April 1, 2010

Exempt vs. Non-exempt: Have You Properly Classified Your Employees?


If you do not properly classify your employees, it may cost you up to four years of unpaid wages, plus interest, statutory penalties and attorneys fees. This can amount to significant sums of money in the hundreds of thousands of dollars or even millions depending on the size of your company. Some of the largest and well known companies in the United States (e.g., Bank of America, Farmers Insurance Exchange, Starbucks) have paid millions of dollars by way of settlement or court order to employees or former employees because these companies were accused of having mis-classified employees as exempt from overtime laws.

But you do not need to be a large company or publicly traded company in order to face liability. Employers of any size are required to properly classify their employees, and if they do not, misclassifications of employees can quickly erupt into class action lawsuits.

Which employees are exempt from overtime laws?

Exempt Employees are those whose job compensation and duties meet the federal and state requirements for overtime exemption. Generally, executive, administrative, professional, and certain outside sales employees are overtime exempt. There are two basic tests that must both be satisfied to determine whether an employee is exempt: the Salary Basis Test and the Duties Test.

To satisfy the “salary basis” test, the employee, whether full or part-time, must be paid a salary equal to at least twice the minimum wage requirement. In California, for example, the minimum wage is currently set at $8.00 per hour, which means that the annual salary rate of an exempt employee must be at least $33,280.

To satisfy the “duties” test, the employee must routinely spend more than 50 percent of his or her working time performing “exempt” duties. Most overtime litigation is borne from this more difficult test. For example, for the administrative exemption, the employee must spend more than 50 percent of his or her time performing the following duties: (1) office or non-manual work directly related to management policies or general business operations of the employer or its customers; (2) exercising discretion and independent judgment; and (3) regularly and directly assists a proprietor, or another executive or administrator; or performing, under only general supervision, work along specialized lines requiring specialized training, experience or knowledge; or executing, under only general supervision, special assignments and tasks.

For example, a company’s receptionist or office staff positions are “non-exempt.” Similarly, the secretarial, payroll, payables and receivables employees, even if called “managers,” are typically non-exempt. Giving them the title of VP of Marketing or VP of Operations and paying them $100,000 per year does not transform the position from a non-exempt position to an exempt position. As such, large salaries and titles alone are not determinative. Instead, employers must analyze the actual work performed by each worker under the professional, administrative and executive exemptions. There is also an exemption for retail salespeople who earn at least 50 percent of their pay in commissions and make more than one and one-half times the minimum wage.

So what should you be doing to avoid liability?

A helpful starting place in exemption analysis is to prepare job descriptions or a duties checklist as to each employee. And then review the job descriptions and the list with experienced employment law counsel to determine, whether and to what extent you need to implement the best corrective action. In some cases, you will need to re-classify an employee or a group of employees. In other cases, you will have the peace of mind that your employee classifications are legally correct. Remember that as an employer, you have the burden to show that you have properly classified employees.

Consulting with legal counsel is paramount to limiting your potential exposure in your employment practices. Feel free to contact Mark Terman or Pascal Benyamini at (310) 478-5656 should you have any questions about the foregoing or any other employment matter.

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