There's More to Exemption Than a Higher Salary

By now, you have probably heard about the proposal by the U.S. Department of Labor (DOL) to update the rules for determining who is exempt as an executive, administrative or professional employee from the overtime requirements of the Fair Labor Standards Act (FLSA). Proposed revisions include increasing the standard salary level and the highly compensated employee total annual compensation threshold, as well as creating an automatic updating mechanism for these thresholds.

In short, DOL's update consists of raising the minimum salary that an employee must earn in order to be eligible for exemption. The current minimum is $684 per week (equivalent to $35,568 annually for a full-year worker). Under the proposal, the new minimum would be equal to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South) – $1,059 per week ($55,068 annually for a full-year worker).

It's not this writer's place to say whether this is a good idea or a bad one; that's the realm of economists and others who study these things. Undoubtedly, you will easily find someone to agree with whatever opinion you would like to hear.

But all of the publicity surrounding this proposed change does raise a concern in this writer's mind – namely, that employers will forget that the "guaranteed minimum salary" required by the regulations is only one part of the test for exemption. In order to be exempt as an executive, administrative or professional employee, the worker in question must meet a duties test for exemption. 

That test focuses on whether the employee's primary duty is of an exempt nature as defined in the regulations. An employee can be salaried, even very highly compensated, but still nonexempt if the employee fails to meet a duties test. If an employer says, "My employees don't get overtime because they are salaried," that employer may be unaware of the duties test and is likely in trouble.

In addition, an exempt employee generally must meet the salary basis test. That test focuses not on the amount of pay – the subject of the proposed regulatory changes – but on the nature of the pay – i.e., whether the employee receives a guaranteed minimum salary without deductions based on the quality or quantity of work performed. If the employer makes deductions for partial day absences or based on lack of work, for example, then the employee is not paid on a salary basis and, in most cases, will not be exempt, no matter how much the employee is making.

The price of misclassifying a nonexempt employee as exempt is high, so it's crucial that employers understand these rules. Indeed, this may be the perfect time for an FLSA audit. 

For more information, or if you have any questions about wage-hour matters generally, please get in touch with this writer or your regular Brown Rudnick contact.