Published March 2001

Careful review needed when deciding exempt status

By Jack Goldberg
Columnist

Are employees exempt because they are highly paid? Are positions with management titles automatically exempt regardless of actual job duties? Should we reward our employees by making them exempt? Why do we need timecards? What does exempt mean?

Although the laws giving rise to the terms “exempt” and “non-exempt” are quite involved, this overview may help answer a few of your questions.

FLSA and similar state laws
The 1938 Congress passed the Fair Labor Standards Act (FLSA) to, among other things, establish a minimum wage and to encourage limits on weekly hours of work by requiring payment of an overtime premium. Subsequently, many states passed similar wage laws, which may be more beneficial to employees.

The provisions of the FLSA or similar state laws apply to most employees. This non-exempt status requires employers to do the following:

— Pay the employee overtime pay at the rate of 1-1/2 times the employee’s regular rate of pay for all hours worked over 40 in a workweek. Some states require overtime to be calculated on a daily basis (e.g. California).

— Maintain and retain specific payroll records, including records that detail the number of hours worked.

— Provide breaks and meal periods.

— Pay minimum wage.

In some limited situations, an employee may be exempt from state and federal minimum-wage and overtime requirements. Employees are exempt because of the nature of their job and the degree of discretion and responsibility required to perform their job. The major exemption categories are known as white-collar exemptions and are designated as Executive, Administrative, Professional and Outside Sales. Under federal law, and in some states, there is an additional exemption for Highly-Skilled Computer Professionals.

In general, an employee is exempt if he or she performs work that is of an exempt quality (e.g. management or nonmanual work related to management policies, exercising independent judgment), performs a sufficient quantity of exempt-type work on a daily basis and earns an appropriate type and amount of compensation (generally, paid on a salary basis).

Because there are specific requirements for each exempt category, employers should assume all employees are non-exempt until a complete analysis clearly indicates otherwise.

Protect exempt status
An employee’s exempt status can inadvertently be destroyed if he or she is treated as non-exempt. For example, generally, an exempt employee’s salary cannot be reduced because of hours not worked in a workweek (though there are specific exceptions to this rule). If an exempt employee’s salary is reduced for reasons other than those authorized by law, exempt status may be lost for that workweek and overtime pay may be required. If this improper reduction occurs frequently, exempt status may be lost for all workweeks.

Avoiding potentially serious problems
Doing the following can help avoid wage and hour problems:

— Review all position descriptions to ensure jobs are properly designated as either exempt or non-exempt.

— Review the status of individuals designated as independent contractors to ensure they are properly designated and are not, in fact, employees.

— Audit files to ensure compliance with record-keeping requirements.

— Stay current on changes in the laws and with record keeping and other requirements.

— Establish appropriate procedures and policies for non-exempt employees to ensure compliance with FLSA and state laws.

— Be alert and respond promptly to any employee concerns about overtime issues.

— Pay attention to the laws of each state where your company has employees.

Jack Goldberg is President of Personnel Management Systems Inc., with offices in Everett, Kirkland and Tacoma. The PMSI Web site is www.hrpmsi.com.

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