Employee Wage Exemptions Easily Explained

by Mark P. Carey | Feb 12, 2020 | Blog, Wage & Hour Topics

By Jill Halper

This article is meant to inform and offer guidance for either an employer or an employee who wishes to have a better grasp on the complex matter of employee exemptions. At the start of employment it is crucial for both parties to understand and be on the same page about the incoming employee’s exemption status so that he or she may be properly compensated and to hopefully avoid any legal disputes that may arise. If this is not clear from the start, an employee who believes he or she might be nonexempt will expect to receive overtime pay in addition to regular pay and a legal battle could ensue where the employer may not only be liable for back pay for the overtime hours, but if if can be shown that the failure to pay the overtime was knowing or intentional, the employer could be subject to double damages (overtime back pay times 2).

OVERTIME DEFINED

The Fair Labor Standards Act (FLSA) Regulations (promulgated by the U.S. Department of Labor established after passage of the FLSA. The FLSA establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments. The FLSA provides that covered nonexempt employees must receive overtime pay for hours worked over 40 per workweek (any fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods) at a rate not less than one and one-half times the regular rate of pay. There is no limit on the number of hours employees 16 years or older may work in any workweek. The FLSA does not require overtime pay for work on weekends, holidays, or regular days of rest, unless overtime is worked on such days. While the FLSA sets forth guidelines related to overtime pay for covered employees (nonexempt employees), it also exempts certain types of employees from its overtime pay requirements.

EXEMPT EMPLOYEE HAVE NO RIGHTS

An exempt employee has virtually “no rights at all” under the FLSA overtime rules. In fact, all an exempt employee is entitled to under the FLSA is to receive the full amount of the base salary in any work period during which s/he performs any work (less any permissible deductions). Nothing in the FLSA prohibits an employer from requiring exempt employees to “punch a clock,” or work a particular schedule, or “make up” time lost due to absences. Nor does the FLSA limit the amount of work time an employer may require or expect from any employee, on any schedule.

Under the FLSA, some jobs are classified as exempt by definition. For example, “outside sales” employees are exempt (“inside sales” employees are nonexempt). For most employees, however, whether they are exempt or nonexempt depends on (a) how much they are paid, (b) how they are paid, and (c) what kind of work they do.

THE SALARY BASIS TEST

To be exempt, an employee must (a) be paid at least $23,600 per year ($455 per week), and (b) be paid on a salary basis, and also (c) perform exempt job duties. These requirements are outlined in the FLSA Regulations. Most employees must meet all three “tests” to be considered exempt. Employees who are paid less than $23,600 per year ($455 per week) are, for the most part, automatically nonexempt.

EXAMPLES OF EXEMPT EMPLOYEES

The following are examples of employees who are explicitly exempt from the overtime pay requirements:

• Executive, administrative, and professional employees (including teachers and academic administrative personnel in elementary and secondary schools), outside sales employees, and certain skilled computer professionals (as defined in the Department of Labor’s regulations);
• Employees of certain seasonal amusement or recreational establishments;
• Employees of certain small newspapers and switchboard operators of small telephone companies;
• Seamen employed on foreign vessels;
• Employees engaged in fishing operations;
• Employees engaged in newspaper delivery;
• Farm workers employed on small farms (i.e., those that used less than 500 “man days” of farm labor in any calendar quarter of the preceding calendar year);
• Casual babysitters;
• Persons employed solely by the individual receiving services (not an agency, non-profit, or other third-party employer) primarily providing fellowship and protection (companionship services) to seniors and/or individuals with injuries, illnesses, or disabilities;
• Certain commissioned employees of retail or service establishments;
• Auto, truck, trailer, farm implement, boat, or aircraft salespersons employed by non manufacturing establishments primarily engaged in selling these items to ultimate purchasers;
• Auto, truck, or farm implement parts clerks and mechanics employed by non-manufacturing establishments primarily engaged in selling these items to ultimate purchasers;
• Railroad and air carrier employees, taxi drivers, certain employees of motor carriers, seamen on American vessels, and local delivery employees paid on approved trip rate plans;
• Announcers, news editors, and chief engineers of certain non metropolitan broadcasting stations;
• Domestic service employees solely employed by the individual, family, or household receiving services (not an agency or other third-party employer) who reside in the private home where they provide services;
• Employees of motion picture theaters;
• Farmworkers;

In sum, where an employee meets or exceeds the minimum weekly pay of $455/week and is paid on a “salary basis”, the analysis of whether they are exempt will come down to what type of work they do and whether that type of work explicitly or otherwise somehow places them into one of the above exempt job title categories.

In many cases, the determination of whether an employee is exempt comes down to whether the employee falls under the first bullet point above (executive, administrative or professional), as the other bullet points for exemption are straight forward. However, whether an employee is considered an executive, administrative or professional employee is not always clear, and in particular, whether an employee is considered a “professional” is the least clear of the three job designations.

PROFESSIONAL EMPLOYEE DEFINED

Under C.F.R. Section 541.301, an employee may be considered a “professional” for purposes of exempt status if he is determined to be a “learned professional”. Section 541.301 provides, in pertinent part, the following:

Learned professionals.

(a) To qualify for the learned professional exemption, an employee’s primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. This primary duty test includes three elements:

(1) The employee must perform work requiring advanced knowledge;

(2) The advanced knowledge must be in a field of science or learning; and

(3) The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

PERFORM WORK REQUIRING ADVANCED KNOWLEDGE

(b) The phrase “work requiring advanced knowledge” means work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment, as distinguished from performance of routine mental, manual, mechanical or physical work. An employee who performs work requiring advanced knowledge generally uses the advanced knowledge to analyze, interpret or make deductions from varying facts or circumstances. Advanced knowledge cannot be attained at the high school level.

IN A FIELD OF SCIENCE OR LEARNING

(c) The phrase “field of science or learning” includes the traditional professions of law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy and other similar occupations that have a recognized professional status as distinguished from the mechanical arts or skilled trades where in some instances the knowledge is of a fairly advanced type, but is not in a field of science or learning.

CUSTOMARILY ACQUIRED BY A PROLONGED COURSE OF SPECIALIZED INTELLECTUAL INSTRUCTION

(d) The phrase “customarily acquired by a prolonged course of specialized intellectual instruction” restricts the exemption to professions where specialized academic training is a standard prerequisite for entrance into the profession. The best prima facie evidence that an employee meets this requirement is possession of the appropriate academic degree. However, the word “customarily” means that the exemption is also available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as the degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction. Thus, for example, the learned professional exemption is available to the occasional lawyer who has not gone to law school, or the occasional chemist who is not the possessor of a degree in chemistry. However, the learned professional exemption is not available for occupations that customarily may be performed with only the general knowledge acquired by an academic degree in any field, with knowledge acquired through an apprenticeship, or with training in the performance of routine mental, manual, mechanical or physical processes. The learned professional exemption also does not apply to occupations in which most employees have acquired their skill by experience rather than by advanced specialized intellectual instruction.

In order to determine if an employee qualifies as a learned professional, pursuant to 29 C.F.R 541.301 (a) the DOL and courts will look to such factors as whether the work performed includes the consistent exercise of discretion and judgement as distinguished from performing routine mental, manual, mechanical or physical work. The test also includes whether the advanced knowledge required by the job is in a field of science. For example, there is no dispute that engineering is one such field and so often times an employee having an engineering academic background will be an exempt employee, even if the majority of their work duties involves manual labor. Lastly, the test includes whether the employee has a degree which requires a prolonged course of specialized intellectual instruction and that the employee’s job duties could not be performed without this specific engineering training. Moreover, the job duties contemplated must be the employee’s “primary duties. Factors that the DOL and courts take into account in determining whether the “primary duty” requirement is met are:

DEFINING PRIMARY DUTIES TO DETERMINE EXEMPTION

1. the relative importance of the exempt duties as compared with other

types of duties;

2. the amount of time spent performing exempt work;
3. the employee’s relative freedom from direct supervision; and
4. the relationship between the employee’s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee

In the case of Cooke v. Gen. Dynamics Corp., 993 F. Supp. 56 (D. Conn. 1997), the court stated that employee’s “primary duty” will usually be what he or she does that is of principal value to employer, not collateral tasks that he or she may also perform, even if they consume more than 50% of his or her time, for purposes of determining whether employee is administrative employee exempt from overtime pay requirements of Fair Labor Standards Act (FLSA). The court also held that whether an employee is exempt from overtime pay requirements of Fair Labor Standards Act (FLSA) is determined by employee’s actual work activities, not by the employer’s characterization of those activities through job title or job description.

By further example, the court in Aneja v. Triborough Bridge & Tunnel Auth., 35 F. App’x 19 (2d Cir. 2002) found that a worker who was employed by the Bridge and Tunnel Authority, who earned a salary of $68,000 per year, who worked in engineering, and who exercised discretion and judgment regularly was a “professional employee” who was exempt from the overtime provisions of the Fair Labor Standards Act (FLSA). The fact that worker supervised others in addition to his engineering tasks, that he lacked authority to hire and fire, and that there was purported a “public service” nature to his work was irrelevant to the analysis of whether he was “professional employee” for FLSA overtime purposes.

Based on the above, just because an employee’s job duties include certain manual tasks such as repairs and maintenance does not automatically take that employee outside of the professional exemption where the employee’s advance knowledge and intellectual skill set is of prime importance to the employer

DEPARTMENT OF LABOR AND EMPLOYMENT ATTORNEY GUIDANCE

The DOL routinely issues opinion letters for reference on these matters. These are useful when trying to find similar fact patterns to your own in order to determine the exemption status.  However, even if there is a perfectly on point opinion letter, or this article has helped you arrive at a preliminary determination, we urge you to contact an experienced employment attorney if this issue is not crystal clear. As an employee you might be entitled to overtime in addition to your regular pay. And as an employer, you might be found to have committed DOL violations which would require you to compensate your employee for back pay and in some instances subject you to punitive damages. This dollar amount derived from this damage award could be devastating, especially for a small business owner who has failed to pay overtime wages for a long duration. The statute of limitations under the FLSA is two years of general violations and three years look back for willful or flagrant violations. In determining whether punitive damages against an employer is appropriate, courts will look to whether the employer knew or should have known that the employee was nonexempt and eligible for overtime. Some courts have been known to consider the employer’s good faith effort to properly designate an employee’s exemption status in their determination of whether the employer’s conduct was intentional or willful. An employer’s efforts to seek counsel and elicit an informed option on this issue will go to the issue of willfulness and might help to convince a court that the mischaracterization and resulting failure to pay overtime wages was an honest mistake. Therefore, if you are an employer who finds themselves in this situation, it is important to get professional legal advice about your employee’s exemption status is there is any gray area or as soon as you are aware there might be an issue as to the employee’s designation. This is especially true when an employee’s job duties, pay, hours, work requirements or experience/education change during the course of their employment.

If you would like more information please contact Jill Halper at info@capclaw.com or call Carey & Associates P.C. at 203-255-4150.