Exempt vs. Nonexempt Employees

Federal and state laws exempt certain employees from wage and hour requirements, especially overtime pay and meal and rest break requirements. If you have a problem distinguishing between exempt and nonexempt employees in your company, you are not alone. Some of the largest multi-million-dollar awards of back pay by the courts stem from employers' misclassification of nonexempt employees as exempt from overtime. The subject is particularly thorny for California employers, because the state's exemption requirements create more restrictions than federal law. As defined in the Industrial Welfare Commission Wage Orders, California's requirements exceed even the federal standards (Fair Labor Standard Act, adopted by the US Department of Labor in 2004, making those federal standards generally irrelevant to California employees.​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​

Determining Exempt or Nonexempt Employee Status: Because it is highly litigated, understanding the distinction between exempt and nonexempt employees is critical. Generally, exempt employees are your key personnel who possess management and decision-making responsibilities. Always assume employees are nonexempt unless they clearly meet the job duties of an exempt position and will earn at least two times the current minimum wage on a monthly basis. If you are not experienced in determining exempt and nonexempt status, or if you are unsure about the status of a particular position, ask competent employment law counsel to review your determination. An exempt employee is normally an executive, administrative or professional employee. Other exempt employee types include some inside and outside salespeople. All other employees generally fall under the nonexempt category. All nonexempt employees are covered by the state and federal wage and hour laws. To avoid paying overtime premiums, an employee must be exempt from the overtime requirements of both state and federal law.

Salary for Exempt Employees: Exempt employees generally must earn a minimum monthly salary of no less than two times the state minimum wage for full-time employment, and the salary must be a pre-determined sum. There are different rules for some employees, such as physicians, computer professionals and outside salespersons. However, placing an employee on a salary does not exempt that employee from wage and hour laws. A nonexempt employee placed on a “salary” earns overtime just as hourly wage earners do.           NOTE: The exempt minimum salary requirement is based on the current state minimum wage, not any applicable local minimum wage.

Temporary Assignments and Employee Status: If an employee who is on a temporary assignment does not perform exempt duties on a regular basis, he/she is not exempt unless he/she works the exempt job and meets the duties and salary tests for at least one calendar month.

Federal Salary Basis Rules: Though the revised federal exemption regulations have no impact in California due to the state’s more rigorous standards, the federal salary basis regulations warrant some attention. The Division of Labor Standards Enforcement indicated that though differences do exist between the state and federal exemption standards, the federal regulations can serve as a guide where there is no conflict. Also, an increasing number of class action lawsuits are now filed under the Fair Labor Standards Act, alleging exemption violations. The federal regulations include a safe harbor provision that provides some protection from liability under federal law. A state court could consider the provision if you are sued under state law. Under the safe harbor provision, an employer can avoid total loss of an exemption as a result of making improper deductions from salary if:

• The employer has a clearly communicated policy that prohibits improper deductions.
• The employer reimburses any adversely affected employees for losses resulting from deductions.
• The employer ceases making prohibited deductions when learning that they were made.

Discretion and Independent Judgment: Most exemptions require the employee to “customarily and regularly exercise discretion and independent judgment.” Discretion and independent judgment involve comparing and evaluating possible courses of conduct and acting or making a decision after considering various possibilities. An employee with discretion and independent judgment must either:

• Have the power to make independent choices pertaining to matters of significance and free from immediate supervision; or
• Have the ability to make a recommendation for action that is subject to a superior’s final authority. The employee must possess sufficient authority for the recommendations to affect matters of consequence to the business or its customers.

To “customarily and regularly” exercise discretion and independent judgment is to use discretion and independent judgment frequently in the course of day-to-day activities. The phrase “customarily and regularly” signifies a frequency that is more than occasional but may be less than constant. An employee who merely applies his/her knowledge in following prescribed procedures or in determining which procedures to follow, or determines if specified standards are met or if an object falls into one or another grade or class, does not exercise discretion and judgment of the independent sort associated with exempt status. Inspectors and graders, for example, may have some leeway regarding the application of knowledge to a particular situation, but only within closely prescribed limits. Almost every employee must make decisions requiring discretion. The discretion and independent judgment exemption requires that the decisions must involve matters of consequence of real and substantial significance to the policies or general operations of your business or customers. The tasks can be related directly to only a particular business segment, but must substantially affect the whole business. Exercising discretion and independent judgment on matters of consequence is different than making decisions that can lead to serious loss through the choice of wrong techniques, improper application of skills, neglect or failure to follow instructions. Employees in training for an exempt position are notexempt employees because they do not exercise discretion and independent judgment during the training process.

Job Title Irrelevant to Employee Status: Job titles alone do not designate an employee as exempt or nonexempt. An employee with an impressive job title may not qualify as an exempt employee if his/her actual duties do not meet the exemption requirements. An employee who performs routine bookkeeping tasks does not become an exempt employee when given the title “controller” rather than “bookkeeper.” Giving an employee the title of “store manager” does not make him/her exempt if he/she opens or closes the store alone, serves customers, maintains merchandise displays and performs the work of a retail clerk. Calling an employee a “computer systems analyst” or “software engineer” does not make that employee exempt unless the employee meets all the exemption tests. 

Exempt Employees Receive Pre-Determined Amount: The exempt employee must receive a pre-determined amount constituting all or part of his/her compensation for each pay period. The amount cannot be reduced because of variations in the number of hours worked or quality of the work performed. Again, this is the general rule for the executive, administrative and professional exemptions.

Deductions from an exempt employee’s salary are very limited: You may pay an exempt employee on an hourly basis for hours in excess of the standard 40-hour workweek, in addition to his/her regular salary. If the standard workweek in a particular industry is less than 40 hours, the Labor Commissioner allows an hourly rate for all hours beyond the industry standard. In addition, any hourly rate paid to otherwise exempt employees for work in excess of eight hours in any one day will not affect the exempt employee’s status.

Primarily Engages In Exempt Work: Most exemptions explained in this section require the employee to be “primarily engaged” in exempt duties. To determine if the employee primarily engages in exempt work, the Labor Commissioner examines the work that the employee performs during the workweek. The Labor Commissioner also considers the amount of time the employee spends on exempt work, as well as your realistic expectations and the realistic requirements of the job. In general, the employee must spend more than 50 percent of his/her time performing exempt duties.

Beware of Managers Performing Nonexempt Duties: Do some of your managers supervise employees and, at the same time, also perform routine tasks, such as stocking shelves or managing the phone lines? How often do you find yourself short-staffed and ask your managers to pitch in to cover some nonexempt type duties while they also supervise other personnel? 

A California court ruled that a manager who performed various nonexempt duties while simultaneously supervising staff was not primarily engaged in the performance of exempt work and was entitled to overtime. Linda Heyen was an assistant manager at a Safeway. She sued Safeway for unpaid overtime, claiming that Safeway should have classified her as a nonexempt employee because she regularly spent more than 50 percent of her work hours performing nonexempt tasks, such as cashiering, bagging groceries and stocking shelves. Heyen stated that the Safeway store was short-staffed and it was impossible to run the store without the manager and assistant manager pitching in to help with tasks just like the other hourly employees.Safeway argued that the hours Heyen spent simultaneously performing both exempt and nonexempt tasks — e.g., managing the store while also performing some bagging of customer groceries — should all count as exempt hours. Safeway maintained that a manager can do both exempt and nonexempt work at the same time without losing the exemption.Safeway argued that while these managers help with bagging or stocking shelves, they still actively function in their managerial capacities of supervising others, observing how the store is run, considering how to make the store run more efficiently, resolving employee and operational problems, and instructing employees. The court disagreed with Safeway and upheld an award of overtime to Heyen. According to the court, when a supervisor is multi-tasking and engaging in the concurrent performance of both exempt and nonexempt duties, the employer should examine the supervisor’s primary reason or purpose for undertaking the task in order to determine if the task is exempt or nonexempt…there are no “hybrid activities.” The court provided this guidance, quoting federal regulations: “If a task is performed because it is ‘helpful in supervising the employees or contribute[s] to the smooth functioning of the department for which [the supervisors] are responsible’… the work is exempt; if not, it is nonexempt.”