Exempt or Not Exempt – That is the Question

The battle rages on between management (aka the oppressors) and labor (the oppressed) about who should be paid overtime.  Management does not want to pay overtime.  They feel that time tracking and reporting slows down business, people like to be recognized for what they do – not how many hours they work, and it saves money.  Labor wants everyone to be paid overtime, to be compensated for the labor they put into the business.  They want what’s right!  Making the rules is the federal government and depending on which party is in power they are either seen as defending the oppressed or supporting fair competition.  There are no winners in this battle royal.

Okay, so that may be a bit over the top, but the base arguments are there.  So the question is:  who should be paid overtime?  The governing legislation is the Fair Labor Standards Act (FLSA) adopted in 1938 and amended many times since.  The FLSA governs minimum wage, overtime, child labor laws, and record keeping. It is enforced by the Department of Labor – Wage and Hour Division.  Enforcing the FLSA is one of the Obama administration’s high priorities and the enforcement division has recently been expanded with more investigators (to defend the oppressed).

The FLSA contains a provision stating that in general, individuals should be paid at 1 ½ times their normal pay rate for any hours worked in excess of 40 hours in one work week (aka overtime).  However, there are other provisions that allow some workers to be “exempted” from the overtime provisions of the FLSA – hence the term “Exempt” – while those who do not meet the qualifications to be exempted are called Nonexempt.   Frequently the terms “Salaried” and “Hourly” are used as synonyms for “Exempt” and “Nonexempt” but they do not necessarily mean the same thing.  There are salaried jobs that are nonexempt and exempt jobs who closely track their hours.

The FLSA contains several different “tests” that can be used to determine if a job can be classified as exempt.  There are income tests and education tests. There are management level tests and inside/outside test (for sales people).  All in all I believe it is one of the most poorly written pieces of federal legislation HR professionals deal with. It is wholly subject to interpretation and similar jobs are often evaluated differently in different companies.

But there is one “simple” test that I use when talking to managers that really cuts to the chase.  Does this job (the person doing the job) regularly make independent decisions on matters of significance?  If yes, they are probably exempt.  If no, then they are probably not.  Unfortunately, that “simple” test doesn’t sound too simple.  We have to agree on the definitions of regularly, independent and significance.  Regularly doesn’t have to mean daily, but it can’t mean monthly.  Independent does not have to mean full authority to do whatever they want, but it does mean really exercising discretion and not following a pre-ordained policy nor having every “decision” affirmed by a superior.  A matter of significance does not have to mean life or death, but it is not ‘where should we go for lunch’.

An exempt employee should regularly use their education, experience and judgment to perform tasks that will materially affect the success of the company. That could mean hiring or firing staff, deciding on the proper accounting treatment of a transaction, or negotiation the purchase or sale of product or materials, establishing budgets and marketing plans, or any number of other things. The key is that if these things are not done well there could be a real impact on the company.

So I encourage you to lay down your arms and set away from this battle field.  There are no bright lines, no clear right or wrong, and hopefully no real oppressed or oppressors.  There is only a vaguely written piece of legislation and lots of interpretation in the offing.  Good luck to you – and God speed.

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Tags: Consulting, DOL, Exempt, FSLA, Human Resources, Kansas City, Nonexempt, Overtime

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