Exempt vs

Exempt vs. Nonexempt under the Fair Labor Standards Act

March 12, 2003

This material was originally presented on March 12, 2003, as part of a seminar entitled New Hampshire Payroll Basics sponsored by Lorman Education Services, and held at the Executive Court Banquet Facility in Manchester, New Hampshire.

The requirement to pay overtime compensation is one of the key provisions of the Fair Labor Standards Act ("FLSA"). The FLSA requires that "nonexempt" employees be paid one and one-half times their regular rate for all hours over 40 worked in a work week. Thus, it is essential that employers understand the difference between exempt and nonexempt status in order to properly pay overtime compensation.

A. Who is Exempt?

The FLSA exempts certain employees from its overtime provisions. The so-called "white-collar" exemptions apply to executive, administrative and professional employees. Common characteristics of these exemptions are: payment on a salary basis, a salary of at least the statutory minimum (currently $250/week), primary duties which are exempt work and the regular exercise of discretion.

1. Executive Employees. An employee is an exempt executive employee if:

	his/her primary duty consists of the management of the enterprise or a recognized department or subdivision; and
	he/she customarily and regularly directs the work of two or more employees; and
	he/she has authority to hire/fire or to recommend hiring/firing.⁽¹⁾

2. Administrative Employees. An employee is an exempt administrative employee if:

	his/her primary duty is the performance of office or nonmanual work directly related to management policies or general business operations or to the administration of school system or educational institution; and
	he/she exercises independent judgment and discretion.⁽²⁾

3. Professional Employees. An employee is an exempt professional employee if:

	his/her primary duty consists of the performance of work either requiring knowledge or an advanced type in a field of science or learning, or teaching, which is customarily acquired through a course of specialized intellectual study and instruction; or
	his/her primary duty consists of work in a recognized field of artistic endeavor which depends primarily on the employee's invention, imagination or talent.⁽³⁾

B. Primary Duty.

In order to qualify for any of the white-collar exemptions, the employee's primary duty must be related to activities which satisfy that exemption. Thus, an exempt executive must have management duties as his/her primary duty. Generally, at least 50% of the employee's time must be devoted to the activity for it to be a primary duty. However, time is not the sole factor. Other factors, such as the relative importance of the exempt work, the frequency of the employee's exercise of discretion, and the level of supervision of the employee may render an employee exempt even if the exempt duties comprise less than 50% of his/her time.

C. Salary Basis Rule.

In order to qualify for exemption, the employee must be paid on a "salary basis". This means that the employee must be paid a predetermined amount regardless of the number of hours worked. With a few exceptions, there can be no deductions from salary because of variations in the quality or quantity of work performed. 29 CFR 541.118. Both federal and state law contain prohibit deductions from salary except in limited circumstances. State law will be discussed later in these materials.

1. Exceptions. Under federal law, deductions may be made in the following circumstances:

	the employee performed no work during the work week.⁽⁴⁾
	the employee is absent from work for a day or more for personal reasons, other than sickness or accident.⁽⁵⁾
	the employee is absent from work for a day or more due to illness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for such absences and the employee either has not qualified for leave or has exhausted his or her entitlement to leave under such plan, policy or practice.⁽⁶⁾
	an offset is made for amounts received by the employee for jury duty, witness fee or military duty.⁽⁷⁾
	the employee is subject to a disciplinary suspension for a safety violation of major significance.⁽⁸⁾
	the employee's salary is prorated for a partial or final week of employment.⁽⁹⁾
	the employee is granted leave for partial days or work weeks pursuant to the Family and Medical Leave Act.⁽¹⁰⁾

2. "Subject to" Deduction. FLSA regulations require that an exempt employee's salary not be "subject to" reduction. The U.S. Supreme Court has interpreted this provision to mean that exempt status is lost when there is an actual practice of making impermissible deductions or the employer's policy creates a "significant likelihood" of such deductions.⁽¹¹⁾ Thus far, courts deciding cases since Auer have held that as long as the employer's policy is subject to an interpretation which satisfies the salary basis test, the exemption will not be lost if there have been no actual deductions.

3. Special Rules for Public Employers. A special exception allows public employers to reduce a salaried employee's pay for partial day absences due to personal reasons or illness or injury as long as the deductions are made pursuant to a system established by statute, ordinance, regulation, policy or practice.⁽¹²⁾

4. Window of Correction. Regulations allow employers to preserve the exempt status of employees who were impermissibly "subject to" reductions in pay or who actually suffered such reductions by reimbursing the employees and agreeing to comply in the future. This "window of correction" is only available if the deduction was inadvertent or for reasons other than lack of work.⁽¹³⁾

5. Penalties for Improper Deductions. The consequences for making improper deductions from the salary of an exempt employee can be far worse than simply having to reimburse the employee for the improperly deducted amount. Under the federal regulations, an employee who is subject to an improper deduction is not paid on a salary basis. Since payment on a salary basis is a prerequisite to exemption from overtime requirements, the exempt status of that employee may be lost. This means the employee would be entitled to overtime compensation for hours worked in excess of forty (40) in each week. The employee will be entitled to back overtime wages for a period of two (2) years or three (3) years if the violation is found to be willful. Since employers typically do not record the exact hours worked by exempt employee, the employee's testimony or personal records may be used to establish the number of overtime hours. 1

Notes:

1. 29 C.F.R. § 541.1

2. 29 C.F.R. § 541.2

3. 29 C.F.R. § 541.3

4. 29 C.F.R. § 541.118 (a)

5. 29 C.F.R. § 541.118 (a)(2)

6. 29 C.F.R. § 541.118 (a)(3)

7. 29 C.F.R. § 541.118 (a)(4)

8. 29 C.F.R. § 541.118 (a)(5)

9. 29 C.F.R. § 541.118 (c)

10. 29 C.F.R. § 825.206

11. Auer v. Robbins, 519 U.S. 452 (1997)

12. 29 C.F.R. § 541.5(d)

13. 29 C.F.R. 541.118 (a)(6)