Tuesday, May 17, 2016

FLSA Fundamentals: The Taxing Taxonomy of Exempt Classifications

*In honor of the Fair Labor Standard Act’s 78th birthday and the highly anticipated changes to the DOL overtime regulations, the Modern Workplace is running a special multipart series entitled “FLSA Fundamentals” which will cover the basics of this important law and culminate in a discussion of the final changes to the regulation upon their release. This is the third post in that series.*

Given the time-intensive and nuanced analysis involved in calculating hours worked by non-exempt employees, compensable and non-compensable working time, and the regular rate of pay, many employers leap at the opportunity to avoid this rigmarole by classifying employees as exempt. As the next few posts in the “FLSA Fundamentals” series will demonstrate, however, properly classifying employees as exempt can be just as harrowing as non-exempt employee requirements. Employers need to beware of misclassifying employees as exempt, because misclassification can lead to multi-claimant lawsuits, awards of substantial damages, and enormous legal defense costs.

Generally, the U.S. Department of Labor’s starting presumption is that all employees are non-exempt employees under the FLSA, which means that they are subject to the minimum wage, overtime, and recordkeeping requirements under the FLSA. Some employees, however, are specifically exempted from the FLSA’s minimum wage and overtime pay requirements if they meet very strict criteria. Distinguishing between non-exempt and exempt status is deceptively difficult, which is why the FLSA still befuddles employers after 78 years.

“To be [exempt] or not to be [exempt], that is the question.”

Contrary to the notions of many employees and employers, the question is decidedly not, “To be salaried or to be hourly.” The way an employer pays an employee may reflect but does not determine exempt status. Paying an employee a salary does not make that employee exempt any more than painting stripes on a donkey makes it a zebra.


This post will discuss three of the most used FLSA exemptions. As will become evident, this “taxonomy” is taxing and involves in-depth analysis of all relevant facts. The duties and payment of an employee, not the job title, will determine whether that employee is, in fact, exempt.

To qualify for the FLSA’s Executive Employee exemption, an employee must meet the following test:

EXECUTIVE EMPLOYEE EXEMPTION
Money
Guaranteed Weekly Salary of at least $455/week
       or
Owner of business with at least 20% bona fide equity interest
Duties
  1. Primary duty (generally >50% of time) is management of enterprise, department, or subdivision
  2. Regularly and customarily directs the work of at least 2 other employees
  3. Has the authority to hire/fire/promote/discipline or make recommendations on these issues which are given particular weight.


The executive exemption typically hinges on analysis of the employee’s “primary duty,” as well as the employee’s true authority to manage employees. As an example, Bert Cooper from Mad Men would qualify as an exempt employee because he manages the ad agency of Sterling Cooper, directs more than 2 employees, and routinely fires employees. Scott Traeger from Parks and Rec, however, would not be an executive employee (since he apparently has only one direct report, Ben Wyatt).

   
NOT


An employee will qualify for the FLSA’s Administrative Employee exemption by meeting the following test:

ADMINISTRATIVE EMPLOYEE EXEMPTION
Money
Guaranteed Weekly Salary of at least $455/week
Duties
  1. Primary duty (generally >50% of time) is performing office or non-manual work directly related to the management or general business operations of the employer or employer’s customers.
  2. Primary duty also includes the exercise of discretion and independent judgment with respect to matters of significance.


When analyzing the administrative exemption, the focus should be on whether the employee’s work “directly relates” to management or general business operations, as well as whether the employee actually exercises independent discretion and judgment such that the employee has authority to make decisions on behalf of the company. For illustrative purposes, Mrs. Landingham from The West Wing would likely be an exempt administrative employee because her office work is crucial to the President and she routinely exercises discretion and independence, but Dilbert would not meet the exemption because he lacks the authority to make decisions on behalf of the company.


      NOT
  
   
Finally, an employee may qualify as a Learned Professional Employee by meeting the following test:

LEARNED PROFESSIONAL EMPLOYEE EXEMPTION
Money
Guaranteed Weekly Salary of at least $455/week
Duties
Primary duty (generally >50% of time) is performing work:
a.  Requiring knowledge of an advanced type in a field of science or learning customarily acquired by prolonged education or an equivalent combination of education and experience, OR
b. Requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Not only does the employee need to possess the advanced knowledge, creativity, or artistic talent to meet the learned professional exemption, the employee must also be working in a job which requires those skills as well. This means that, while Will I. Am from the Black Eyed Peas would qualify as a Learned Professional, Will Hunting from Good Will Hunting would not, despite his math genius, because he lacks prolonged education and does not need this advanced learning to work as a janitor at MIT.


     NOT     


The next installment in the “FLSA Fundamentals” series will grapple with two other commonly used (and misused) exemption categories. The salary basis common to many of these exemptions will likely be significantly revised when the Department of Labor releases its new regulations, which are expected this May or July. The last post in this series will explain and explore these new regulations upon their release.

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