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

The Issue:  Which employees are exempt from overtime laws?

The Solution:  Exempt employees are those whose job compensation and duties meet the federal and state requirements for overtime exemption.

Analysis:  Misclassifying employees 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 stemming from wage and hour and class action lawsuits.  

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: (1) the Salary Basis Test, and (2) the Duties Test. 

Salary Basis Test: To satisfy the “salary basis” test, the employee must be paid a salary equal to at least twice the state minimum wage requirement.  In California, the minimum wage is currently set at $9.00 per hour (i.e., annual salary of $37,440).

Duties Test: To satisfy the “duties” test, the employee must routinely spend more than 50 percent of his or her working time performing “exempt” duties.  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. 

Most overtime litigation is borne from this more difficult duties test.  Employers must analyze the actual work performed by each worker.

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.  Remember that as an as an employer, you have the burden to show that you have properly classified employees.