exempt non exempt 09

HRSPECIALIST

EXEMPT OR NONEXEMPT?How to Make the Call and Avoid FLSA Overtime Lawsuits

EDITOR EDITORIAL DIRECTOR ASSOCIATE PUBLISHER PUBLISHER

Kathy A. Shipp Patrick DiDomenico Adam Goldstein Phillip A. Ash

© 2009, Capitol Information Group, Inc., 7600A Leesburg Pike,West Building, Suite 300, Falls Church,VA22043-2004. Phone: (800) 543-2055; www.BusinessManagementDaily.com.All rights reserved. No part of thisreport may be reproduced in any form or by any means without written permission from the publisher.Printed in U.S.A.

This publication is designed to provide accurate and authoritative information regarding the subject mattercovered. It is sold with the understanding that the publisher is not engaged in rendering legal service. If yourequire legal advice, please seek the services of an attorney.

BEVN

EXECUTIVE SUMMARY

Contents

Overview: Many Employers Unknowingly Violate the Law . . . . . . . . . . 1

Classification Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Salary-basis test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Duties tests: The 5 exemption categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1. Exempt executive employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32. Exempt administrative employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33. Exempt professional employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44. Computer-related professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65. Outside sales employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

10 Common Employer Mistakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91. Misclassifying assistants and computer pros . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92. Switching employees to exempt once they hit a pay threshold . . . . . . . . . . . . . . . . . . . . 93. Looking only at job titles, not at employees’ duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94. Wrongly assuming all help-desk workers qualify for the computer exemption . . . . . . . 105. Not giving exempt executives true hiring/firing authority . . . . . . . . . . . . . . . . . . . . . . . 106. Allowing clerical tasks to defeat administrative exemption . . . . . . . . . . . . . . . . . . . . . . 107. Looking only at the degree, not the job, to classify learned professionals . . . . . . . . . . . 118. Wrongly assuming all medical staff qualify for the professional exemption . . . . . . . . . 119. Jeopardizing exempt employees’ status if you pay them extra . . . . . . . . . . . . . . . . . . . . 12

10. Not ensuring store managers’ primary duty is management . . . . . . . . . . . . . . . . . . . . . . 12

6 Compliance Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141. Adopt a safe-harbor policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142. If you reclassify an employee, do so with finesse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143. How to avoid paying overtime to an employee who doesn’t satisfy one of the

white-collar exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144. Fine-tune your record-keeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145. If exempt status is in question, issue a ‘good-faith’ reply . . . . . . . . . . . . . . . . . . . . . . . . 156. If you have doubts about how to classify employees, educate yourself . . . . . . . . . . . . . 15

Frequently Asked Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Are hourly bonuses OK for salaried employees? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Does exemption class matter for part-time employees? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Can we legally convert all employees to nonexempt? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Does extra holiday pay endanger exempt status? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Comp time for exempt workers: Is this a slippery slope? . . . . . . . . . . . . . . . . . . . . . . . . . . 18Should we track hours of straight-commission workers? . . . . . . . . . . . . . . . . . . . . . . . . . . 18Is a mandatory 45-hour week allowed for exempt staff? . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Can we change the status of an hourly ‘working’ supervisor? . . . . . . . . . . . . . . . . . . . . . . 19Can we require salaried staff to make up lost time? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Are exempt workers entitled to unlimited sick leave? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Self-Audit: Test Your Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Exempt or Nonexempt? How to Make the Call

© 2009, Capitol Information Group 1

Rather than calming the turbulent legal waters, the revamping of the federal overtimelaws in 2004 has churned up even more disputes and lawsuits. The U.S. Labor

Department continues to issue a sober report card on employers for violating the rules.

In fiscal 2008, the Labor Department awarded more than $123 million in back wages to nearly183,000 employees for overtime claims.

The top mistake for employers—and the most costly one—is wrongly labeling employees asexempt from overtime pay, according to the Labor Department.

Certain executive, administrative and professional employees are exempt from the Fair LaborStandards Act (FLSA), meaning they aren’t eligible for overtime pay. But the $64,000 question is:Which employees qualify for the overtime exemption?

Confusion over the revised FLSA regulations means that many employers—some estimates run ashigh as 40%—unknowingly violate the law. Technology companies, in particular, are being targeted.(Adding to the confusion, some states set their own exempt/nonexempt classification rules.)

The stakes are high. Employees misclassified as exempt can be eligible for two years’ worth ofback wages (three if the violation was “willful”) at 1.5 times the hourly rate, plus liquidated damagesequal to the unpaid wages. That means employees can collect up to three times their regular rate.

How can you avoid becoming another victim of an employee lawsuit or a charge statistic at theLabor Department? The key is to regularly audit your work force classifications and job descriptionsto ensure you’re correctly classifying employees as exempt.

By understanding and applying the revamped overtime rules, you’ll save yourself years of litiga-tion and thousands of dollars in attorneys’ fees. This executive summary provides you with a blueprintto do just that.

Overview: Many Employers Unknowingly Violate the Law

Beware high-stakes class-action suits The rising tide of overtime suits includes some huge class-action awards and settlements over misclassification mis-takes by large corporations.

Private lawsuits filed by multiple employees have jumped 77% over the past five years, according to the NationalEmployment Lawyers Association. Some recent examples:

• Siebel Systems agreed to pay $27 million to settle an overtime class-action suit by hundreds of computer work-ers who claimed they were wrongly classified as exempt software engineers, but whose actual job duties didn’t riseabove the level required for exempt status.

• USB paid out $89 million to settle overtime-related lawsuits by financial advisers who claimed it had incorrectlylabeled them as exempt workers.

• IBM settled a class-action lawsuit by paying $65 million to 32,000 tech workers who claimed the company with-held overtime pay by misclassifying them as exempt.

Bottom line: Plaintiffs’ attorneys see easy money in overtime suits, especially when they can turn one employee’slawsuit into a huge class action involving similarly situated employees.



When a new hire comes on board, you mustdetermine whether to classify him or her as

exempt or nonexempt under the FLSA. The keyconsideration: Exempt workers aren’t eligible forovertime pay. Rather, they’re paid for the jobthey do, not the hours they keep.

Generally, employees must meet two require-ments to be classified as exempt: (1) They mustbe paid on a salary basis and (2) they must hold aposition with duties designated by the LaborDepartment as appropriate for exempt status.

Those exempt positions generally fall intofive categories:

1. Executive2. Administrative3. Professional (both learned and creative

professionals)4. Computer professional5. Outside salesIn addition, the revised regulations contained

a new “highly compensated” employee exemptionfor workers who are paid total annual compensa-tion of $100,000 or more (see box on page 4).

Following is a detailed breakdown of theexemption categories, adapted from LaborDepartment fact sheets.

Salary-basis testBeing paid on a salary or fee basis is the quid proquo of exempt employees. They aren’t paid over-time for working more than 40 hours a week; inexchange, their employer must provide a guaran-teed salary, which can’t be reduced when theywork fewer than 40 hours.

This reflects the understanding that exemptemployees have the discretion to manage theirtime and are not answerable for hours worked orthe number of tasks performed. Rather, they’repaid for the general value of the services theyprovide. In addition, you may not deduct pay fortime when work isn’t available if salaried work-ers are ready, willing and able to work.

Under the Labor Department’s revised regula-tions, the minimum salary a worker must earn to

qualify as exempt is $455 per week, $910biweekly (every other week), $985.83 semi-monthly (every 1st and 15th of the month),$1,971.66 monthly or $23,660 annually.

Other characteristics of being paid on a salarybasis:

• Exempt employees earn a set salary even ifthey work only part of the week.

• Employers can’t dock their pay for a partial-day absence.

• Employers can’t dock their pay as a disci-plinary measure unless they have committed a serious safety infraction (breaking a ruledesigned to prevent endangering the facilitiesor other workers). The new regulations statethat you may deduct for “unpaid disciplinarysuspensions of a full day or more imposed ingood faith for infractions of workplace con-duct rules,” such as sexual harassment orworkplace violence. You’ll need, however, awritten policy that you apply uniformly to allworkers.

(Note: The Labor Department offers a ModelSalary Basis Policy that you should adopt. It pro-vides a “safe-harbor” defense for employers thatunintentionally make improper deductions froman exempt employee’s salary. For details, seepage 14.)

Make sure you abide by the salary rules. Ifyou don’t, the employee is no longer exempt, nomatter what his or her duties and responsibilitiesare. And remember: Destroying a person’sexemption can make you liable for two years’overtime pay for any hours worked beyond 40per week.

Duties tests: The 5 exemption categoriesWorkers who earn at least $455 a week may beexempt from overtime pay if they also meet theappropriate tests for their classification, as out-lined below.

Classification Guidelines



1. Exempt executive employeeTo qualify for the executive exemption, anemployee must earn a minimum of $455 perweek and meet the following tests:

• Primary duty: manages the enterprise or acustomarily recognized department or subdi-vision of the enterprise.

• Customarily directs the work of two or moreother employees.

• Has authority to hire or fire other employeesor whose suggestions and recommendationsas to hiring, firing, advancement, promotionor other change of status of other employeesmust be given particular weight.

A rule of thumb: The executive shoulddevote substantial time to supervision. Thatincludes interviewing, selecting and trainingworkers, setting and adjusting pay rates andhours, handling complaints and discipliningemployees, directing work and determining whatmaterials, supplies, machinery or tools to buy,sell or stock.

That’s not to say that exempt executives can’tperform other tasks such as stocking shelves orserving food. If they remain responsible for thesuccess or failure of the operations under theirmanagement while performing nonexempt work,they may be classified as executives. In addition,if they control when nonexempt work is per-formed, their exemption is valid.

The more time the employee spends doingthe work of the enterprise as opposed to directingthe work, the more likely he or she is an “execu-tive” in name only and thus eligible for overtimepay. Take, for example, a court case involving an“executive” who was the manager at a car wash.He spent 95% of his workday washing carsinstead of directing others’ work and little or notime managing the business. The court ruled hewasn’t exempt.

The revised FLSA regulations also clarifythat the phrase “directs the work of two or moreemployees” means two full-time workers or theirequivalent. Thus, an executive could supervisefour part-time workers and meet the qualifica-tions, but not one full-time and one part-timeemployee.

The final requirement is new: Executivesmust do more than supervise to be classified asexempt. They must have actual authority overthose they supervise or at least have some say inpersonnel decisions. It doesn’t matter if the finaldecision rests with a higher-level manager.Factors that weigh in favor of meeting thisrequirement include:

• Whether recommendations on hiring andfiring are part of the executive’s job description.

• Whether the executive frequently makessuggestions and recommendations.

• How often his or her suggestions and rec-ommendations are followed.

2. Exempt administrative employeeTo qualify for the administrative exemption, anemployee must earn a minimum of $455 perweek and meet the following tests:

• Primary duty: performs office or nonmanualwork directly related to the management orgeneral business operations of the employeror the employer’s customers.

• Exercises discretion and independent judg-ment with respect to matters of significancein performing his or her primary duty.

The new regulations specify that sellinggoods or services in retail isn’t work directlyrelated to the management or general businessoperations of the employer. Examples that domeet the test include working in tax, finance,accounting, budgeting, auditing, insurance, qualitycontrol, purchasing, procurement, advertising,marketing, research, safety and health, humanresources, labor relations, governmental relations,computer networking, Internet and databaseadministration, and legal and regulatory compli-ance. In addition, if you have employees whoperform the same sort of functions for your cus-tomers, they may also be exempt. So, if youemploy tax experts or financial consultants whoadvise your customers, they’re probably exemptprovided they meet the salary requirement.

The administrative exemption applies only if the employee also exercises discretion and in-dependent judgment. In general, independent



judgment means that the employee compares andevaluates possible courses of action and makes adecision after considering the options.

Such employees must have the authority tomake an independent choice, free from immedi-ate direction or supervision. Even though theirdecisions may be revised or reversed after review,they’re still exercising independent judgment.However, the term means more than the use of askill in applying well-established techniques,procedures or specific standards described inmanuals or other sources.

Examples of jobs that qualify for the adminis-trative exemption:

• Insurance adjusters who analyze claims andmake recommendations on litigation or settle-ments.

• Financial service industry workers who ana-lyze customer assets, needs and investmentsand make recommendations, but not employ-ees whose primary responsibility is to sell afinancial product.

• Executive or administrative assistants who,without specific instructions or prescribedprocedures, have delegated authority regard-ing matters of significance.

• Human resource managers who formulate,interpret or implement employment policies.

• Purchasing agents with authority to bind thecompany on significant purchases.

• Employees of educational establishmentswho serve as administrators, principals anddepartment heads. Specialists such as coun-selors, social workers and dietitians don’tqualify under this exemption but may fallunder the “learned professional” exemption(see below).

Examples of workers who don’t qualify forthe administrative exemption include inspectorswho follow strict guidelines, such as electrical orbuilding codes, and comparison-shoppers whoreport competitor prices.

3. Exempt professional employeeThe specific requirements for exemption as bonafide professional employees are summarizedbelow. These employees fall into two general cat-egories: learned professionals and creative pro-fessionals.

Learned professional exemption:To qualify for the learned professional exemp-tion, an employee must earn a minimum of $455per week and meet these tests:

• Primary duty: performs work requiringadvanced knowledge, defined as work that’spredominantly intellectual in character and

‘Highly compensated worker’ exemptionWhen the Labor Department revised the overtime rules in 2004, it created an exemption category for “highly compen-sated employees.” Essentially, any employee who earns more than $100,000 a year and regularly performs even one ofthe exempt duties of an executive, administrative or professional employee is precluded from earning overtime.

To qualify as a highly compensated exempt employee, the person must meet several tests:

• The employee earns total annual compensation of $100,000 or more, which includes at least $455 per week paidon a salary basis.

• The employee’s primary duty includes performing office work or nonmanual duties.

• The employee customarily and regularly performs at least one of the exempt duties or responsibilities of anexempt executive, administrative or professional employee.

So, for example, an employee may qualify as an exempt highly compensated executive if he or she customarily andregularly directs the work of two or more employees, even though the person doesn’t meet all the other requirementsin the standard test for exemption as an executive.

The required compensation of $100,000 or more may consist of commissions, nondiscretionary bonuses and othernondiscretionary compensation earned during a 52-week period. It doesn’t include credit for board or lodging, pay-ments for medical or life insurance, or contributions to retirement plans or other fringe benefits.



requires consistent exercise of discretion andjudgment.

• Has advanced knowledge in a field of scienceor learning that’s customarily acquired by aprolonged course of specialized intellectualinstruction.

In other words, a learned professional per-forms work that usually involves analysis, inter-pretation or making deductions from facts andcircumstances. Learned professionals work withtheir intellect, not with their hands. The regula-tions go so far as to state that their advancedknowledge can’t be attained in high school butmust ordinarily be in specialized academic train-ing at a higher level. That doesn’t always mean afour-year degree, however; the test is whether theacademic training is a standard prerequisite forentrance into the profession.

The types of learning cited in the regulationsinclude the traditional professions of law; medi-cine; theology; accounting; actuarial computa-tion; engineering; architecture; teaching; physi-cal, chemical and biological sciences; pharmacyand similar occupations. The list will be open toexpansion as new professions are created andacademic training and specialized degrees areoffered in the fields of science and learning. If anadvanced specialized degree becomes the stan-dard for a particular occupation, that occupationwill become a learned profession. So, it’s a goodidea for you to keep on top of developments inprofessional fields and regularly review your jobdescriptions and minimum training requirementsagainst national standards. Otherwise, you maymiss the opportunity to classify professionals asexempt from overtime.

The regulations go to great lengths to demon-strate what types of professions the Labor Department believes fit in the learned profes-sional category:

• Doctors and lawyers who hold advancedacademic degrees in medicine or law, arelicensed in their professions and actuallypractice their profession. The exemption alsocovers doctors engaged in internships and res-idency programs who have completed therequisite academic degree for the general

practice of medicine. They include medicaldoctors, osteopathic physicians, podiatrists,dentists and optometrists. The salary require-ment doesn’t apply to doctors or lawyers.

• Teachers employed by educational establish-ments whose primary duty is teaching, tutor-ing, instructing or lecturing in the activity ofimparting knowledge. Teachers may be certi-fied by a state agency or may work in privateschools or other settings without certification,so certification alone is not the sole standard.The salary requirement doesn’t apply toteachers.

• Registered or certified medical technologistswho have completed three academic years ofpre-professional study at an accredited collegeor university, plus a fourth year of course workin a school of medical technology approved bythe American Medical Association.

• Nurses who are registered by their stateboard of nursing as RNs and have completeda specialized academic degree as a prerequi-site for being licensed. (Check with your stateto see if that includes a two-year associatedegree as well as a four-year bachelor’s degree.)Under the regulations, licensed practical nurses(LPNs) or other paraprofessionals don’t meetthe learned professional exemption.

• Dental hygienists who have completed fouryears of pre-professional or professional stud-ies at an accredited college or universityapproved by the American Dental Association.

• Physician assistants who have completedfour years of academic training and graduatedfrom a program certified by one of two pro-fessional associations.

• Accountants who are certified publicaccountants or hold jobs similar to them.Accounting clerks and bookkeepers who doroutine financial work aren’t included in thiscategory.

• Chefs with four-year academic degrees in theculinary arts. However, cooks who performroutine mental, manual, mechanical or physi-cal work don’t qualify for this category.



• Athletic trainers who have completed fouryears of academic training in a specializedprogram accredited by the Commission ofAccreditation of Allied Health EducationPrograms and are certified by their profes-sional board.

• Funeral directors and embalmers licensedby and working in a state that requires a four-year academic degree program accredited bythe American Board of Funeral ServiceEducation. (Check with your state board offuneral directors for its requirements.)

The regulations exclude most paralegals orlegal assistants from the exempt professional cat-egory because entry into this field doesn’t requirean advanced academic degree. Most paralegalshave two-year associate degrees or certificatesrather than four-year specialized degrees in thefield. Exception: If you hire someone in anotherlearned profession to work as a paralegal, he orshe is probably exempt (for example, a registerednurse who’s hired as a paralegal to help evaluatemedical malpractice claims).

Note: The Labor Department issues opinionletters to guide employers on whether a particulartype of job fits into an exempt category. Forexample, it recently clarified whether medicalcoders who work at home are exempt or hourlyworkers. Because medical coders have no recog-nized educational program at the college level,the department concluded that they aren’t pro-fessionals. (It’s not enough that they have a professional certification program available.)This opinion may signal reluctance on the LaborDepartment’s part to expand the professional cat-egory beyond well-recognized professional jobs.(FLSA 2005-35)

Creative professional exemption:To qualify for the creative professional exemp-tion, an employee must earn a minimum of $455per week and meet these tests:

• Primary duty: performs work requiring inven-tion, imagination, originality or talent in arecognized field of artistic or creative endeav-or. The exemption doesn’t apply to work thata person could perform with general manualor intellectual ability and training.

• Works in a recognized field of artistic or cre-ative endeavor, including music, writing, act-ing and the graphic arts.

Unfortunately, it’s hard to assess whethersomeone is a creative professional since educa-tional background isn’t a prerequisite. Rather, theexemption hinges on whether the person holdingthe position is engaged in a creative endeavor.Thus you should carefully review your own jobdescriptions before placing someone in the cre-ative professional exempt category.

Generally, the following are exempt creativeprofessionals:

• Actors

• Musicians, composers and soloists

• Painters and artists who are given generalguidelines as to subject matter

• Cartoonists who are given only the title orunderlying concept for a cartoon and mustrely on their own creative ability to expressthe concept

• Essayists, novelists, short-story writers andscreenplay writers

• Writers in advertising agencies

• Journalists working for newspapers, maga-zines, television and other media who con-tribute a unique interpretation or analysis to anews product or those who appear as on-airpersonalities, conduct interviews or serve asnarrators or commentators

Examples of workers who don’t qualify forthe creative professional exemption: reporterswho only rewrite press releases, report on routinecommunity events such as school board meetingsand the like; animators who illustrate cells formotion picture cartoons; photographers who onlyretouch photos.

4. Computer-related professionalTo qualify for this exemption, a computer em-ployee must meet all the following tests:

• Be compensated either on a salary or feebasis at a rate not less than $455 per week or,if paid on an hourly basis, earn at least$27.63 per hour.



• Must be a computer systems analyst, com-puter programmer, software engineer or othersimilarly skilled worker in the computer fieldperforming the duties described below.

• Primary duty must consist of:

1. Application of systems analysis techniquesand procedures, including consulting withusers, to determine hardware, software or sys-tem functional specifications.

2. Design, development, documentation, analy-sis, creation, testing or modification of com-puter systems or programs, including proto-types, based on and related to user or systemdesign specifications.

3. Design, documentation, testing, creation ormodification of computer programs related tomachine operating systems.

4. Or a combination of the aforementionedduties that requires the same level of skills.

No specific educational requirement appliesto this exemption. The Labor Department says,however, that workers who simply use computersto aid in their work, such as drafters and others incomputer-aided design, don’t qualify. This ex-emption also doesn’t include those who repaircomputers or assemble them. (Caution: This isan area where many employers go wrong by

trying to classify even IT help-desk workers asexempt. See details on page 10.)

5. Outside sales employeeOutside sales employees also may be exempt iftheir primary duties are one of the following:

• Making sales or

• Obtaining orders or contracts for services oruse of facilities for which a consideration willbe paid by the customer and

• Who are customarily and regularly engagedaway from the employer’s place or places ofbusiness while selling or obtaining orders orcontracts for services

Essentially, an outside sales employee spendsmost of his or her time away from the employer’soffice facilities “on the road” making sales calls.The person doesn’t lose exempt status by per-forming a few tasks that aren’t directly related tosales. For example, the person may restock dis-play cases, attend sales conferences, write salesreports and revise sales catalogues as work inci-dental to the main task of getting orders.

The outside sales exemption doesn’t apply tosalespeople who work in house or may workfrom a home office. The regulation specifies that“outside sales does not include sales by mail,

Nonexempt: Blue-collar workers and first respondersTake note: The five FLSA exemptions described here apply only to “white-collar” employees who meet the salary andduties tests set forth in the Part 541 regulations of FLSA Section 13(a)(1).

They don’t apply to manual laborers or other “blue-collar” workers who perform work involving repetitive opera-tions with their hands, physical skill and energy. FLSA-covered, nonmanagement employees in production, mainte-nance, construction and similar occupations (such as carpenters, electricians, mechanics, plumbers, iron workers,craftsmen, operating engineers, longshoremen, construction workers and laborers) are entitled to minimum wage andovertime premium pay under the FLSA, and they aren’t exempt under the Part 541 regulations no matter how highlypaid they might be.

In addition, the exemptions don’t apply to most workers involved in law enforcement, including police officers,detectives, deputy sheriffs, state troopers, investigators, correctional officers, parole and probation officers, parkrangers, firefighters, paramedics, emergency technicians, ambulance personnel and rescue workers. If their duties areto prevent, control or extinguish fires, prevent or detect crime, conduct investigations, perform surveillance, pursuesuspects or supervise them before or after conviction, they’re probably entitled to overtime pay no matter how wellthey’re paid.

Note: Although many first responders may hold college degrees, the Labor Department pointed out that a four-year degree is generally not a prerequisite for employment in their field; therefore, they don’t cleanly fit into any exemptcategory.



telephone or the Internet ...” unless the person isfollowing up on a personal sales call. The crucialfactor distinguishing outside salespeople fromothers is the emphasis on face-to-face selling.

Under the regulations, drivers who also sellmay be exempt outside sales employees if they:

• Provide the only sales contact between theemployer and the customers visited, and takeorders, deliver them from the truck then orlater and are paid based on the volume ofgoods sold.

• Obtain or solicit orders along the route orsolicit new customers during their stops.

Not everyone who drives a truck full of goodsqualifies. For example, drivers who stock vend-ing machines or get the occasional order or sim-ply deliver and set up displays are not exemptoutside salespeople.

No minimum salary requirement applies foroutside sales employees. Many are paid straightcommission rather than a salary. This includesinsurance and real estate salespeople.



The five exemption categories described in thefirst chapter are the Labor Department’s gen-

eral guidelines to follow in properly classifyingemployees. But as many employers have dis-covered the hard way, it’s not so simple to makethose calls.

Heed the lessons learned by other employersto avoid incurring costly penalties, back-wagepayments and legal fees—not to mention theblack mark against you that an FLSA lawsuit can bring. Here are 10 common mistakes youwant to avoid to stay in compliance with theFLSA’s classification rules.

1. Misclassifying assistants and computer prosEmployers are making the most classificationmistakes with two types of employees, says attor-ney William Schurgin of Seyfarth Shaw:

1. Executive assistants. “The number ofexecutive assistants that are truly exempt is small… and this is an issue that Labor is going aftertime and time again,” Schurgin says.

Key points: If the executive is out of theoffice, could the assistant make some key deci-sions in his or her place? If not, the person islikely nonexempt.

In fact, the violation most frequently citedby the Labor Department is one in which theemployee’s primary duty is not “the performanceof office or nonmanual work directly related tothe management or general business operationsof the employer or the employer’s customers.”Violations of the administrative duty testoccurred in 353 FLSA cases involving about2,800 employees in 2006.

2. Computer professionals. The FLSA’sovertime rules contain an exemption for certaincomputer professionals, but too many employerstry to shoehorn every IT person into that category,even help-desk people. “It’s a very, very hot-button issue with the Department of Labor rightnow,” Schurgin says.

2. Switching employees to exempt once they hit a pay thresholdAerospace contractor Ball Corp. had to pay outalmost $1 million to 900 employees to settle aLabor Department complaint. The problem: Thecompany switched top-tier hourly workers toexempt status once employees reached the top ofthe hourly pay scale. They were also required towork through lunch without pay.

Ball Corp. misunderstood the exemptionsavailable under the FLSA. Although earnings arepart of the calculations, job duties and responsi-bilities play an important role, too.

3. Looking only at job titles, not at employees’ dutiesMany employers believe that anyone with a“manager” title is automatically exempt fromovertime. But the term “manager” means differ-ent things in various organizations. That’s whyit’s important to look at each employee’s specificduties and responsibilities when deciding whetherhe or she is eligible for overtime.

That’s especially true in industries that haveenjoyed overtime exemptions for years. Most arebased on unique jobs with special requirements,such as truckers who move goods from state tostate. But attempts to stretch these industry-specific exemptions to other jobs often fail.

Case in point: A dozen drivers sued thePittsburgh Transportation Company (PTC), a pri-vate bus company for disabled people. The driv-ers routinely drove more than 40 hours per week,but the PTC didn’t pay overtime, arguing thatthey were exempt because the Motor Carrier Actexcludes many truck drivers from the FLSA.

However, that law refers to drivers who movegoods across state lines. The PTC bus driverstransported customers to and from doctorappointments. The PTC couldn’t prove that its

10 Common Employer Mistakes



drivers were engaged in interstate commerce(such as delivering riders to airports), so it had topay the drivers overtime.

Labeling the employees as “exempt truckdrivers” wasn’t enough; what counted was howthey did their jobs. (Packard v. PittsburghTransportation Co., No 03-3-88, 3rd Cir.)

4. Wrongly assuming all help-desk workers qualify for the computer exemptionWhile the FLSA says certain computer profes-sionals are exempt employees, be ultra-cautiousabout applying this exemption.

Courts are littered with cases of employersbeing punished for wrongly applying exempt sta-tus to lower-level IT workers, such as help-deskstaff (aka “IT support specialists”).

In a recent opinion letter, the Labor Depart-ment said some IT support specialists are notcovered by the FLSA’s administrative exemptionbecause their jobs are not “directly related” totheir company’s management or general opera-tions.

In this case (as with many other help desks)the duties of the computer-support specialistsinvolved installing, configuring, testing and trou-ble-shooting computer applications, networksand hardware.

While that’s complex work, the LaborDepartment said it doesn’t require the employeesto exercise “discretion and independent judgmentwith respect to matters of significance withrespect to management or general business oper-ations of the employer,” as is required to obtainthe exemption status.

To read the opinion letter, visit www.dol.gov/esa/whd/opinion/flsa.htm and click onFLSA2006-42.

5. Not giving exempt executivestrue hiring/firing authorityBefore you classify supervisors as exempt execu-tive employees, make sure you’ve given themenough authority to make that classification stick.That means delegating true hiring/firing power

with the clear understanding that your organiza-tion will typically follow the supervisors’ recom-mendations.

If you give power in name only, the LaborDepartment or courts could reclassify your man-agers as nonexempt, hourly employees. And thatcould cost you big bucks in overtime pay and fines.

Case in point: A Delaware chicken farmemployed five crew leaders to transport “chicken-catcher” workers to the farm and supervise themas they caught birds. The farm classified the crewleaders as exempt executive employees andrefused to pay overtime or travel time. Reasoning:Crew leaders could suggest who should be hiredor disciplined.

The crew leaders sued, claiming they shouldbe classified as nonexempt and receive overtime.A federal court agreed, saying it takes more thanmere hiring and discipline suggestions to earnexecutive-exemption status. Employers mustshow that they nearly always follow through onthose suggestions. (Davis, et al., v. MountaireFarms Inc., No. 05-3982, 3rd Cir.)

Bottom line: Make sure your exempt execu-tive employees play a major role in employmentdecisions. If they don’t, you have two choices:(1) Reclassify their jobs as nonexempt and payovertime, or (2) beef up their roles to make sureyou give their hiring/firing suggestions “particu-lar weight.” (That can simply involve pullingsupervisors into performance reviews and person-nel decisions.)

6. Allowing clerical tasks todefeat administrative exemptionHere’s one more reason to double-check your jobdescriptions: Some exempt employees may try toclaim they’re entitled to overtime pay simplybecause they spend a fair amount of time on fil-ing and typing.

Make sure their job descriptions emphasizethat the employee’s primary duties involve theexercise of discretion and independent judgment,and don’t mention clerical tasks.

These days, few employees have the luxuryof a secretary. Many perform their own adminis-trative tasks, which they previously assigned to



hourly support staff. But even exempt employeeswho find large chunks of their day devoted tosuch mundane tasks don’t lose their exempt-employee status.

So long as their major responsibilities involvediscretion and independent judgment, employeeswon’t be entitled to overtime pay simply becausethey perform some clerical work.

Case in point: Diane O’Bryant worked herway up from an hourly clerical position tobecome an administrator for a Reading, PA, cityagency. Her job entailed processing fair-housingcomplaints and doing a weekly TV show onhousing issues. But she spent much of her timefilling out forms, filing and typing. O’Bryantsued, alleging she was entitled to overtime paybecause she devoted a lot of time to clerical tasks.

The 3rd Circuit Court of Appeals disagreedand tossed out the case. It reasoned that even ifshe spent more than 40% of her time on clericalwork, her main responsibilities were to enforcelaws and produce a TV show, which required dis-cretion and independent judgment. Therefore, shewas exempt, not hourly. (O’Bryant v. City ofReading, No. 05-4259, 3rd Cir.)

7. Looking only at the degree,not the job, to classify learned professionalsJust because an employee holds an advanceddegree or professional certification doesn’t auto-matically qualify him or her for the “learned pro-fessional exemption.” What counts are the per-son’s job duties.

The position must be one that requires thejob-holder to have specialized college-level train-ing in a field of science or learning. Look at thejob requirements, not the person holding that job.

Case in point: An engineering firm firedproperty assessor Cyrus Stell, who has a bache-lor’s degree in mechanical engineering and is alicensed engineer in Texas and Arizona. He sued,demanding overtime plus double damages. Healleged the company wrongly classified him asexempt under the learned professional exemption.

The company argued that Stell’s degree andcertification showed he was a “learned profes-

sional.” But the court said proof that Stell was adegreed engineer wasn’t enough. The employer,which had the burden of proof to show its classi-fication was correct, couldn’t show that the jobStell held required him to apply that specializedknowledge. The court then ordered a trial. (Stellv. Engineering & Fire Investigations, No. 06-00827, SD TX)

Online resource: For more on the learnedprofessional exemption, read a Labor Departmentopinion letter on the subject. Go to www.dol.gov/esa/whd/opinion/flsa.htm, select the year 2005and read opinion letter FLSA 2005-28.

8. Wrongly assuming all medical staff qualify for the professional exemption Not all medical employees with advanced train-ing and licenses meet the “learned profession”exemption, which allows employers to paylawyers and doctors by the hour and still not paythem overtime. That blanket exemption appliesonly to lawyers who practice law and doctorswho practice medicine, not other related profes-sionals.

Many employers in the medical field assumethat the exemption includes highly trained andlicensed physician’s assistants and nurse practi-tioners, so they pay those employees on anhourly basis. But the first federal appeals court toconsider the issue ruled that such classificationsaren’t legal.

Case in point: Nurse practitioners and physi-cian assistants in five states sued their employer,EmCare, after the company refused to pay themovertime. EmCare said the employees werehourly medical professionals who were exemptfrom overtime.

The Labor Department sided with theemployees, saying nascent professionals such asnurse practitioners and physician assistants stillhad to be paid on a salary basis to be deemedexempt under FLSA rules.

A court agreed, saying those professions arestill in need of protection against “the evil ofoverwork as well as underpay.” (Belt, et al., v.EmCare, No 05-40370, 5th Cir.)



Advice: The simple fix is to pay nurse practi-tioners, physician assistants and all other quasi-professionals in the medical field who otherwisefit the “professional” exemption on a salary basis.

9. Jeopardizing exempt employees’ status if you pay them extraDo you pay exempt employees extra for workingextra hours? If you do, make sure you clearlyindicate that you still consider the employeesexempt. That way, should you stop making thepayments, you haven’t created unreasonableexpectations.

Never refer to the payments as “overtime”!Instead, clarify that they are bonuses paid toexempt employees.

The key is to make sure you have sound rea-sons to back up the employee’s exempt classifi-cation. Incorporate those reasons into the jobdescription, and you’ll be able to defend yourposition if the employees balk at the removal ofextra payments.

Case in point: When a nuclear power plantdecided to save on labor costs by eliminatingextra payments to technical writers it had alreadylisted as exempt employees, the writers balkedand sued. They alleged they were wrongly classi-fied as exempt.

But the plant trotted out job descriptions andtestimony that demonstrated the technical writersoperated independently with little supervision.Although they had a set of guidelines to follow,

the writers were free to come up with individualand novel solutions within those guidelines. Thecourt concluded they were exempt under theFLSA’s administrative exemption. (Renfro, et al.,v. Indiana Michigan Power Company, No. 06-1935, 6th Cir.)

10. Not ensuring store managers’primary duty is management Employers today are seeing a lot of lawsuitsinvolving store managers, who often work 60 to70 hours per week for a set salary. Since much oftheir time is spent working side-by-side withhourly staff, helping serve customers and clean-ing up, these employees are claiming they’renonexempt workers due overtime pay.

The key to avoiding such FLSA lawsuits: acareful analysis of managers’ actual job duties(not their titles).

For managers to be truly exempt, they mustdo more than work the floor. Their duties shouldinclude tasks that rely on discretion and inde-pendent judgment and are clearly related to man-agement, not just serving customers.

But, as a recent ruling shows, exempt man-agers still can spend a good portion of their timeperforming tasks that look like hourly work, aslong as their “primary” duty is management.

Case in point: Kevin Keevican and MichaelTerrazas were exempt Starbucks store managersworking between 55 and 70 hours per week.

They sued, alleging they should be non-exempt employees who were due overtime pay.

Commissioned finance managers exempt from overtimeIf you’re a retailer and have commissioned employees on staff, it’s likely that those employees aren’t eligible for over-time pay.

Why? Such employees are covered by a long-standing FLSA rule (section 207(i)), which says that retail and serviceindustry employees are exempt from overtime pay if they earn more than half of their compensation from commissions(and if their regular rate of pay is at least 1.5 times the minimum wage).

Case in point: Several finance and insurance (F&I) managers at three Oregon and Washington auto dealershipssued for overtime pay. Their incomes mostly came from commissions paid when they persuaded car buyers to buyextended warranties and insurance.

A lower court sided with the managers. But the 9th Circuit Court of Appeals ruled for the dealerships, citing theFLSA section that says commissioned employees at retail and service establishments aren’t eligible for overtime. (Gieg,et al., v. DRR, et al., No. 03-35619, et al., 9th Cir.)


Both estimated they spent up to 80% of theirtime making drinks, running the register andcleaning. But they also were responsible for theoverall success of the stores, plus they orderedinventory, hired other baristas and scheduledemployees.

The court dismissed their cases, concludingthat working side-by-side with their subordinatesdidn’t mean they, too, were automatically hourlyemployees. Their primary function was still man-agement. (Mims, et al., v. Starbucks, No. H-05-0791, SD TX)

Store managers can meet executive exemption without constant on-site supervision of staffThe Labor Department recently issued an important opinion letter that clarifies the criteria that store managers mustmeet to qualify for the executive exemption under the FLSA. (Opinion Letter FLSA 2006-35)

Essentially, the government said that store managers can retain their exempt status (i.e., ineligible for overtimepay) even if they don’t physically supervise employees under their control on a regular basis. (That’s often the casewhen managers don’t work the same shift as employees they oversee.)




1. Adopt a safe-harbor policyWhen the Labor Department rewrote the over-time regulations, it created a “safe harbor”defense for employers that unintentionally makeimproper deductions from exempt employees’salaries. That provision allows you to correctimproper-deduction mistakes without losing anemployee’s exempt status. Prior to that change, asingle mistake could have resulted in lost exemptstatus, overtime back pay and fines.

To use that defense, you must adopt a policythat bans improper deductions and provides anavenue to raise complaints.

The Labor Department offers a sample policythat you can (and should) adopt for your ownorganization. You can find the Model SalaryBasis Policy at www.dol.gov/fairpay (click on“Model Policy” in column at right).

2. If you reclassify an employee,do so with finesse Whenever you reclassify an employee as non-exempt, you’ll likely encounter one of two reac-tions:

• Some employees, especially those who viewthemselves as “management,” will view areclassification as a demotion or an insult.

• Others may use reclassification to complainthat they should have received overtime for aslong as they’ve been employed.

To soften these reactions, consider “selling”reclassification by explaining that the organiza-tion has changed the way it compensates certainemployees in an effort to recognize their contri-butions.

Draw the spotlight away from reclassifica-tions by implementing them at the same time asother organization changes, such as new fringe-benefits programs.

In any event, don’t say the organization ischanging a classification to comply with thewage-and-hour law. Doing this would effectivelyinvite employee complaints.

3. How to avoid paying overtimeto an employee who doesn’t satisfy one of the white-collarexemptions Although all your nonexempt employees mustreceive overtime pay whenever they work morethan 40 hours in a workweek, you should beaware of two “loopholes”:

• Independent contractors. In some cases, itmay be appropriate to reclassify employees asindependent contractors, who are obviouslynot due overtime pay. Such a reclassificationwon’t be possible in most cases, but it’s worthlooking into. Remember that titles don’t mat-ter. What matters is whether the “economicrealities” demonstrate that a worker mayproperly be classified as a contractor.

• Salaried, nonexempt. Many employers areunaware that some employees can be properlyclassified as “salaried nonexempt.”

Specifically, Labor Department rules say anonexempt employee whose hours fluctuateweek-to-week can be paid on a salary basis if anagreement exists between you and the employeethat he or she will receive overtime pay equal toone-half his or her regular rate.

Using a “salary-plus-half-time” calculation,instead of the traditional calculation, means thatthe employee will earn less overtime pay. Indeed,under salary-plus-half-time calculation, anemployee’s regular rate grows smaller for eachhour worked beyond 40 hours a week.

4. Fine-tune your record-keeping Beyond proper classification, simply keepingaccurate records goes a long way toward com-pliance.

Under the FLSA, your record-keepingrequirements for exempt employees differ fromthose for nonexempt workers. Because you don’tpay exempt employees by the hour, you shouldnot track the exact number of hours they work on

6 Compliance Tips



a daily basis. Doing so could make it seem to awage-hour auditor that you are indeed basing payon the number of hours worked, which mightraise the question of whether the employee istruly exempt.

However, just because a worker is exemptdoesn’t mean your company is freed from keep-ing records on him or her. For exempt employees,you should keep records that describe the work-week and the wages paid for that period.

Specifically, you should keep these recordson exempt staff:

• Personal information, including name, homeaddress, occupation, gender (for equal-paylaws), birth date for workers under age 19(for child labor laws) and the person’s work-place identification number

• Time of day and day of week when theemployee’s workweek begins

• Total wages paid each pay period

• Date of payment and the pay period coveredby each payment

Your records for exempt employees can alsotrack which days are used for sick days, vacationdays or personal days.

Advice: The FLSA’s record-keeping rules arecomplex. Additional factors such as industry andtype of work can come into play. To find moreadvice and read the pertinent federal regulations(29 CFR 516, subparts A and B), go to therecord-keeping section of the Labor Depart-ment’s site at www.dol.gov/dol/topic/wages/wagesrecordkeeping.htm or call the agency’sFLSA hotline at (202) 693-0067.

5. If exempt status is in question,issue a ‘good-faith’ replyIf employees come forward to protest that youowe them overtime pay because they should trulybe nonexempt, it pays to act fast and be able toshow good cause why you classified them asexempt in the first place.

Your quick response may determine whetheryou’ll owe just the back overtime pay or double

that amount. The FLSA allows employees to col-lect double (or “liquidated”) damages unless youcan show your mistake was made in good faithand you honestly intended to classify theemployee correctly. Plus, you may be on thehook for attorneys’ fees.

To head off such complaints, host an annualclassification review. Have a team compare allemployees’ job descriptions (and actual duties)against the FLSA exemption regulations.

(Note: Some states set their own rules. Get alegal opinion if you’re stumped about an employ-ee’s status.)

If any positions should be switched to hourly,make the change as soon as possible and startpaying overtime. Then, do your best to calculatewhat you owe for past unpaid overtime.

Bottom line: If an employee files an over-time suit, your annual classification audit wouldlikely be enough proof of your good-faith effortsto ward off double damages.

6. If you have doubts about how to classify employees, educate yourselfYou can request an opinion letter from the LaborDepartment. If you make the request before any-one questions your classification and provide the agency with all relevant information, chancesare the court will say you acted in good faith.Learn more at www.dol.gov/esa/whd/opinion/opinion.htm.

Also, have an experienced attorney reviewyour job descriptions to make sure you haven’tmade any obvious errors. It’s another way toshow good faith.

Case in point: Rahaman Khan worked forIBI Armored Service on the company’s truckdock. IBI classified Khan as exempt under anobscure exception to the FLSA that excludesfrom the law some dockworkers who load trucks.Instead, they are regulated under the MotorCarrier Act, which doesn’t require overtime pay.

Khan sued for unpaid overtime, claiming hewasn’t really a “loader,” the exempt category.Khan and IBI agreed that if he was covered by



the FLSA, he was entitled to $7,744 in unpaidovertime.

The court concluded that Khan was not aloader because his actual duties did not involvegetting on trucks and placing cargo. IBI couldn’tshow that it relied on expert opinions, Labor or

Transportation Department guidance or anythingother than its own assertion that Khan was exempt.

In such cases, wrote the judge, “double dam-ages are the norm.” It ordered IBI to pay Khan$15,488. (Khan v. IBI Armored Services, No.1:04-CV-762, ED NY)



The revamped FLSA regulations have sparkedmany questions among HR professionals and

business owners. Here’s a sampling of typicalworker-classification questions we’ve receivedfrom readers of our HR Specialist newsletters,answered by employment law attorneys.

Are hourly bonuses OK for salaried employees?

QI employ a physical therapist on a salariedbasis, making her an exempt professional

employee. Can I pay her an hourly bonuswithout causing her to lose the exempt status?—J.M., Virginia

AYes. The FLSA permits an employer to pay anhourly bonus to a salaried employee without

jeopardizing the employee’s exempt professionalstatus so long as the employer continues to payher salary.

Let’s say you pay her a salary of $500 perweek as your physical therapist. If you are soinclined, you are permitted to give her another$500 cash in addition to her paycheck, but youcan’t give her a $1,000 tip in lieu of her normalsalaried paycheck.

Bonuses such as you suggest may be a goodway to pay exempt employees who travel onbusiness, too. While hourly employees are enti-tled to their hourly rate for some travel time,exempt employees are not—they have to work aslong as it takes to get the job done, and thatincludes traveling to and from a business meetingor event. But paying extra for travel may ease thesting. Follow the same rules outlined above toavoid problems with the Labor Department.

Before you open your wallet, however, checkapplicable state laws to make sure you’re not violating your state wage-and-hour laws.

Does exemption class matterfor part-time employees?

Q Does the salary threshold of $455 a week(under which employees are automatically

eligible for overtime) hold true even if the per-

son works part time, say one or two days aweek? We have employees who meet theprofessional exemption, but they work parttime and wouldn’t reach the $455 threshold. —L.S., Pennsylvania

A If an employee works only one or two daysper week, he or she probably won’t ever work

more than 40 hours in any week. So, it doesn’treally matter whether you treat part-timers asexempt or nonexempt for overtime purposes.

But what if your part-timer, who is clearlyexempt, occasionally works more than 40 hoursin a week? In such cases, you have two choices:First, you could simply pay the part-timeemployee at a time-and-a-half rate for all hoursworked beyond 40 for that week. Second, youcould rely on Labor Department rules that sayexempt status is determined on a week-by-weekbasis, and pay that employee a salary for theweek. Your choice will likely be motivated moreby employee morale than the legal requirements.

Can we legally convertall employees to nonexempt?

QFor years, we’ve always had salariedemployees. But we have many employees

who always come in late and leave early.That’s hard to track. We’re thinking of mak-ing them hourly employees and getting a timeclock. If I make them all hourly employees, Iknow that I have to pay overtime, but it mightbe worth it. Can I legally change their statusfrom exempt to hourly, or are some employeesrequired to be salaried? —B.B., New York

ANo law prevents you from converting all youremployees to hourly, nonexempt status.

However, on top of the additional overtime costsyou’d face, we anticipate that an across-the-boardchange would create a morale problem, too.

Indeed, many employees are disappointedwhen they’re converted from salaried to hourlystatus. Those employees aren’t focused on theovertime dollars. Instead, they view themselvesas “professionals” and think of overtime assomething for “less valuable” employees.

Frequently Asked Questions



Does extra holiday payendanger exempt status?

QOur company policy says employees whowork on holidays are paid time-and-a-half.

If an exempt employee works on a holiday,can I pay him time-and-a-half? —R.E., Iowa

AYou may pay exempt employees additionalcompensation for hours worked beyond their

standard workweek without affecting their exemptstatus. So, you can pay more for holiday work.The extra pay doesn’t have to be time-and-a-half.It can be straight time, half time or a flat sum.

Keep in mind, however, that in borderlinecases the Labor Department may view extra com-pensation as a factor in deciding whether a work-er is truly exempt. Paying the worker exactly asyou do a nonexempt employee, on an hour-for-hour basis, weighs against any exempt status.

Comp time for exempt workers: Is this a slippery slope?

QIs it legal to give our full-time, salariedemployees extra time off from work due to

meetings and extra workload responsibilities?—C.E., West Virginia

ATechnically yes, but be careful. If someone isa bona fide exempt employee, giving him or

her extra time off or extra compensation for extrawork won’t, by itself, violate the salary basis test.However, it may be used against the company toshow that the employee’s compensation is reallytied to hours, not a predetermined fixed salary.And this risks the employee’s exempt status.

If you do give extra time off to exemptemployees, make sure it’s not an hour-for-hourswap. It’s better, for example, to give them anextra day off per month, regardless of the amountof extra work that month.

Should we track hours ofstraight-commission workers?

QWe have mechanics who work on a straightcommission basis. Do we need to track

their hours? —E.D., Nevada

AFederal wage-and-hour law requires you tokeep written records of hours worked for

all nonexempt employees. Just because yourmechanics are paid straight commissions doesn’tconvert them to exempt status. In fact, it’s likelythat your mechanics are nonexempt and that you’rerequired to maintain records of their hours workedand pay them overtime for all hours above 40 per week.

While employers aren’t required by law tokeep hours-worked records for exempt employ-ees, many employers—for productivity or otherbusiness reasons—nevertheless do so. Nothing inthe law prevents you from requiring all employ-ees (exempt and nonexempt) to record their hoursworked by punching a time clock or maintaininga time sheet. Just make sure you don’t baseexempt employees’ compensation on those hours.

Is a mandatory 45-hour weekallowed for exempt staff?

QWhat are the legal ramifications of requir-ing all employees to work a minimum of

45 hours a week (nine hours a day)? Everyonein the office is an exempt employee. —S.M.,New Jersey

ADo you really believe that everyone in youroffice is exempt? First, you should conduct an internal wage-

and-hour audit to determine which of youremployees are truly exempt.

Job titles alone don’t make employeesexempt. Exempt status hinges on whether anemployee actually performs exempt job dutiesand receives a bona fide salary.

Don’t put this off! Your potential liabilitymay be growing each day because the LaborDepartment can force you to cough up unpaidovertime going back three years.

If all your employees are truly exempt, youcan require such employees to work nine hours aday. However, if you find that some should benonexempt (hourly) employees, make sure to paythem overtime at one-and-a-half times their regu-lar rate whenever they work more than 40 hoursin a workweek.



Can we change the status ofan hourly ‘working’ supervisor?

QWe have an hourly worker who overseesboth the maintenance and housekeeping

departments and supervises two employees. Inthis job, he has the authority to hire and fire,but he’s also a “working” supervisor who per-forms maintenance in and around the property.Can his status be changed to salary/exempt? —T.W., Texas

ADepending on the circumstances, a workingsupervisor may or may not qualify for the

executive exemption. Under Labor Departmentregulations, an executive has the primary duty ofmanaging the business (or part of it) and regularlydirects the work of two or more employees. As arule of thumb, an employee’s “primary duty” isthe duty that he spends more than 50% of histime performing.

However, “primary duty” isn’t always a timetest, as a recent case proved. A court will alsolook at the importance of his managerial dutiescompared with his other duties, his freedom fromsupervision and how much discretion he exerciseson the job.

Can we require salaried staff to make up lost time?

QWe’re a small company (fewer than 20employees) and don’t keep time sheets.

Our entire staff is salaried. We expect employ-ees to make up personal time and sick time(neither of which affects their vacation time orholiday time). Are we wrong to expect that if asalaried employee takes two hours for a doc-tor’s appointment, he or she should make upthat time later? —M.V., Florida

AWe suspect that you have some serious FLSAviolations. First, it’s unlikely that every

employee on your payroll is truly exempt fromthe overtime rules. Second, while your “make-up-time-lost” policy may not violate the FLSAregulations on its face, it clearly suggests thatyou tie employees’ pay to hours worked (i.e., thatyour employees are not paid on a salary basisand so do not qualify for exempt status).

We suggest that you contact a good laborlawyer ASAP.

Are exempt workers entitledto unlimited sick leave?

QOur company gives eight hours of sickleave per month to nonexempt employees.

We’ve been told that, under the FLSA, exemptemployees are to be paid whenever they aresick. So our exempt employees have virtuallyan unlimited sick-leave balance. Is this a cor-rect way to interpret the FLSA? Should wehave some type of sick-leave accrual andtracking for our exempts? —D.H., Kentucky

AExempt employees should not have unlimitedpaid sick leave. Your company can make pay

deductions for sickness absences of a day ormore as long as you have a policy that providescompensation for the loss of salary due to sick-ness.

So if an employee is absent for a day or moredue to sickness, dock the exempt employee’ssalary for that absence and take time from theemployee’s sick-leave “bank” to cover it. If thatworker uses up her accrued sick leave, you candeduct additional absences from her salary.

Note: You can deduct from an exemptemployee’s salary when she’s absent for a fullday or more for personal reasons other than sick-ness. But the general rule for private employers isthat the FLSA doesn’t allow any reduction in payor docking for partial-day absences, whether ornot it’s for illness.



To be considered exempt from overtime, an employee must generally be paid on a salary basis andhis or her job duties must meet the Labor Department’s standards for one of the exemption

categories discussed below.Use this self-audit to test whether you’re properly classifying workers as exempt. (Note: To access

this checklist online, go to www.theHRSpecialist.com/checklist.)

n Executive Employee Answer the following questions to determine whether you’ve misclassified a worker as an exemptexecutive:

Don’tYes No Know

1. Is the employee’s primary duty managing the enterprise or a departmentor subdivision of the enterprise? q q q

2. Does the employee customarily direct the work of two or more otheremployees or their equivalent? q q q

3. Does the employee have the authority to hire or fire, and do his or herrecommendations carry significant weight if unauthorized to make thefinal decision? q q q

4. Is the employee paid the equivalent of at least $455 per week on a salary basis? q q q

If you answered “No” to any of these questions, you may have misclassified the worker as an exemptexecutive.

Note: If the employee is at least a 20% owner of the business and meets requirements #1 and #2above, he or she need not meet the salary requirement in #4 or the authority requirement in #3.

n Administrative EmployeeAnswer the following to determine whether a worker is misclassified as an exempt administrativeemployee: Don’t

Yes No Know

1. Is the employee’s primary duty performing office or nonmanual workdirectly related to the management or general business operations of theemployer or the employer’s customers? q q q

2. Does the employee exercise discretion and independent judgment withrespect to matters of significance? That is, does he or she evaluate andcompare possible courses of action and then make a decision or recommendation after considering the various possibilities? q q q


If you answered “No” to any of these questions, the employee may be misclassified as exempt administrative.

Self-Audit: Test Your Compliance

n Learned Professional EmployeeAnswer the following to determine whether a worker is misclassified as an exempt learnedprofessional:

Don’tYes No Know

1. Is the employee’s primary duty to perform work requiring knowledge ofan advanced type in a field of science or learning customarily acquiredby a prolonged course of specialized intellectual instruction? q q q

2. Is the advanced knowledge obtained by completing an academic courseof study resulting in a four-year college degree or leading to certification? q q q


If you answered “No” to any of these questions, the employee may be misclassified as an exemptlearned professional. Exception: Those who’ve completed the educational requirements for a law ormedical degree need not meet the minimum salary requirement. Also, teachers need not be certified ormeet the minimum salary requirement to qualify as learned professionals.

n Creative Professional EmployeeAnswer the following to determine whether a worker is misclassified as an exempt creativeprofessional:

Don’tYes No Know

1. Is the employee’s primary duty to perform work requiring invention,originality or talent in a recognized field of artistic endeavor such as music,writing, acting and the graphic arts? q q q

2. Does the work require more than intelligence, diligence and accuracy (i.e., does it require “talent”)? q q q


If you answered “No” to any of these questions, you may have misclassified a worker as an exemptcreative professional.

n Computer ProfessionalAnswer the following to determine whether a worker is misclassified as an exempt computer professional:

Don’tYes No Know

1. Is the employee paid at least $455 per week on a salary or fee basis or,if paid hourly, at a rate of not less than $27.63 per hour? q q q

2. Is the employee’s primary duty:

• Application of system analysis techniques and procedures, includingconsulting with users, to determine hardware, software or systemfunctional specifications; or q q q





n Computer Professional (continued)Don’t

Yes No Know

• Design, development, documentation, analysis, creation, testing ormodification of computer systems or programs, including prototypes,based on and related to user or system design specifications; or q q q

• Design, testing, documentation, creation or modification of computerprograms related to machine operating systems; or q q q

• A combination of the aforementioned duties requiring the same levelof skills? q q q

If you answered “No” to #1 or were unable to answer “Yes” to any parts under #2, you may havemisclassified the worker as an exempt computer professional.

n Outside Sales EmployeeTo determine whether a worker has been misclassified as an exempt outside sales employee, answerthe following questions:

Don’tYes No Know

1. Is the worker’s primary duty making outside sales? q q q

2. Does he or she regularly work away from the company’s place of business? q q q

3. Does the worker sell tangible or intangible items, such as goods,insurance, stocks, bonds or real estate, or obtain orders or contracts for services or the use of facilities? q q q

If you answered “No” to any of these questions, you may have misclassified the worker as an exemptoutside sales employee.

exempt non exempt 09

Documents

system functional specifications

machine operating systems

specialized intellectual instruction

labor department offers

system design specifications

learned professional exemption

creative professional exemption

flsas administrative exemption