Wage Claims Article

Exempt Versus Non-Exempt For Overtime Requirements

*A Federal Judge has stopped this law from going into effect on December 1st as originally planned. For more information see this article: https://www.shrm.org/ResourcesAndTools/legal-and-compliance/employment-law/Pages/judge-blocks-flsa-overtime-rule.aspx

Background:  The Fair Labor Standards Act (the FLSA) sets a minimum wage for most employees in the United States (with states having the right to increase it).  The FLSA also requires that overtime be paid to employees when they work more than 40 hours in a workweek.  As you might expect, there are lists of exceptions in the FLSA to both these simple rules.  This article addresses only one exception, what’s commonly referred to as the “White Collar” Exemption.  The White Collar Exemption is the most common exception to both the FLSA’s minimum wage and the overtime requirements.*

The test for whether an employee is Exempt under the White Collar Exemption from the overtime and minimum wage requirements has two parts – both a compensation test and a job duties test.  The compensation part of the test will change dramatically on December 1, 2016, and though the job duties test remains unchanged many employers are looking closely at all job positions to make sure each one is properly categorized and paid as non-exempt or exempt.  This may impact you, so here are some things you should know.

The Test for the White Collar Exemption (the test that determines whether your employer has to pay you overtime):  Five basic job types may be Exempt under the White Collar Exemption:  Executive Employees, Administrative Employees, Professional Employees, Outside Sales Employees and Computer Employees. The FLSA** doesn’t want employers to deny employees the right to be paid overtime simply by labelling someone an Executive or a Professional (or any other title suggested by the job types) and so it lists in pretty significant detail various duties or responsibilities an employee must have in order to be considered a Professional or an Executive or any other of the job types that allow the denial of overtime.
 
Even if an employee meets the job duties test, he/she is not Exempt unless he/she receives a guaranteed salary of at least $455 per week ($23,660 annually).  On December 1, 2016, that minimum annual salary more than doubles – it increases to $913 per week ($47,476 annually).***   This does not mean that on December 1 employees classified as Exempt because their job duties fit the test and they earn more than the current threshold of $23,660 will automatically get a raise to $47,476.****   Employers have a choice in how to comply with the changed rule, and more than likely they will only raise the salary of those Exempt employees who already earn close to $47,476 and will reclassify those well below $47,476 to Non-Exempt, or otherwise adjust their workforce.
    
What does reclassification from Exempt to Non-Exempt mean to you?  The upcoming change in the compensation level test -- as well as the high penalties for misclassifying an employee under the job duties test as Exempt -- will result in many of you who are currently treated as Exempt being reclassified as Non-Exempt.  Don’t despair!  This is not a demotion or loss of status.  The Exempt versus Non-Exempt distinction deals only with pay rules, not the value of your contribution to your company. 

In fact, in many cases becoming eligible for overtime may be a positive; it could result in a bump in what you take home.  Consider the mid-level manager previously exempt from overtime with a salary of $25,000 ($480 per week) who routinely worked 60 hours per week.  Because she didn’t receive overtime, she was receiving $8 per hour – that’s less than Arizona’s minimum wage (currently set at $8.05).  If she had been eligible for overtime and her hourly rate was the minimum of $8.05*****, she would have been paid $563 per week.  Being classified as Exempt harmed this employee financially.  And she is not alone. 

The bottom line is that every employee should look closely at his or her actual job duties (not just the written job description!) and rate of pay to determine whether they are properly classified as Exempt or Non-Exempt.  You may be leaving overtime dollars you deserve to be paid on the table.   

Who To Turn To For Help:  If you have questions about any aspect of the White Collar Exemption, whether it’s related to the duty tests, the salary test, the impact of a reclassification on your income, or your rights under the FLSA, you may want to talk with an attorney knowledgeable about wage and hour laws.  Another option available to you if you have questions about the wage and hour laws and your rights under those laws is to call the Wage and Hour Division of the Department of Labor.  The telephone number for the DOL office in Arizona is 1-602-514-7100, or call the agency’s toll-free help line at 1-866-487-9243.
   
Contributing Attorney Writer: Shirley Kaufman is an attorney at Faulkner Law Offices, PLLC where she focuses on employment law.
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 *If you want to learn more or have questions about any other exceptions to the minimum wage and/or overtime rules, you should contact the Wage and Hour Division office of the Department of Labor or call an attorney knowledgeable about the FLSA requirements.

**The Wage and Hour Division of the Department of Labor is charged with enforcing the FLSA, but for sake of easy reading we refer to the FLSA as if it’s the agency with the goal of protecting employees from misclassification and thus the denial of overtime or minimum wage protections.
   
 ***The White Collar Exemption has a separate test for Highly Compensated Employees (HCEs). The job duties test for HCEs is streamlined in comparison to those for Executive, Administrative and Professional Employees.  The current minimum salary to qualify as Highly Compensated is $100,000.  On December 1, it increases to $134,004 annually. 

 ****The FLSA contains details about whether and under what circumstances bonuses or other payments may be included as salary for purposes of determining whether the salary test is met. 

*****Exempt employees’ salary may fall below the minimum wage if they work enough hours and their salary is near the current $23,660, and this is legal (they are exempt).  Non-exempt employees must be paid at least the minimum wage for all hours worked.