Exempt vs. Nonexempt: Where to Draw the Line
One of the first decisions you must make when new hires come on board is whether they should be classified as "exempt" or "nonexempt" under the Fair Labor Standards Act. The key consideration: Exempt workers do not have to be given overtime pay. The logic is that they are paid for the job they do, not the hours they keep. Four categories of employees are considered exempt: executive, administrative, professional and outside sales personnel. If you misclassify a worker as exempt, you could be hit for back pay and face a wide-ranging investigation by the U.S. Department of Labor. That could result in significant financial penalties.

To be considered exempt, an employee's job duties must meet a number of standards. Answer the following questions to determine whether a worker has been misclassified.

Executive EmployeesYes    No
1. Is the employee's primary duty managing a company, or a department or subdivision of a company?____ ____
2. Does the employee customarily direct the work of at least two other workers?____ ____
3. Does the employee have the authority to hire and fire, or do his recommendations on such matters carry significant weight?____ ____
4. Does the employee regularly exercise discretionary powers in his work?____ ____
5. If your company is a retail or service company, does the worker spend less than 40 percent of his work time engaged in nonmanagerial duties?____ ____
6. If your company is not a retail or service firm, does the worker spend less than 20 percent of his work time engaged in nonmanagerial duties?____ ____

If you answered "No" to any of these questions, the worker may have been misclassified as an exempt executive employee. There are two significant exceptions: If the employee's regular salary is at least $250 a week, only questions 1 and 2 must be answered affirmatively. If the employee is in sole charge of an independent business or of a physically separate branch business, or owns at least a 20 percent interest in the business, questions 5 and 6 do not apply.

Administrative EmployeesYes    No
7. Is the employee responsible for office or nonmanual work directly related to the management policies or general business operations?____ ____
8. Does the employee regularly exercise discretion and independent judgment (as opposed to always following established procedures)?____ ____
9. Do any of the following circumstances describe the employee's regular duties?
     a. Assisting a proprietor, executive or administrative employee.____ ____
     b. Performing work only under general supervision along technical lines.____ ____
     c. Executing special assignments only under general supervision.____ ____
10. If your company is a retail or service company, does the worker spend less than 40 percent of his regular work time engaged in duties not directly related to his administrative duties?____ ____
11. If your company is not a retail or service company, does the worker spend less than 20 percent of his regular work time engaged in non- administrative tasks?____ ____

If you answered "No" to any of these questions, the worker may have been misclassified as an exempt administrative employee. The exception is that if the employee's regular salary is at least $250 a week, then only questions 7 and 8 need to be answered affirmatively.

Professional EmployeesYes    No
12. Do any of the following statements reflect the employee's regular duties?
     a. The employee performs work that requires knowledge of an advanced type in a field of science
       or learning, customarily obtained by a prolonged course of specialized instruction and study.		_____ ____
     b. The employee performs work that is original and creative in character in a recognized field of artistic
       endeavor whose result depends primarily on the employee's invention, imagination or talent.		_____ ____
     c. The employee works as a teacher in an educational institution._____ ____
13. Does the employee consistently exercise discretion and judgment?_____ ____
14. Does the employee spend less than 20 percent of his time on tasks that are not part of his professional duties?_____ ____
15. Is the employee paid a salary of at least $170 per week?_____ ____

If you answered "No" to any of these questions, the worker may have been misclassified as an exempt professional employee. Exceptions: If the worker earns at least $250 per week, question 14 does not apply. If the worker holds a valid license or certificate permitting the practice of law or medicine (including interns and residents) and engages in such practice, question 15 does not apply. If the worker is a teacher in a school or other educational institution, question 15 does not apply.

Outside Sales EmployeesYes    No
16. Is the worker employed for the purpose of outside sales?_____ ____
17. Does he regularly work away from the employer's place of business?_____ ____
18. Does the worker sell tangible or intangible items, such as goods, insurance, stocks or real estate? Or does he obtain orders or contracts for services?_____ ____
19. Does the employee spend less than 20 percent of his time engaged in activities not described in question 18?_____ ____

If you answered "No" to any of these questions, the worker may have been misclassified as an exempt outside sales employee. There is no salary test for outside sales personnel.

Recommendation: Anytime you assign an employee exempt status, make sure you can justify that decision. To protect yourself against changes in job content affecting exemptions, update all job descriptions regularly. Also, be sure that exempt employees do not exceed the 20 percent limit on nonexempt work. An employee should know which part of her job is nonexempt. Make it a rule that she must have supervisory approval to work beyond the 20 percent limit.