How To Determine Whether An Employee Is Exempt From Overtime Pay

Properly determining whether employees are exempt from overtime pay is critical to any business.  Private lawsuits to recover unpaid overtime are on the rise, and compliance with the overtime laws continues to be an enforcement priority for the U.S. Department of Labor and cognate state agencies.

Violators may be required to pay penalties, multiple damages, and the prevailing party’s attorney fees, and business owners and those with authority over payroll decisions may be subject to individual liability, as well as criminal prosecution.  As such, noncompliance poses severe risks for the employing entity and its leadership team.

To assist businesses with their compliance efforts, this article explains how to determine whether an employee may be designated as exempt from overtime pay.

1.      Prepare Job Description

First, prepare a job description for the position in question.  This should include basic information such as title, pay, objective, reporting relationships, and hours; qualifications as to education, experience, training, and skills; physical requirements or restrictions, such as heavy lifting, exposure to extreme temperatures, or standing for long periods of time; and essential functions – that is, the tasks and obligations required to fulfill the duties of the job.

2.      Review Federal Exemptions

As most employers are covered by the federal wage and hour laws, the next step is to determine whether any of the federal exemptions to overtime pay may apply.  Having the job description in hand will facilitate this exercise.  The key federal exemptions can be summarized as follows

Executive Exemption.  To qualify, the employee must meet the salary level test and be paid on a salary basis (discussed in parts 3 and 4 below).  The employee also must:  (1) have as his or her primary duty the management of the enterprise or a department or subdivision thereof; (2) direct the work of at least two full-time employees or their equivalent; and (3) have authority to hire or fire others (alternatively, his or her suggestions as to hiring, firing, advancement, promotion, or other changes in status must be given particular weight).

Administrative Exemption.  To qualify, the employee must meet the salary level test and be paid on a salary or fee basis.  The employee also must:  (1) have as his or her primary duty the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and (2) exercise discretion and independent judgment as to matters of significance in fulfilling the primary duty.

Learned Professional Exemption.  To qualify, the employee must meet the salary level test and be paid on a salary or fee basis.  The employee also must have as his or her primary duty:  (1) work requiring advanced knowledge in science or learning; (2) that is predominantly intellectual in character; (3) that is customarily acquired by a prolonged course of specialized intellectual instruction; and (4) that involves the consistent exercise of discretion and judgment.

Creative Professional Exemption.  To qualify, the employee must meet the salary level test and be paid on a salary or fee basis.  The employee also must have as his or her primary duty work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

Computer Employee Exemption.  To qualify, the employee must be compensated either on a salary or fee basis at a rate that satisfies the salary level test, or on an hourly basis at a rate not less than $27.63 per hour.  The employee also must:  (1) be employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field; and (2) have as his or her primary duty (a) the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; (b) 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; (c) the design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or (d) a combination of the above duties requiring the same level of skills.

Outside Sales Exemption.  To qualify, the employee must:  (1) have as his or her primary duty making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and (2) be customarily and regularly engaged away from the employer’s place of business.

Highly Compensated Employee Exemption.  To qualify, the employee must:  (1) perform office or non-manual work that includes at least one of the duties of an exempt executive, administrative, or professional employee; and (2) be paid total annual compensation of at least $100,000, a figure expected to rise to approximately $122,148 later this year.  This amount must include weekly payments on a salary or fee basis that satisfy the salary level test.

Teachers, Lawyers, and Doctors.  Generally, teachers, lawyers, and doctors are considered to be exempt from overtime pay under federal law.

3.       Be Aware Of Imminent Increase In Salary Level Test

The exemptions requiring payment on a salary or fee basis presently require the amount of the salary or fee to be at least $455 per week (the equivalent of $23,660 per year for a full-year worker).  This is known as the salary level test.  However, this amount is expected to rise to approximately $921 per week (the equivalent of $47,892 per year for a full-year worker) later this year.  When this occurs, employees whose earnings dip below the salary level test will have immediate rights to overtime pay.

4.       Make Sure Salary Basis Test Is Met

Satisfying the salary basis test requires more than simply paying the employee a salary rather than an hourly wage.  The salary generally must be paid on a weekly or less frequent basis and may not be reduced for variations in the quality or quantity of the employee’s work.  Subject to certain narrow exceptions, an exempt employee must receive the full salary for any week in which he or she performs any work, regardless of the number of days or hours worked.  Otherwise, the employee is not being paid on a salary basis within the meaning of federal overtime law and, as such, may not actually be covered by a federal exemption.

5.      Don’t Overlook State Overtime Laws

It is important to review both state and federal overtime laws in determining whether an employee may be exempt from overtime pay.  When these laws conflict, and they often do, the employee is entitled to the benefit of the law providing greater pay.  To illustrate, although Massachusetts law exempts restaurant workers from overtime pay, federal law does not.  Accordingly, if the employing Massachusetts restaurant is covered by federal overtime law (and most businesses are), then it must pay overtime, notwithstanding the state law exemption.

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Given the complexity of the overtime exemptions, the imminent increase in the salary level test, and the significant risks of noncompliance, employers should proceed carefully in designating any employee as exempt from overtime pay.  In the event of any doubts or uncertainties, experienced employment counsel should be consulted.

This article has been featured as an American Bar Association e-report.  Click here to see the article as published by the ABA.