Common Misconceptions About Exempt Employees

Now more than ever it’s crucial to properly classify your employees and understand the limitations of their exemption status. Here are some common misconceptions and assumptions about exempt employees that conflict with the truth.

“Exempt employees are automatically exempt from earning overtime.”

False — employees earning below the salary cap of $23,660 are overtime-eligible; however, very few salaried workers qualify for it because the salary cap has gone four decades without being updated. When the Obama Administration updated the salary cap to $46,467 last May, four million exempt employees were on the brink of becoming overtime-eligible. This lead to the outcry and a lawsuit was filed by several business groups. Just days before its Dec. 1 start date, it was temporarily blocked by a Judge who challenged the legality of the rule.

“Instituting a ‘salary threshold’ to govern who is overtime-eligible runs counter to the Fair Labor Standards Act (FLSA).”

This argument has its merits. However, historically, there has always been a salary threshold capping overtime-eligibility; it just hadn’t been updated in 40 years. That being said, never before have so many workers come so close to becoming overtime-eligible, solely based on their salary level. The issue does raise questions over the definition of “exempt,” as basing overtime-eligibility on salary alone seems to conflict with the tenets of the FLSA.

“Paying an employee the current minimum weekly threshold of $455 per week (or $11.38 per hour) classifies an employee as exempt.”

“Many believe simply because they pay above the current minimum weekly threshold of $455 per week (or $11.38 per hour), they can automatically classify an employee as salaried,” says dual-certified HR Professional and small HR consulting business GO-HR owner Sharon DeLay. “That is certainly ONE bar that has to be passed, but I would say it is the SECOND one, not the first. More importantly, are the duties tests. Even when the law was going to change last year (and was reversed just days before it was to go into effect), most employers were using the money over the tests as their filter.”

According to DeLay, “The exemption tests really are critical and a few of the most significant ones include:

• Management of two or more FULL-TIME EQUIVALENT employees. Note, this is more than just two people.
• The employee needs to have the authority to hire and fire, or significantly influence the hiring and firing of people (or influence their advancement in the organization).
• The person must exercise discretion and independent judgment regarding matters of significance. This does not mean they can decide how many reams of paper to order (as one client told me), but decisions that significantly impact the business’s standing.”

“A salaried employee is automatically exempt from the provisions of the FLSA.”

In most cases, a salaried employee is an exempt employee. However, according to Charles Vethan, Esq., CEO of the Vethan Law Firm, “A salaried employee may be nonexempt if they are paid a salary for a pre-set number of hours a week, with the understanding that those hours may fluctuate from week to week. This is called the fluctuating workweek. While employees must still be paid overtime in such cases, they are only required to pay the extra time at half the rate determined by the employee’s salary.”

“When my salaried employee is late or absent, I still dock his pay.”

According to DeLay, docking the pay of a salaried employee for incidents like being late to work, for breaking something, because work is slow, etc. means running the risk of reclassifying that employee to non-exempt. “There are few instances where salaried employees’ pay can be docked without jeopardizing that exemption level,” an issue we’ve previously written about.

“Following the White-Collar exemptions standard is a sure way to decide whether an employee is exempt or not.”

According to Vethan, “The less clear the definition, the easier it is to misclassify your employees. Employees classified under the administrative exemption can be characterized as either exempt or non-exempt because it isn’t as clearly defined within the FLSA and it might be difficult to articulate how they ‘independently manage matters of significance.’ It’s important to remember that an employee is presumed covered by the FSLA unless the employer can prove he or she isn’t.”