engaged away from the employer’s place or places of business (meaning the majority of the employee’s work is performed outside of the company’s place of business).
There are a few exceptions to these exemptions such as police officers, fire fighters and paramedics. Additional information about the exceptions are available on the Department of Labor website.