Exempt or Non-Exempt? Three Part Test

Exempt or Non-Exempt? Three Part Test

Easy as 1 2 3

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ExemptUpdated FLSA Exemption Three part standard test (Employers have until 12/1/16 to comply with new overtime rule.) Exempt or Non-Exempt? Three Part Test

The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.  However, the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional, outside sales employees, and also certain computer employees.  A big misconception among employers is that job titles will determine if the employee is exempt or not.  That is not correct.  Job titles do not determine exempt status

Three Part Standard Test for Exemption Status/Classification

In order for an employee to be classified as exempt in most cases, their duties and salary must meet all three of the following requirements:

  1. Salary Basis – “Salary Basis” is a pre-determined amount that cannot be reduced because of variations in the quality or quantity of the employee’s work in the proposed regulations.
  2. Level Test – (The past Level Rule: The employee must be paid on a “salary basis” at not less than $455/week or $23,660/year, except computer positions.) The New Level Rule: The employee must be paid on a “salary basis” at not less than $913/week or $47,476/year, except computer positions. **2 notes regarding exceptions to the salary test: a) Computer positions are based on hourly not salary rate –new numbers as of 5/18/2016 — (was $455/week or $27.63/hr).  b) Outside Sales does not have to meet the Salary Basis Test.
  3. Duties/Function Test- (no changes to the “duties test” and allowing bonuses and incentive payments to count toward up to 10 percent of the new salary level)

Does the employee function in one of the following areas?  Does the employee meet any of these requirements for the specific function?

  • Executive: must be primarily engaged in management, direct the work of 2 or more full time employees and be authorized to affect the terms and conditions of other employees through hiring, firing, etc.
  • Administrative: must be engaged in office or non-manual work related to general business operations and must use independent judgement and discretion with regard to significant matters
  • Professional: must perform functions that require advanced knowledge in a field of science or learning
  • Computer: must perform functions that require the application of systems analysis techniques, the design or development of computer systems or programs, or the creation or modification of programs relating to operating systems.
  • Outside Sales: must make sales and regularly work away from the employer’s business
  • Highly Compensated Employees performing office or non-manual work and paid total annual compensation of $134,004 under the new rule (was $100,000) or more (which must include at least $913 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.

New FLSA Overtime Rule Released. What’s Next?

Job Analysis:  If the employee passes both the salary and exemption applicability tests, a job analysis of what the employee does on a daily basis should be performed. To qualify for exemption, employees must meet certain tests regarding their job duties.   Like I mentioned above, job titles are not a good reason to classify an employee as exempt from overtime.  Here are keys to a thorough job analysis:

Review Minimum qualifications for the job including education, on the job training and experience

Review Prior job descriptions and related materials

Confirm Work with supervisors that duties and qualifications are accurate

Conduct Workflow reviews and the positions purpose to the organization

Gather Organizational Charts

Gather historical information on the positions such as past job descriptions, etc. (Positions should be reviewed on a regular basis to ensure that employees are maintaining or progressing into proper classifications and positions.) Job descriptions should also be updated regularly, usually during performance reviews.

If the employee and their position do not meet one of the above requirements, the employee should be classified as non-exempt and will receive overtime pay for hours worked over 40 hours per work week.

Overtime Rule Affects 7.4 Million Businesses

4. READ THIS TOO!  Ok, Ok, I guess it is Easy as 1-2-3-4

***Quoted by DOL Wage & Hour: Blue Collar Workers: The exemptions provided by FLSA Section 13(a)(1) apply only to “white collar” employees who meet the salary and duties tests set forth in the Part 541 regulations.  The exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy.  FLSA-covered, non-management employees in production, maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers are entitled to minimum wage and overtime premium pay under the FLSA, and are not exempt under the Part 541 regulations no matter how highly paid they might be.

***Note that state laws may be different, so check your state wage and hour exemption information to ensure there is no conflict.

***Special rules apply to State and local government employment involving fire protection and law enforcement activities, volunteer services, and compensatory time off instead of cash overtime pay.

***If you are not certain of an employee’s classification status, it is a best practice to seek legal counsel.

OVERVIEW OF NEW OVERTIME RULE

New Overtime Rule from the Department of Labor & the White House The final rule will become effective on December 1, 2016, giving employers more than six months to prepare. The final rule does not make any changes to the duties test for executive, administrative and professional employees.

  • Raised the salary threshold indicating eligibility from a minimum of $455/week to $913/week ($47,476 per year). It will be tied to the 40th percentile of the lowest Census region (currently the South). According to the DOL, employers have a few options when addressing the gap:
    1. Increase salary to minimum $47,476/year
    2. Change classification to non-exempt and provide overtime pay for hours worked over 40 hours
    3. Limit employees to 40 hours   
    4. Reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
    5. Some combination of the above.
  • Raised the “highly compensated employee” threshold – from $100,000 to $134,004 – above which only a minimal showing is needed to demonstrate an employee is not eligible for overtime.
  • Updates to the salary level will occur every three years, the first update to occur January 1, 2020. DOL will give 150 days’ notice prior to change-August 1, 2019.  DOL estimates the first update will result in the salary level being set at $51,168.
  • Employers will be permitted to use commissions and non-discretionary bonuses (up to 10%) to satisfy the new salary level, paid quarterly, and subject to a “catch up.”
  • No changes to the duties test.  DOL sought comments regarding whether the apply a requirement that exempt employees spend more than 50% of their time performing exempt work, as in California. Exempt or Non-Exempt? Three Part Test

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