Guide to FLSA Rules Regarding Exempt/ Nonexempt Employees

As a payroll professional, you are often called upon to classify employees as exempt or nonexempt. Read on to learn what this means and why it matters. NOTE: This guide is provided for informational purposes and covers Federal laws only. It is not intended to offer specific legal advice from counsel and does not cover state laws, which may vary. If you require legal or other expert assistance, seek the services of a competent professional.

Why FLSA exemption matters

For wage and hour purposes, when employees are exempt, it generally means they are exempt from minimum wage and overtime premium pay protections of the Fair Labor Standards Act (FLSA). As such, you are not required to pay them extra for overtime. On the other hand, exempt employees generally must receive a full weeks pay for a week in which they perform any work, regardless of number of days or hours worked, unless one of the following exceptions is met: The employee is absent for one or more full days due to sickness or disability (including workrelated accidents) and the deduction is made in accordance with a bona fide plan, policy, or practice that provides compensation for loss of salary due to sickness and disability. The employee is absent for one or more full days for personal reasons other than sickness or disability (exempt employees may not be docked for absences due to jury duty or appearance as a court witness). Your company imposes penalties in good faith for infractions of safety rules of major significance. Your company imposes, in good faith, unpaid disciplinary suspensions of one or more full days for infractions of certain workplace conduct rules such as rules prohibiting sexual harassment, workplace violence, drug or alcohol use, or for violations of state or federal laws. This provision refers to serious misconduct, not performance or attendance issues. The suspension must be according to a written policy that applies to all employees. The employee takes leave under the Family Medical Leave Act. The employee is absent the entire workweek, or performs no work during an entire workweek.

When employees are nonexempt, extended working hours become an issue: Such employees must generally be paid for overtime at time and one half their regular rate of pay for each hour, or fraction thereof, in excess of 40 hours in a workweek. Minimum wage laws apply. On the other hand: Such employees may be docked for missed hours or days, or suspended without pay for variations in the quality or quantity of work performed.

How do you determine if employees are exempt or nonexempt?

The FLSA recognizes seven major categories of exempt workers: Executive employees Administrative employees Learned professional employees Creative professional employees Computer employees Highly compensated employees Outside sales employees If you believe an employee falls into one of these categories, refer to the appropriate test on the following pages. If the employee meets the criteria of that test, then he or she is most likely exempt.

Youll find complete details at the Department of Labor Web site.

The United States Supreme Court has ruled that establishments must plainly and unmistakably meet the letter and spirit of FLSA laws. Whats more, there are additional categories of exemption (e.g., apprentices, family members) and additional requirements for employers of each employee type. Therefore, you may want to view the detailed descriptions published by the Department of Labor Wage and Hour Division at www.dol.gov/esa/whd. Click on Exempt Employees in the Frequently Requested column on the left.

Executive Employees are Exempt* if

They are paid at least $455/week on a salary basis AND JOB CONTENT & DISCRETION EXERCISED Primary duty is management of the enterprise or a recognized department or subdivision. Customarily and regularly directs the work of two or more other employees; AND Has authority to hire or fire other employees, OR the employees suggestions as to hiring, firing, promotion or other change of status of other employees are given particular weight. TYPES OF WORK Employees involved in interviewing, selecting and training, setting and adjusting pay and work hours; maintaining production or sales records; appraising employee productivity and efficiency; handling employee complaints; disciplining employees; planning and apportioning work; providing for the safety and security of employees or property; budgeting; monitoring or implementing legal compliance measures.

Administrative Employees are Exempt* if

They are paid at least $455/week on a salary or fee basis AND JOB CONTENT & DISCRETION EXERCISED Primary duty is the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employers customers. Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. Customarily and regularly exercises discretionary powers and independent judgment in performing the job. TYPICAL PROFESSIONS COVERED Tax, finance, accounting, budgeting, auditing, insurance, quality control, purchasing, advertising, marketing, research, safety and health, personnel management, human resources, employee benefits, labor relations, public relations, government relations, computer network and database administration, legal and regulatory compliance. Does not include selling or production of the employers goods or services.

Learned Professional Employees are Exempt* if

They are paid at least $455/week on a salary or fee basis AND JOB CONTENT & DISCRETION EXERCISED Primary duty is the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character, requiring the consistent exercise of discretion and judgment. The advanced knowledge must be in a field of science or learning and customarily acquired by a prolonged course of specialized intellectual instruction. TYPICAL PROFESSIONS COVERED Medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy and other occupations that have a recognized professional status and are distinguishable from the mechanical arts or skilled trades where the knowledge could be of a fairly advanced type, but is not in a field of science or learning. Typically excludes LPNs, paralegals, accounting clerks, bookkeepers, mechanical arts, skilled trades, and employees who have acquired their skill by experience rather than advanced specialized intellectual instruction.

Outside Sales Employees are Exempt* if

JOB CONTENT & DISCRETION EXERCISED Primary duty is making sales or obtaining orders or contracts for services, or for the use of facilities for which a consideration will be paid by the client or customer. The employee is customarily and regularly engaged away from the employers place or places of business. The salary requirements of FLSA regulations do not apply. 4 TYPES OF WORKERS Sales associates who work off-site.

Computer Employees are Exempt* if

They are paid at least $455/week on a salary or fee basis, or not less than $27 .63/hour, AND JOB CONTENT & DISCRETION EXERCISED Primary duty of (1) application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional applications; (2) design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; (3) design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (4) a combination of duties described in (1), (2), and (3), the performance of which requires the same level of skills. TYPICAL PROFESSIONS COVERED Computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field.

Creative Professional Employees are Exempt* if

They are paid at least $455/week on a salary or fee basis AND JOB CONTENT & DISCRETION EXERCISED Primary duty is the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. TYPICAL PROFESSIONS COVERED Actors, musicians, composers, soloists, certain painters, writers, cartoonists, essayists, novelists, and others as set forth in the regulations. Journalists may satisfy the duties requirements for the creative professional exemption if their primary duty is work requiring invention, imagination, originality, or talent. Typically excludes copyists and journalists who do not contribute a unique interpretation, investigation, or analysis to a news product.

Highly Compensated Employees are Exempt* if

They are paid at least $455/week on a salary or fee basis and have a total annual compensation of $100,000 or more. JOB CONTENT & DISCRETION EXERCISED Customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee, as identified above in the standard tests for exemption. TYPES OF WORKERS Highly paid managers, administrators, or professionals.

*Depending on the facts and circumstances, information beyond that presented on pages 3, 4, 5, and 6 may affect status determination. Visit www.dol.gov/esa/whd. 6

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For more about FLSA regulations and requirements, visit the Web site of the Department of Labor Wage and Hour Division: www.dol.gov/esa/whd.

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