Almost 10 years ago I wrote an article on the high cost of getting “it” wrong. That “it” is the exempt or nonexempt classification of your employees. That “it” also includes independent contractors. Even though we have seen massive changes with new laws and legislation in the last decade, including a global pandemic, not a tremendous number of changes have occurred in the wage and hour arena. Let’s look at what you must keep in mind when trying to decipher what position is or is not exempt.
Many of us wish that every employee could be classified as an exempt employee or even an independent contractor. There would be no worries about timekeeping, overtime or in the case of an independent contractor, no benefits or tax issues.
Fortunately, or unfortunately, this isn’t the case. We know that the Fair Labor Standards Act (FLSA) has strict laws governing who is and who is not exempt.
Have you ever been stumped on how to properly classify a position as exempt or nonexempt? You are certainly not alone. In theory, it should be simple. However, figuring out who’s who is anything but simple. The federal Department of Labor (DOL) estimates that nearly 70% of employers are noncompliant with the federal FLSA. Federal and state agencies are working together to combat misclassifications. This joint effort is an attempt to help prevent wage theft.
Three things to keep in mind when determining whether a position is exempt or nonexempt.
Remember the three-pronged test when it comes to classifying employees. ALL three areas must be met:
- Salary Level
- Federal level is $35,568 annually or $684 per week.
- Many states have a higher minimum salary level that must be met and may increase annually.
- Salary Basis
- The employee must be paid on a salary basis, meaning they receive a predetermined amount of compensation each pay period.
- Job Duties
- These should be defined in a well written job description outlining tasks that an employee must perform for a particular position.
The first two tests, salary level and salary basis, are easy to understand and implement. It’s the third test, the job duties, that often gets overlooked or undervalued.
An important phrase which is contained in the FLSA’s regulations regarding how to determine exempt status is whether the individual in a particular position can exercise discretion and independent judgement. That phrase should be considered when you are defining the primary duties of a particular position. I’ll be honest, it’s typically when we look at these job duties that many of us get lost and confused. What exactly does discretion and independent judgement mean?
Under federal regulations, discretion and independent judgement means: “Comparing and evaluating of alternative courses of action and independently determining a course of action over ‘matters of significance’, free from immediate direction. One must have the delegated authority to make choices and commitments on behalf of an organization.”
Discretion and independent judgement can be exercised even if the decision or recommendation is reviewed at a higher level. The term “discretion and independent judgement” does not require that the decisions being made must be final or free from any review. The fact that an exempt manager’s decisions may be subject to review and occasionally the decisions are revised or reversed after review or reflection, does not mean that the exempt manager is not exercising discretion and independent judgement.
The level of responsibility defined by the regulations goes beyond the ability all employees have to exercise their best judgement and discretion when their duties involve confidential information such as employee files, donor records, or disciplinary proceedings. Discretion and independent judgement do not mean following prescribed procedures, policies, or determining whether specified standards have been satisfied, even if there is some leeway in reaching a conclusion. This is a deeper responsibility beyond being able to make basic decisions.
Factors to consider when determining whether the employee exercises discretion and independent judgement with respect to matters of significance.
The more answers you respond to with a “yes” means the position is more likely to exercise discretion and independent judgement within the meaning of the FLSA regulations.
Does the position:
- Formulate, affect, interpret, or implement management policies or operational practices?
- Carry out major assignments in conducting a business’s operations?
- Perform work that affects business operations to a substantial degree even if the employee’s assignments are related to operations of a particular segment of the business?
- Have authority to commit the employer in matters that may have a significant financial impact to the employee’s employer or the employer’s customers?
- Have authority to waive or deviate from established policies or procedures without prior approval?
- Have authority to negotiate and bind the organization to significant commitments?
- Provide consultation or expert advice to management?
- Plan for long-or-short-term business objectives?
- Investigate and resolve matters of significance on behalf of management?
- Represent the organization in handling complaints, arbitrating disputes, or resolving grievances?
In the end, the burden of proof on whether a position qualifies as exempt, is on you, the employer and not on the employee. Remember, generally your exempt employees are your key personnel who possess management and/or decision-making responsibilities. Many believe that exempt employees should be the exception, not the norm.
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The information contained in this article is not a substitute for legal advice or counsel and has been pulled from multiple sources.