Question

I’m a new human resources person at this company. I’m trying to make sure that I properly classify employees as exempt or non-exempt. Can you point out some resources?

Answer

The best place to start is the US Department of Labor’s website, which provides information on the Fair Labor Standards Act (FLSA). Ever since the FLSA was adopted in 1938 employers have struggled to classify employees properly. While some of the standards are clear, others are open to interpretation and rely on nuance.

The FLSA defines an employee as “any individual employed by an employer.” The words “to employ” are defined as including “to suffer or permit to work.” That statement reinforces the fact that it is the employer who controls the workplace in all aspects, including the proper classification of an employee.

The statute defines a non-exempt employee as one who is paid on an hourly basis and is eligible for overtime after 40 hours worked in a work week. While some employers may count non-work hours such as holidays or sick time, the right to overtime is only based upon hours worked.

The other presumption in the law is that all employees are non-exempt unless the employer can demonstrate that the person belongs in one of the exempt classifications discussed below. Because classifying employees as exempt is a significant benefit to employers (no need to pay overtime), the law has established stringent tests that the employer must meet to demonstrate exempt status.

Executive, Professional and Administrative

There are three major classifications of exempt employee: executive, professional, and administrative. While the same salary threshold applies to all three, each has specific job duties that must be met to demonstrate that the position is exempt.

Every exempt employee must be paid at least $684 per week on a salary basis. The salary basis is either weekly, biweekly semi-monthly, or monthly. Paying an exempt employee monthly in Massachusetts requires the employee to elect monthly pay rather than weekly or bi-weekly.

It is important to note that merely paying at or above the salary test threshold does not make that person exempt.

Assuming the salary basis is met, the focus for determining whether somebody is exempt is evaluation of job duties.

Executive

Job-duties requirements include:

1. The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
2. The employee must customarily and regularly direct the work of two or more other full-time employees or their equivalent; and
3. The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

The employee must meet all three of these criteria to be classified as exempt. Otherwise, the person is non-exempt. The requirements of the executive position are spelled out in more detail in this fact sheet.

Professional

There are two types of professionals recognized under the FLSA – the learned professional and the creative professional. Each classification has specific criteria.

Learned Professional – job duties requirements include:

1. The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work that is predominantly intellectual in character and that includes work requiring the consistent exercise of discretion and judgment;
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.

Creative Professional requirements include:

1. The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

An employee must meet all of these criteria to be classified as exempt. Otherwise, the person is nonexempt. The requirements of the professional position are spelled out in more detail in this fact sheet.

Administrative

This is by far the most imprecise of the three major classifications and the one that can present the biggest challenge to an employer.

Administrative – job duties include:

1. The performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
2. The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Employees must meet these criteria to be classified as exempt. Otherwise, the person is nonexempt. The requirements of the administrative position are spelled out in more detail in this fact sheet.

There are three other narrow exempt classifications: outside sales, computer and highly compensated employees.

Computer employee

Job duties include:

1. Employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below;
2. The employee’s primary duty must consist of:
   1. The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
   2. The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
   3. The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
   4. A combination of the aforementioned duties, the performance of which requires the same level of skills.

In the case of computer employees who meet the criteria outlined above there is an alternative pay model that enables them to qualify as exempt. Instead of being paid a salary, the computer professional need only be paid at least $27.63 an hour.

Employees must meet these criteria to be classified as exempt. Otherwise, the person is nonexempt. The requirements of the computer professional position are spelled out in more detail in this fact sheet.

Outside Sales

Job duties include:

1. The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
2. The employee must be customarily and regularly engaged away from the employer’s place or places of business.

Please note that there is no minimum salary requirement for the outside sales position.

Employees must meet these criteria to be classified as exempt. Otherwise, the person is nonexempt. The requirements of the outside sales position are spelled out in more detail in this fact sheet.

Highly Compensated Employees

Highly compensated employees performing office or non-manual work and paid total annual compensation of $107,432 or more (which must include at least $684 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

Employees must meet these criteria to be classified as exempt. Otherwise, the person is nonexempt. The requirements of the highly compensated employee are spelled out in more detail in this fact sheet.

Properly classifying employees can be daunting even for a seasoned HR professional. Use these fact sheets as a starting point to determine the job duties of each position.

If you are interested in having AIM review one or more of your positions, please contact Kelly McInnis at kmcinnis@aimhrsolutions.com for more information.

If you have general questions about the FLSA and employee classifications, please call the AIM Hotline at 1-800-470-6277.