Classify Correctly and Stay Classy: Exempt vs. Non-Exempt Employees (Accidental HR)

image2When you’re running at full speed and trying not to trip, it’s often the little things that mess you up. And when it comes to human resources, these gremlins are particularly dangerous when you’re practicing “Accidental HR” – the unplanned, unbudgeted and unsupported business of ‘doing’ HR in a catch-as-catch-can manner, buried under a task list of understandably critical priorities like making payroll, getting more customers and generally running your business.

One of the many gremlins you need to be aware of is the classic confusion over employee classification. Every time you hire someone or shift an employee’s professional role, the question comes up: Are they Exempt or Non-Exempt? And for that matter, what exactly do these terms mean? Some business owners resolve this question with nothing more than simple coin toss or less-than-educated guess.

But we want you to stay classy…and compliant when it comes to these things!

Here’s a quick summary on how to better evaluate whether or not an employee is Exempt or Non-Exempt.

First, you need to know that the whole exempt/non-exempt question arose because of a law called the Fair Labor Standards Act (FLSA). Almost all employers are covered by the FLSA. The key question raised by FLSA in this regard is how to treat those employees who exceed 40 hours of work in a given week (i.e. overtime). Exempt” means “exempt from overtime under this law” and Non-Exempt, naturally, means “eligible for overtime”.

The three factors the government has used to develop and apply its rules for classifying Exempt employees have to do with some key factors:

1. How much you pay an employee
2. How you pay that employee
3. The nature of the work performed by the employee.

Do you pay this employee through a salary, or by the hour? Remember that if you pay someone an hourly wage, it must be at least equal to the legally required minimum wage, and you must pay overtime of 1.5 times hourly pay (at a minimum) for any hours worked beyond 40 in each week.

Hourly employees are considered Non-Exempt and are, therefore, entitled to overtime wages. Salaried employees, who are usually serving in management roles (professional, technical, supervisory or executive) or those who are in outside sales positions (usually paid by commission), are generally considered Exempt (although, interestingly, those in inside sales positions are usually Non-Exempt).

Remember, however, that you can’t just take an employee from a 40 hour-per-week hourly position, pay them the same amount in a salary, and suddenly declare them Exempt. It doesn’t work that way. Item #3 above (the nature of the employee’s work) is the absolute most important part!

In fact, if the FLSA does not specifically provide an exemption for the type of position the employee holds, then you may be violating the law regardless of how you compensate the employee. So, if everyone is Non-Exempt unless the law itself says otherwise, then what does the law actually say? The most common exemptions specified in the FLSA include the following:

1. Administrative employees involved primarily in office-related, non-manual work and who exercise discretion and independence of judgment in their work. You must also pay them a certain amount per week in order for this position to qualify as Exempt.

2. Executive employees who are clearly recognized as responsible for management duties and activities, and who regularly direct the work of two or more other employees and possess significant authority. You must also pay them a certain amount per week in order for this position to qualify as Exempt.

3. Computer employees must be directly involved in consulting, testing, designing, developing, documenting, analyzing and managing computer systems or programs. You must also pay them a certain amount per week in order for this position to qualify as Exempt.

4. High-wage employees who make more than $100,000 per year are generally exempt.

5. The ‘learned’ professions are also generally exempt, such as lawyers, doctors, dentists, teachers, architects, engineers, and the clergy. However, it gets complicated quickly because while an accountant or CPA may be exempt, the bookkeeper working next to her or him may not be. Registered nurses (RNs) may be exempt, but licensed practical nurses (LPNs) may not be. A scientist working in a research lab may be exempt, but the research assistant on the same bench may not be. A registered pharmacist (RPh or PharmD) may be exempt, but the pharmacy technician may not be.

6. Creative professionals are usually exempt, but again this may depend on the nature of their work. Those who are directly involved in the invention, creativity, originality and a unique interpretation or analysis may be exempt. However, the increasingly technical nature of much of this work, coupled with downward wage pressures and more ‘assembly-line’ style work conditions, has created some red flags for the FLSA and employers should proceed with caution.

You can certainly get a clear sense of what the government is trying to do. In short, it’s looking to protect the labor rights of those who need protection, while giving somewhat greater latitude to the nature of the work and compensation relationship between employer and employee where the professional or individual is in a more powerful position.

Remember, too, that the Fair Labor Standards Act was originally written into law in 1938 and is regularly amended and updated, as any law written in 1938 would probably need to be. Ask yourself what the world looked like for you in 1938, and you quickly get the point!

By the way – Since the law is regularly updated, amended, revised and reinterpreted, the information above is just that – information and information only. Specifically, it’s information that, while reasonable as a resource for general guidance and to help you gain a better overall understanding of the law, it is not intended or appropriate for use as an official or complete reference for formal business, legal or other purposes.

The IRS and the U.S. Department of Labor can make your life very unpleasant if either or both conclude that you are cheating at the classification game. The best thing to do next is to consult with an HR professional who is regularly updated, fully informed and constantly reviewing how the law is applied to the widest range of scenarios.

In addition, the best way to learn more about the Fair Labor Standards Act is to go on the web and visit it for yourself, right here:

U.S. Department of Labor – FLSA Overview
http://www.dol.gov/whd/flsa/

So remember: Classify conservatively, commit to careful compliance, and stay classy!

For more information on how your business can benefit from leaving the gaps, gremlins and gripes of “Accidental HR” behind, contact HR Resolutions today for a free initial consultation to discuss how on-site, on-call and as-needed HR outsourcing can work cost-effectively in your business, or call us at 717-652-5187 today.

Article Sources:

FLSA Resources by Chamberlain, Kaufman & Jones LLP http://www.flsa.com/coverage.html

What’s the Difference Between Exempt and Nonexempt Workers? (Monster.com)
http://career-advice.monster.com/salary-benefits/salary-information/whats-the-difference-between-exempt/article.aspx

Exempt vs. Non-exempt Employees (HR Hero)
http://topics.hrhero.com/exempt-vs-non-exempt-employees/#

The Difference Between Exempt & Non-Exempt Employees (CPA Practice Advisor) http://www.cpapracticeadvisor.com/blog/11173480/payroll-the-difference-between-exempt-non-exempt-employees

Image Credit: PFJK @ Flickr (Creative Commons)

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