INSTANT EXECUTIVE BRIEFING. FLSA Self-Audit: Exempt vs. Nonexempt. Compensation & Benefits SPECIALIST BLSA

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1 INSTANT EXECUTIVE BRIEFING FLSA Self-Audit: Exempt vs. Nonexempt HR SPECIALIST Compensation & Benefits BLSA

2 Contents DOL stops issuing opinion letters Audit: Test your compliance Executive employee Administrative employee Learned professional employee Creative professional employee Computer professional Outside sales employee Check every job description Paid on a fee basis Managing exempt workers EDITOR EDITORIAL DIRECTOR ASSOCIATE PUBLISHER PUBLISHER Kathy A. Shipp Patrick DiDomenico Adam Goldstein Phillip A. Ash 2010, Capitol Information Group, Inc., 7600A Leesburg Pike, West Building, Suite 300, Falls Church, VA Phone: (800) All rights reserved. No part of this report 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 matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal service. If you require legal advice, please seek the services of an attorney. For more information on the FLSA, visit

3 INSTANT EXECUTIVE BRIEFING FLSA Self-Audit: Exempt vs. Nonexempt Amid much fanfare, the U.S. Labor Department in 2004 rewrote the rules that determine which employees are exempt from the Fair Labor Standards Act (FLSA) and which are nonexempt (eligible for overtime). The goal was to ease confusion and lawsuits. But so far, that hasn t happened. We thought the [new regulation] would fix that, said Jack McKeon, a Labor Department deputy administrator. It really hasn t. The result: more classification mistakes, more lawsuits and fines. A Las Vegas firm was fined $1.2 million a New Orleans company was assessed $185,000 and a small business in Houston was sued for $1.1 million, just to name a few. The Labor Department continues to issue a sober report card on employers for violating the rules. In 2008, it recovered more than $185 million in back wages for over 228,000 employees. In 2010, it planned to beef up its investigative force by 33%. The top mistake for employers and the most costly one is wrongly labeling employees as exempt from overtime pay, according to the Labor Department. Confusion over the revised FLSA regulations means that many employers some estimates run as high as 40% unknowingly violate the law. And that s a ticking time bomb that could cost you a fortune. Employees misclassified as 1

4 2 INSTANT EXECUTIVE BRIEFING DOL stops issuing opinion letters Looking for an answer to your complex, fact-specific question about overtime, FLSA or wage-and-hour issues? For the past 50 years, employers could ask the Labor Department to issue an opinion letter to provide guidance. But the DOL stopped that practice in 2010, replacing the letters with administrator interpretations designed to offer general guidance on federal pay laws. The change signals how the DOL is now favoring employees over employers where pay disputes are concerned. (Read more details and find links to both kinds of guidance at exempt can be eligible for two years worth of back wages (three if the violation was willful ) at 1.5 times the hourly rate, plus liquidated damages equal 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 the Labor Department? The key is to regularly audit your work force classifications and job descriptions to ensure you re correctly classifying employees as exempt. Generally, two requirements must be met to classify employees as exempt: (1) They must earn a salary and (2) they must hold a position with duties the Labor Department designates as appropriate for exempt positions. Those positions generally fall into five categories: 1. Executive 2. Administrative 3. Professional (both learned and creative professionals) 4. Computer professional 5. Outside sales. But it s not that simple. That s why we ve created the self-audit on page 3 so you can double-check whether you re properly classifying employees as exempt from the FLSA. (Note: You also can access this checklist online at

5 FLSA Self-Audit: Exempt vs. Nonexempt 3 Audit: Test Your Compliance To be considered exempt from overtime, an employee must generally be paid on a salary basis and his or her job duties must meet the Labor Department s standards for one of the exemption categories discussed below. Use this checklist to test whether you re properly classifying workers as exempt. Executive Employee Answer the following questions to determine whether a worker is misclassified as an exempt executive: 1. Is the employee s primary duty managing the enterprise or a department or subdivision of the enterprise? 2. Does the employee customarily direct the work of two or more other employees or their equivalent? 3. Does the employee have the authority to hire or fire, and do his or her recommendations carry significant weight if unauthorized to make the final decision? 4. Is the employee paid the equivalent of at least $455 per week on a salary basis? If you answered No to any of these questions, you may have misclassified the worker as an exempt executive. Note: If the employee is at least a 20% owner of the business and meets requirements #1 and #2 above, he or she need not meet the salary requirement in #4 or the authority requirement in #3. Administrative Employee Answer the following questions to determine whether a worker is misclassified as an exempt administrative employee: (Continued on page 4)

6 4 INSTANT EXECUTIVE BRIEFING (Continued from page 3) 1. Is the employee s primary duty performing office or nonmanual work directly related to the management or general business operations of the employer or the employer s customers? 2. Does the employee exercise discretion and independent judgment with respect to matters of significance? That is, does the person evaluate and compare possible courses of action and then make a decision or recommendation after considering the various possibilities? 3. Is the employee paid the equivalent of at least $455 per week on a salary basis? If you answered No to any of these questions, the employee may be misclassified as exempt administrative. Learned Professional Employee Answer the following questions to determine whether a worker is misclassified as an exempt learned professional: 1. Is the employee s primary duty to perform work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction? 2. Is the advanced knowledge above customarily obtained by completing an academic course of study resulting in a four-year college degree or leading to certification?

7 FLSA Self-Audit: Exempt vs. Nonexempt 5 3. Is the employee paid the equivalent of at least $455 per week on a salary basis? If you answered No to any of these questions, the employee may be misclassified as an exempt learned professional. Exception: Those who ve completed the educational requirements for a law or medical degree need not meet the minimum salary requirement. Also, teachers need not be certified or meet the minimum salary requirement to qualify as learned professionals. Creative Professional Employee Answer the following questions to determine whether a worker is misclassified as an exempt creative professional: 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? 2. Does the work require more than intelligence, diligence and accuracy (i.e., does it require talent )? 3. Is the employee paid the equivalent of at least $455 per week on a salary basis? If you answered No to any of these questions, you may have misclassified the employee as an exempt creative professional. Computer Professional Answer the following questions to determine whether a worker is misclassified as an exempt computer professional: (Continued on page 6)

8 6 INSTANT EXECUTIVE BRIEFING (Continued from page 5) 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? 2. Is the employee s primary duty: Application of system analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; or 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; or Design, testing, documentation, creation or modification of computer programs related to machine operating systems; or A combination of the aforementioned duties requiring the same level of skills? If you answered No to #1 or were unable to answer Yes to any parts under #2, you may have misclassified the worker as an exempt computer professional. Outside Sales Employee To determine whether a worker has been misclassified as an exempt outside sales employee, answer the following questions: 1. Is the worker s primary duty making outside sales?

9 FLSA Self-Audit: Exempt vs. Nonexempt 7 2. Does he or she regularly work away from the company s place of business? 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? If you answered No to any of these questions, you may have misclassified the worker as an exempt outside sales employee. Check every job description To make sure you ve correctly classified exempt employees, use careful documentation. That means having an accurate, up-to-date job description for every position in your organization. You should check every position against the revised overtime regulations and definitions. That way, you can avoid any unpleasant surprises and stand the best chance of reclassifying some workers as exempt. Also, take the opportunity to raise salaries to the new levels so that you can retain the exemption for some workers (especially those in the administrative and executive categories). While no federal law requires you to have job descriptions, they make it much easier to justify exempt status and comply with other federal and state employment laws, such as the ADA. If you haven t already done so, pull out the job description of every worker you have classified as exempt and ask the following: 1. Is the description accurate? That is, does it describe what the person holding the job does? If not, revise it to reflect the actual job duties.

10 8 INSTANT EXECUTIVE BRIEFING 2. Does the description designate the position as exempt? If not, correct it. 3. Does the description include the exempt category in which the position belongs and list the job duties you believe justify the classification? If not, revise it. 4. Has the employee acknowledged that the description is accurate, and has signed and dated it? If he or she claims the description isn t accurate, modify it so that you both agree. 5. Does the description list which job duties are essential functions of the position and which are not? This is important for administering reasonable accommodations under the ADA. Disabled workers must be able to perform only the essential functions of their jobs, with or without reasonable accommodations. 6. Does the salary match the new minimum of at least $455 per week? Unless you raise the salary of exempt workers to the new threshold, they ll automatically become eligible for overtime. Now s the time to calculate whether raising salaries or paying overtime will be the most effective way to control your payroll costs. Compare the hours the employee works now over a standard workweek with how much you d have to pay if he or she became eligible for overtime. Tip: If you decide to increase salaries, consider the impact on employee morale. If you began paying overtime after the regulations were revised in 2004 and then changed their pay rate to regain the exemption, employees may view this as taking away a benefit. Paid on a fee basis Administrative, professional and computer employees may be paid on a fee basis rather than on a salary basis. If an employee is paid an agreed sum for a single job, regardless of the time required to complete it, the person will be deemed paid on a fee basis.

11 A fee payment is generally paid for a unique job rather than for a series of jobs repeated a number of times and for which identical payments are repeatedly made. To determine whether the fee payment meets the minimum salary level requirement, the test is to consider the time worked on the job and whether the payment is at a rate that would amount to at least $455 per week if the employee worked 40 hours. For example, an artist paid $250 for a picture that took 20 hours to complete meets the minimum salary requirement since the rate would yield $500 if he or she had worked 40 hours. For more details, visit the Labor Department s site at Managing exempt workers FLSA Self-Audit: Exempt vs. Nonexempt 9 Once you ve classified workers as exempt, make sure you treat their work in a manner consistent with that status. Remember: The major advantage of employing exempt workers is that you don t have to pay them overtime. They re expected to work as long and hard as needed to complete their job duties. If that means burning the midnight oil well past 40 hours, so be it. If a worker classified as exempt challenges you in court, the burden falls on you to prove his or her exemption. Unfortunately, most courts construe exemptions very narrowly. Your best defense: Keep accurate records, maintain up-to-date job descriptions and have proper procedures in place to avoid destroying someone s exempt status unintentionally. Final tip: Ultimately, if you re in doubt about how to categorize employees, it s better to err on the side of caution and classify them as nonexempt. That way, you ll steer clear of trouble with the Labor Department. The overtime you might have to pay them is far less damaging than the potential penalties for guessing wrong.

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