Exempt Versus Non-Exempt: Preparing
for Changes in Overtime Rules Rachel A. Forthofer, CPA
U
nder federal law, the Fair Labor Standards
Act (FLSA), enforced by the Wage and Hour
Division of the Department of Labor, establishes overtime rules for “covered” employees.
“Covered” employees, referring to coverage
under the FLSA (including veterinary practice
employees), fall into one of two categories in
terms of overtime rules: exempt and nonexempt.
Exempt employees are exempt from only one
thing: overtime premium pay. An exempt employee meets very specific criteria set out by
the FLSA, and is paid on fixed salary basis
regardless of hours worked. Exemption status
allows the employer the ability of not paying
overtime, subject to salary thresholds as
explained later.
Overtime work must be paid to non-exempt
employees, at a minimum of one and one-half
times the employee’s regular wage for all
hours worked over 40 hours per week. Please
note that state law can be more rigorous as to
when premium pay is required (California, for
example).
So how do you know whether to classify an
employee as exempt or not? In general, the employer must be able to justify employee classification as exempt based on a three-part test.
The test includes The Minimum Salary Test,
The Duties Test, and The Salary-Basis Test.
All three tests must be met to prove exempt
employee status. It is important to note that
under federal law all employees are considered
non-exempt unless the employer can prove
otherwise. In other words, the burden of proof
lies with the employer to qualify an employee
as non-exempt for overtime purposes.
It is a common misconception that all salaried
employees are exempt from overtime pay.
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This is not the case. Under the FLSA, exempt
employees must be paid on a salary basis, but
paying someone on a salaried basis does not
automatically make him or her an exempt employee. You can pay an employee on a salaried
basis and still be required to pay him or her
overtime pay. A summary of the three tests that
must be met for exempt employee status follows.
The Salary-Basis Test
The salary test sounds simple on its surface.
For an employee to be exempt, she must be
paid on a salary basis. “Salaried” for this purpose means she must receive a guaranteed
minimum amount of money each pay period
on a weekly or less frequent basis for any week
that the employee performs any amount of
work. You cannot dock a “salary-basis”
person’s pay for the quality or quantity of work
performed.
The key exception to the no-pay-docking rule
is for absences of one or more full days of
work. An employer may deduct from a salarybasis employee’s pay if they are out sick, for
example, for a full day, if the deductions is
made in accord with a bona fide plan or practice policy. To do so, the absence must be for
an entire day.
If a salary-basis employee so much as comes to
the practice, checks the voicemail, and leaves,
she must be paid for the entire day. Even
answering email related to work from home
may defeat an employer’s ability to dock pay
for the day.
The Duties Test
The next test that an employee must meet to be
considered exempt is the duties test. The FLSA
provides for three typical categories of exempt
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job duties: executive, administrative, and professional. Note well, the actual duties performed provide this exemption, regardless of
an employee’s job title.
Executive Job Duties Exemption
To qualify for the executive job duties exemption, an employee’s duties must include all of
the following:
1. Management of the practice, or of a recognized department/subdivision, for more than
50% of the employee’s time
a. Example “management” duties for this
purpose include interviewing and hiring,
setting and adjusting pay rates, directing
the work of others, determining the types
of supplies and equipment purchased,
disciplining employees, etc.
2. Regular supervision of two or more
other full-time equivalent employees
3. Genuine input into hiring and firing
decisions
a. The employee must have the authority
to hire and fire, or a particular weight in
hiring and firing decisions (not just the
occasional suggestion).
Administrative Job Duties Exemption
The administrative job duties exemption is one
of the toughest duties tests to apply under the
FLSA, yet it is often the exemption that employers most like to (incorrectly) apply. To
qualify for this exemption, the employee’s primary (more than 50% of time spent) duties:
1. Must be office or non-manual work directly
related to the management of general business
operations of the practice
a. Possible duties include tax, finance,
insurance, personne X[