The FLSA has a number of categories of employees who are exempt from the overtime laws. In some cases, however, state laws cover the employees who are exempt from the FLSA. In addition, exemptions are applied on a workweek basis. Employees who perform non-exempt duties in a workweek typically are not exempt that week and are entitled to FLSA overtime compensation for overtime hours worked that week - regardless of their FLSA status the rest of the year.
There are a few well-established principles regarding exemptions to the Act.
- Employees are presumed to be entitled to overtime pay;
- The employer bears the burden of proving that an employee fits within a claimed exemption;
- Job duties, not job titles govern whether an exemption applies. Employers often give employees fancy administrative or professional sounding job titles for purposes of exempting them from overtime pay. Legally, this does not work. In determining whether or not an exemption to overtime pay applies, an employee's actual job duties must be evaluated;
- Lastly, the exemptions to the overtime exemptions are narrowly construed against the employer and if there is a reasonable doubt as to whether an exemption applies, the employee is supposed to receive overtime compensation.
What are the so-called "white collar" exemptions?
These are the administrative, professional and executive exemptions. They are misnamed the "white collar" exemptions because in today's economy many office workers are covered by the overtime laws.
These are the most commonly misapplied exemptions. Many employers and employees mistakenly believe that if an employee is salaried, then regardless of what the employee does, he or she qualifies as an administrative or professional employee. This is wrong. To qualify as an administrative, executive or professional employee, an employer must prove both that an employee is paid on a salaried basis and that the employee performs the duties of the claimed exemption. This means that no workers paid on an hourly basis can be excluded from receiving overtime pay on the basis that they are an administrative, professional or executive employee. Many employees, however, who are paid on a salaried basis are entitled to overtime compensation because they do not perform the duties of an administrative, executive or professional employee.
How is payment on a salaried basis defined?
The U.S. Department of Labor defines payment on a salaried basis as receipt of an employee's full salary in any workweek in which the employee performs any work without regard to the number of hours or days worked. There are exceptions to this in that some courts have found the payment of straight time overtime pay to employees does not necessarily mean that they are paid on an hourly basis. Employees whose pay is docked because they do not work their full scheduled workday are considered to be hourly paid, and are not paid on a salaried basis.
IMPORTANT! The administrative, executive and professional exemptions do not apply to hourly paid employees. In other words, to apply these exemptions to an employee, an employer must prove that the employee is paid on a salaried basis, and that the employee's job duties fit within the claimed exemption. Many salaried employees are entitled to overtime pay because their duties do not meet the test for the overtime exemption their employer is claiming.
What are the job duties tests for the administrative, professional and executive exemptions?
The duty tests for each of these exemptions can be quite complicated. Each exemption sets forth a three-part test which is briefly outlined below. To qualify for the exemption, the employer must prove that the employee's primary job duties meet all aspects of the duty test.
The term primary job duty means the principal, main, or most important duty that an employee performs. An employee can only have one primary job duty, which is determined on a case-by-case basis.
ADMINISTRATIVE DUTIES TEST
The administrative exemption is limited to employees who make decisions with regard to matters of significance concerning the internal operations of their employer. It is intended to apply to people in jobs such as personnel, labor relations, high level budget analysts, management analysts, and other similar types of employees.
To be exempt from receiving overtime compensation as an administrative employee, an employee must:
- receive a weekly salary of at least $455 (unless employed by someone other than the government in American Samoa, in which case the employee must make at least $380 per week);
- primarily perform office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and
- exercise discretion and independent judgment with respect to matters of significance in the performance of their primary duties.
Note that the test for the exemption is a three-part test and that all three parts must be established for the employer to exempt employees from receiving overtime pay. Thus, an employee who performs non-manual work directly related to the management or general business operations of the employer may not qualify for the exemption if the employee does not customarily and regularly exercise independent judgment and discretion with regard to matters of significance. For example, someone who simply reviews and summarizes data would likely not be found to be an administrative employee and would be entitled to FLSA overtime compensation.
In addition, the Department of Labor and courts have applied a production worker/administrative worker distinction in which the workers who perform the day-to-day work necessary for an employer to fulfill its mission do not qualify as administrative employees.
Set forth below are some examples of workers who were found by courts or the Department of Labor to be entitled to overtime pay:
- Escrow workers working for a title company
- Quality assurance specialists
- Indoor wholesale salespeople working for an electrical supplier
- State police detectives
- Import/Export specialists who work for the federal government
- Probation officers and district attorney investigators
- Convention planners employed by a tourist bureau
- Electronics technicians troubleshooting repair of satellite equipment
- Insurance claims investigators
- Senior border patrol agents
- Computer specialists performing simple programming
- Television news producers for a local television station
- INS anti-smuggling criminal investigators
- Case Managers for a service provider for disabled individuals
- Senior legal analysts who only wrote memoranda for attorneys to review
PROFESSIONAL EXEMPTION -- LEARNED PROFESSIONALS, CREATIVE PROFESSIONALS AND COMPUTER PROFESSIONALS
(1) LEARNED PROFESSIONS
The professional exemption is intended to apply to employees who work in recognized professions that typically require a four year college degree or higher such as doctors, lawyers, engineers, architects, scientists, teachers in a recognized school system, etc. Disputes involving the professional exemption typically arise when an employee has developed an area of expertise through on-the-job experience that the employer attempts to claim is a profession such as equipment technicians or journalists or when a person trained as a professional is not performing professional work such as an accountant who is doing bookkeeping.
There is a three-part duty test for the professional exemption. The employer must prove all three parts of the test. The three parts are:
- The employee must perform work requiring advanced knowledge;
- The advanced knowledge must be in a field of science or learning; and
- The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
The first step of the test “work requiring advance knowledge”rdquo; means that the work must be “predominantly intellectual in character.” The work must also require “consistent exercise of discretion and judgment.” There is no set level of education required in order for work to qualify under this test. The work can be “attained at the high school level.”
The second step “field of science or learning” includes such fields as law, medicine, engineering, teaching, pharmaceuticals, and other professions. The regulations state that mechanical arts or skilled trades do not qualify under this exemption.
The final part of the test “customarily acquired by a prolonged course of specialized intellectual instruction” makes the exemption applicable only to professions where “specialized academic training is a standard prerequisite.” This does not mean that the exempt employee must have said academic training, but in general people of that profession must “customarily” have it.
The federal regulations list several professions to whom this exemption does or does not generally apply
Some professions that the regulation lists as exempt under the learned professional exemption are:
- Registered or certified medical technologists
- Registered Nurses, registered by a state examining board
- Dental hygienists who have completed an accredited academic program
- Physician assistants who have completed an accredited academic program
- Certified Public Accountants
- Chiefs and sous-chefs who hold degrees in culinary arts
- Athletic trainers who have completed an accredited academic program
- Licensed funeral directors and embalmers
Some professions that the regulation lists as non-exempt under the learned professional exemption are:
- Licensed practical nurses and other similar health care employees
- Accounting clerks
- Cooks who perform routine mental, manual, mechanical, or physical work
- Legal assistants
(2) CREATIVE PROFESSIONALS
Persons employed in the arts are exempt from receiving overtime under the creative professional exemption. This is most often misapplied to persons who work in fields that have limited avenues for creativity such as draftsman, journalists, technical writers, copy writers and the like. This exemption can apply to journalists, if they write more creative pieces, such as opinion columns. Journalists who only collect information and issue standard reports or whose work product is substantially controlled by their employer do not qualify for the exemption.
To be excluded from receiving overtime as a creative professional, an 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. Examples of fields to which this exemption apply include music, writing, acting, or the graphic arts. The results must be dependent primarily on the invention, imagination or talent of the employee.
(3) COMPUTER PROFESSIONALS
This exemption applies to computer programmers and computer systems analysts. In contrast, employees who are engaged in the maintenance, operation or repair of computers and software are clearly entitled to receive overtime. Because these positions can change quickly due to technology, it is important to look at the duties of a position instead of just the title. Computer systems analysts, computer programmers, and software engineers in the computer software field are exempt from receiving FLSA overtime only if they meet certain tests Congress has established for the computer professional exemption.
To meet this exemption, an employee must make at least $455 per week and meet the specified duties. The employee’s primary duty must involve one of the following four duties:
- The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
- 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;
- The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
- A combination of the aforementioned duties, the performance of which requires the same level of skills.
The exemption only applies to highly skilled employees who have achieved a level of proficiency in the theoretical and practical application of a body of specialized knowledge in computer systems analysis, programming and software engineering. The exemption does not apply to employees who work in computer repair or manufacturing or whose work is not primarily engaged in computer systems analysis and programming or other similarly skilled computer-related occupations.
The executive exemption applies to managers and high level supervisors who are paid on a salaried basis of at least $455 per week. A three-part duty test is used to determine whether salaried employees can legally be denied overtime compensation on the basis that they are "executives."
To prove that its employees meet the duty test, an employer must establish that the primary, or most important, duty of the employee is managerial. This includes anyone who owns at least a 20 percent interest in his or her employer. Management duties include work such as, for instance: interviewing and training of employees, setting and adjusting employees’ rates of pay and hours of work, directing the work of employees, evaluating employees’ work, dealing with employee complaints, disciplining employees, planning the work, assigning work, and controlling the budget.
An employee does not have to spend a certain percentage of his or her time managing employees to be primarily involved in managing, but must spend some time managing and it must be his or her primary duty. For instance, a relief manager, who only occasionally performs any managerial tasks, would not be exempt under this rule.
Second, the employer must establish that the employee customarily and regularly directs the work of two or more employees. The employees must be either full-time employees or the employees directed must be the equivalent of two full-time employees. In order for the exemption to apply, the employee must actually direct the employees and may not merely assist in directing them.
Finally, in order for the executive exemption to apply, the employee must have the authority to hire and fire employees or the authority to make decisions or recommendations with respect to changes in employment status that are given “particular weight,” his or her opinion as to the hiring and firing of employees must be given “particular rate.” Even if the employee does not have the ultimate authority to hire and fire, the executive exemption can apply to him or her. The employee must be able, though, to make more than just an occasional suggestion as to the hiring or firing of the employees that he or she manages.
OUTSIDE SALES EXEMPTION
This exemption applies to employees who engage in making sales away from the employer’s place of business. It does not apply to telemarketers or any other salespeople who make sales from their employer's place of business.
The outside sales exemption is limited to employees whose primary duty is to work away from the employer’s business making sales or obtaining orders or contracts from clients.
COMMISSIONED RETAIL SALES EXEMPTION
Employees of retail or service establishments are exempt from receiving overtime if more than half of the employee's earnings come from commissions and the employee averages at least one and one-half times the minimum wage for each hour worked.
In addition, for this exemption to apply, 75 percent of the employer's annual dollar volume of sales must be recognized as retail sales. This prevents the retail sales exemption from applying to wholesalers.
MOTOR CARRIER EXEMPTION
Excluded from receiving overtime are drivers, driver's helpers, loaders and mechanics employed by a motor carrier (cars, trucks, etc.), if the employee's duties affect the safety of operation of vehicles in transportation of passengers or property in interstate commerce. This exclusion was enacted because these types of employees are subject to regulation by the Department of Transportation. Generally, though, this exemption does not apply to employees whose work involves motor vehicles that weigh 10,000 pounds or less. Thus, drivers of vehicles weighing less than 10,000 pounds are covered by the FLSA overtime pay requirements.
Independent contractors are not, of course, entitled to FLSA overtime pay.
People who work as employees are entitled to greater legal protections and monetary benefits than independent contractors. In theory, independent contractors are free from the set work time, discipline, and other restrictions that govern employees' conduct and buy their own tools and equipment – they run their own businesses.
There is much less regulation involved for employers if they treat their workers as "independent contractors" rather than "employees." Employees have many more legal rights: the right to overtime pay, to unionize, to social security credits, to protection against discrimination (age, race, sex, disability, national origin, etc.), unemployment insurance and to a multitude of other benefits. Independent contractors primarily only have the right to be paid pursuant to their contract with the employer.
Many state and federal laws cover employees that do not cover independent contractors. A sampling of some of the important laws that only cover employees are:
- Fair Labor Standards Act and state overtime laws: These are laws that require employers to pay time and one-half overtime compensation to employees who work over 40 hours in a week.
- Laws Prohibiting Discrimination: Generally, only employees are protected from discrimination on the basis of race, color, national origin, disability, religion, sex, age and disability.
- Family and Medical Leave: Only employees are entitled to leave under the Family and Medical Leave Act and similar state statutes. This can be particularly important if a person is compelled to leave work for a period of time due to illness and wishes to return to work in the same job that the person held when he or she left.
- Employee Retirement and Related Benefits: Generally, employees’ retirement and other related benefits are protected by the Employment Retirement and Income Security Act (ERISA), but independent contractors are not.
- Employment Taxes: The Internal Revenue Code obligates employers to pay employment taxes (unemployment insurance, Social Security, Medicare) and to withhold taxes (income, Social Security and Medicare) for employees. Generally, this is not true for independent contractors. Of course, independent contractors must still pay their own taxes.
- Right to Organize Unions and Engage in Collective Bargaining: Generally, collective bargaining rights and the protections from retaliation and discrimination under the National Labor Relations Act and similar state laws are afforded only to employees and not to independent contractors.
The Tests to Determine Status as Employee or Independent Contractor
Classifying certain workers as employees or independent contractors can be difficult. Currently, there are essentially two tests used to determine whether or not a worker is an independent contractor or employee. The Internal Revenue Service applies the "right to control test." Under the Fair Labor Standards Act (FLSA) and other statutes, the courts have applied the "economic reality test."
Right to Control Test (also called the Master-Servant or common law agency test):
This test distinguishes independent contractors from employees based on the degree to which an employer exercises control over the worker. The control factors that are considered include:
- What is the degree of control the employer exercises over the day-to-day work performed?
- Is the worker engaged in a business or occupation that is distinct from the employer?
- Is the occupation a specialist job or one usually performed under supervisor?
- What is the degree of skill involved in the job?
- Does the employer or the worker supply the tools and equipment necessary to perform the job?
- How long is the worker employed by this employer?
- Is the work performed part of the regular business of the employer?
- Does the worker perform the same type of work for other business entities?
- Do the parties believe they are creating an employer/employee relationship business?
- How is the worker paid for his work: by the job or project or by the hour or salary?
These factors are analyzed in their totality to determine whether a worker is an employee or independent contractor.
Economic Reality Test
This test is somewhat broader than the control test and it classifies greater numbers of workers as employees. Courts and the Department of Labor look to the "economic realities as a whole" to determine how to classify a worker. Generally, there are seven factors viewed under this test:
- The amount of the worker's investment in facilities and work equipment;
- The nature and degree of control retained or exercised by the company over the worker's work product;
- The worker's opportunities for profit and loss;
- The degree to which the worker's independent initiative, judgment, and planning in market competition with others is necessary for the success of the worker's operation;
- The degree of the permanency of the relationship between the employer and the worker;
- The extent to which the services are a part of the employer's business; and
- The degree of dependency of the worker on the employer for continued work.
The overtime laws are intended to provide broad coverage. As a result, these factors are construed in favor of a worker having the status as "an employee."
Some courts apply a hybrid test combining the control test and the economic realities test. This is often done in interpreting the law under the Age Discrimination in Employment Act (ADEA) and the federal Civil Rights Act of 1964. The hybrid approach includes the factors under the right of control test, but also includes such factors as:
- The type of occupation;
- The skill required;
- Whether the worker is furnished with equipment;
- How long the worker has been employed by the employer;
- Whether paid leave is provided;
- How the employee is paid; and
- How the work relationship was terminated.
In determining how to classify an employee the courts view the purpose and nature of the law (or laws) at issue. The failure to consider a worker as an employee can result in a great diminishment of a person's employment protections and benefits. Thus in close cases, courts often decide in favor of finding an employee/employer relationship rather than independent contractor status.
There are other exemptions that apply to employees in certain other occupations. For example, some taxicab drivers, seaman, railway employees, airline employees, employees of some seasonal and recreational establishments, and some agricultural workers are exempt from the FLSA. Again, the general presumption is that employees are entitled to receive overtime compensation and the vast majority of workers, including workers in office jobs and service jobs, are entitled to FLSA overtime compensation.