How confident are you in your employee classifications and the process you use to categorize them? Do you really understand the differences between exempt vs. non-exempt classifications when it comes to your white-collar employees?
One of the biggest misconceptions with employee classification is that anyone who isn’t bussing tables or taking orders at the corner deli can qualify for one of the white-collar exemptions under the Department of Labor (DOL).
Unfortunately, it’s not that simple. You shouldn’t automatically assume that certain employees are exempt.
So, how does one decide if an employee is exempt vs. nonexempt?
Pay rate, job duties, and responsibilities are all key factors in determining if an employee is exempt or non-exempt, not the type of clothes they wear or their work environment.
This guide can help you better understand the qualifications for exemption and, hopefully, minimize your potential for a wage claim, DOL audit, or IRS fines for employee misclassification.
Exempt vs. Non-Exempt
In a nutshell, the most significant difference between non-exempt workers and their peers who qualify for a white-collar exemption is overtime pay and timekeeping requirements.
Non-exempt employees are entitled to overtime pay, and their employers are required to track and pay all overtime hours as regulated under federal or state law.
Conversely, exempt employees are exempt from being paid overtime. Therefore, if a white-collar exemption is determined, it could indicate that an employer would not be required to track and pay overtime for the exempt employee.
Under federal law, to be classified under one of the white-collar exemptions, an employee must make at least $684 per week (which translates to $35,568 per year). That’s exclusive of board, lodging or other facilities in accordance with federal regulations.
But employee classifications are a little more complicated than remembering that rule.
For example, even if an employee meets this established pay minimum, but their job duties involve repetitive or manual tasks without creativity or decision-making power, they most likely would be non-exempt and eligible for overtime pay.
It’s also important to remember that a job title does not dictate an exemption.
You may feel your administrative assistant is critical to your business. However, under the DOL’s guidelines, there are very specific requirements to be met in order to qualify for a white-collar exemption.
Keep in mind that some states also have specific regulations for exemptions – for example, computer professions in California. Be sure to review state requirements as well.
Common White Collar Exemptions
With so many variables factoring into the equation, how do you know if an employee does in fact qualify for an exemption (assuming they meet the pay minimum outlined above)? Below is some detailed information, as defined by the DOL, to assist you.
Note: All of the criteria outlined for each type of exemption must be met.
- Primary duty is in managing the enterprise (or one of its recognized departments or subdivisions).
- Customarily and regularly directs the work of two or more full-time employees or their equivalent.
- Has authority to hire and fire or make recommendations, which are given particular weight for hiring, firing, advancement, promotion or other change of status for other employees.
- Paid on a salary basis for all hours worked ($684 weekly minimum or higher).
Examples may include business owners, CEOs and vice presidents (VPs).
- Primary duty is office or non-manual work directly related to general business operations of the employer or employer’s customers.
- Exercises discretion and independent judgment on significant matters. (Employers should document the amount of time an employee spends performing each job duty, i.e., daily, regularly, or only occasionally.)
- Examples include people who have the authority to negotiate and bind the company on important issues, provide consultation or expert advice to management, or are involved in planning long- or short-term business objectives.
- Paid on a salary basis for all hours worked ($684 weekly minimum or higher).
This category is the most commonly misclassified because of the stigma that often comes with being non-exempt in an office setting.
Common positions classified incorrectly here include secretaries, office managers and even some positions that have a dual responsibility, such as a manager of a restaurant who may be working the register (performing non-exempt duties and supervising employees).
- Primary duty must be the performance of work requiring “advanced knowledge,” which is defined as work that is predominantly intellectual in character and requires the consistent exercise of discretion and judgment.
- The advanced knowledge must be in a field of science or learning.
- The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
- Paid on a salary or fee basis (as defined by regulations, and no less than the $684 weekly minimum).
Examples include doctors, lawyers, artists, writers, and architects, to name a few.
Highly compensated employees
Employees with over $100,000 in compensation may be exempt if they perform at least one of the duties listed above for the executive, administrative and professional exemptions.
Annual Reviews for Employee Classifications
Employers should annually review employee job duties to help ensure appropriate employee classifications. Some questions to consider during the review follow.
- Does this person lack independence or authority? If yes, they may be non-exempt. An office manager title does not necessarily mean an employee has authority over processes or people. That’s especially true if their duties mostly include picking up materials at the store and ordering lunch – or even organizing the office.
- Is the duty performed repetitive? In other words, does this person do the same thing almost every day? If yes, they are likely non-exempt. Think assembly line or order taker.
- Does this person do mostly physical labor? If yes, they are likely non-exempt. If a person is your lead groundskeeper but most of their work is still manual labor, they should be non-exempt.
- If the employee is a salesperson, do they spend most of their time outside the office? If yes, they are likely exempt. A lot of companies try to claim all outside sales folks as exempt, even the ones working in the office. To be exempt under sales, you have to be out pounding the pavement selling, not inside the office. Take heed: This is an exemption where employers often get it wrong, especially if employees are conducting phone sales or sales from the office.
Key takeaways on classifying employees
To help ensure that you properly classify your employees, keep these key tips in mind.
Talk to people about what they do
Sit down with them, as recommended annually, and ask them what their job is like on a daily basis.
Ask them how often they do something. Find out if they work independently and what type of authority they may have.
For example, you might ask, “Do you conduct independent research or supervise anybody?”
Be sure you know and understand regulations defined by the DOL before sitting down with your employees.
Never go by titles – go by function
This was mentioned earlier, but it’s important enough to recap. Here’s another example.
You have a recently promoted office manager who has authority to process and approve payroll, but who also still serves as the receptionist and meets the salary requirement for exempt. How do you classify this employee?
The answer is non-exempt.
This person has little to no decision-making authority as it relates to the business strategy and supervises no employees. If you classify them as exempt, then they get terminated and file a lawsuit, you could owe thousands in back wages.
Remember, as an employer, you are required to track and pay overtime (as defined by federal and state requirements) if an individual does not meet an exemption.
Unsure? Go with non-exempt
If you’re not 100-percent sure whether an employee is exempt or non-exempt, it is best to classify them non-exempt and have them track their hours and pay overtime appropriately.
Misclassifying and risking a wage claim, class action lawsuit or DOL audit is costly – so if there’s any doubt, veer to the conservative side and classify the employee as non-exempt.
Review job classifications every year
Again, the DOL recommends a review of each job duty annually, because what an employee was doing last year may have evolved into something new without a title or salary change. For example, your receptionist has started answering the phone every day during lunch. If that’s the case, you owe them for overtime.
Employers focused on their business strategy may not realize this without sitting down one-on-one with employees at the end of the year and diving into it.
Don’t get creative with bonuses and extra pay
Avoid finding alternative ways to pay extra in order to eliminate payment of overtime.
Never raise a person’s wage to cover their overtime. If you do that, you just gave them an increase. You may think you’re doing someone a favor, but in reality, you’re setting yourself up for wage and overtime claims using that newly increased wage.
Also, if they’re non-exempt, bonuses must factor into wages when calculating overtime pay, as part of what’s called their “regular rate of pay.” Discuss this topic with an expert on wages and hours, or a labor law attorney, to make sure you’re complying with regulations.
Lastly, it’s illegal to offer the trendy compensatory time pay, or comp time, for most non-exempt employees. They must be paid for all hours worked, including overtime.
Remember: Mistakes can be costly
There are lots of attorneys on the hunt for potential lawsuits in this category, who won’t charge former employees filing a suit. Once they’re contacted by one disgruntled person from a company, they can easily use that person’s experience to target others and bring them into the fold.
Bottom line on employee classifications
Don’t risk misclassification. It can be far too costly to the business you’ve worked so hard to build.
Get to know the rules and regulations pertaining to exempt vs. non-exempt employees, and seek guidance when you need it. A professional employer organization (PEO) or certified professional employer organization (CPEO) can provide your business with many benefits, including assistance with government-related HR compliance issues.
For more insight on common employment law violations and how to avoid them, download our free e-book, Employment law: Are you putting your business at risk?
Insperity is an Educational Partner to NAIFA as well as a supporter of NAIFA's Business Performance Center. For members, you can learn more about Insperity and how to partner within the Member Portal.