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Exempt vs. Non-exempt Classification Test

Exempt vs. Non-Exempt are you passing the test?

Correct employee classification can be tricky. Misclassification often times lead to headaches and substantial financial penalties. The Exempt vs. Non-Exempt question is a trending issue on both the Federal and State fronts. Employers should make every effort to ensure their employees are classified correctly. It is also imperative for employers to know if their state(s) of operation have any regulations governing employee classification. Let’s start with the most basic definitions of these two types of employees;

  • Exempt:  Workers exempt from the overtime provisions of the Fair Labor Standards Act (FLSA)
  • Non-Exempt: Workers subject to all FLSA provisions including the payment of overtime.

Under the FLSA, certain criteria must be met to be classified as Exempt. There is a Salary and a Duties test. Please make sure to note the “and” in between “a Salary and a Duties test”. The minimum salary that must be paid is $455 per week ($23,600 annually). A salary is generally defined as having a “guaranteed minimum” amount of money s/he can count on receiving for any work week in which s/he performs “any” work. The salary amount is not generally subject to reduction based on hours worked.

Many employers believe if an employee is paid on a salary basis, this alone will make the position Exempt, and therefore the employee will not be eligible for overtime pay – this is an incorrect belief. This misconception is one of the most common made and the quickest way to a Department of Labor (DOL) audit or some sort of expensive legal action.

The Duties test is where many employers falter in the Exempt analysis. There are a number of Exempt Categories and each have their own requirements that must be met in order to consider those employees as Exempt. The most common are the Administrative Exemption, Managerial Exemption and the Professional Exemption.  For more information, please see  various tests for Exemption.

If both the Salary and the Duties tests are not met, then the position in question must be considered Non-Exempt and must follow all of the applicable provisions of the FLSA.

As mentioned earlier it is imperative to know what State requirements may also be applicable, let’s look at California for example. Each business in California is governed by one of seventeen Wage Orders which lists the criteria for Exempt status.  In general, California has three tests that must be satisfied for Exempt status, which are;

  • Salary Test: Must make a guaranteed salary of $33,280 annually. In California the minimum salary required for Exempt status is directly tied to the state minimum wage, it is defined as twice the minimum wage. This means if California increases its minimum wage the minimum salary required for Exempt status will also increase.
  • Duties Test:  Similar to the Federal categories, see appropriate Wage Order for specifics.
  • Time Spent Test: California requires that Exempt employees spend more than 50% of their time on Exempt level duties, which at a minimum would be 51% of their time spent on exempt duties.

In California, if all three tests are not satisfied then the position in question must be considered Non-Exempt and the must follow all applicable federal and state regulations for payment.

The news has been full of stories of companies settling for staggering sums for wage and hour violations in the last few years such as; Siebel Systems – $27.5 million, Rubio’s Restaurants – $7.5 million, Darden Restaurants (Olive Garden) – $11 million and the list goes on and on. The impact of a wage and hour claim for a smaller organization could be devastating considering the monetary impact of back wages, penalties, interest and unpaid taxes. If there is a question about the correct status of a worker it is best to err on the side of caution and classify as Non-Exempt and seek professional guidance before determining a position is Exempt. Exempt vs. non-exempt doesn’t have to be a scary topic. Contact us today for advise and consultation for your business.