Exempt or Non-Exempt Employee?

Although employers are effective at initially classifying a hire as an exempt or non-exempt employee, employers infrequently revisit whether employees continue to be properly classified after being hired. This failure frequently exposes employers to significant liability.

Employers are generally familiar with the difference between an exempt and non-exempt employee: exempt employees are paid a salary and do not receive overtime pay, while non-exempt employees are paid hourly and are entitled to overtime pay. After an employer initially classifies employees as exempt or non-exempt, an employer must periodically evaluate whether the duties actually performed by its employees warrant a re-classification.

 

The Duties Test for Exemption

In Oregon, whether an employee is properly classified as exempt depends on two general tests: the duties test, and the salary test. Under the duties test, the three most common exemptions which may apply to employees who perform general office work or non-manual work include: executive, administrative, and professional.

• Executive Exemption: to be properly classified as an exempt employee under the executive exemption, the employee must: (1) primarily manage a distinct unit or subdivision within the organization, (2) spend most of the workweek performing management duties (generally meaning more than 50% of worktime), (3) supervise two or more full-time employees (or the equivalent of two or more), (4) have hiring or firing authority, or if not full authority, their recommendations on such matters must be given particular weight, and (5) the employee must customarily and regularly exercise authority to make decisions of significance within the organization. Other factors which are considered include: whether the employee makes significantly more money than what is paid to non-exempt employees, whether the employee makes frequent management decisions, and whether the employee is free from direct supervision.

• Professional Exemption: To be properly classified as an exempt employee under the professional exemption, the employee must: (1) primarily perform work as a professional in either learned or artistic professions, or as teachers in an educational institution or as highly skilled computer professionals (highly skilled professionals are those who have attained knowledge of an advanced type customarily acquired by a prolonged course of specialized intellectual instruction and study. A four-year degree may, in some instances, satisfy this requirement.), (2) spend most of the workweek performing professional duties, (3) perform work that is predominantly intellectual and varied rather than routine, manual, mechanical, or physical, and (4) consistently exercise discretion and independent judgment.

 

The Salary Test for Exemption

Any employee who meets one of the above duties tests must also meet the salary test. This test requires that employees be paid on a genuine salary basis as opposed to hourly or other methods. The salary must be a minimum weekly salary of $455.00 per week or $23,660 annually. Additionally, the salary must be predetermined, and may not vary based on the quantity or quality of work, subject to several exceptions not discussed in this article.

So why does this all matter? As discussed above, it is imperative that employers periodically review the duties actually performed by its exempt employees in order to avoid significant liability in the event the duties of exempt employees deviate from what was originally anticipated at the time the employee was classified as exempt. Consider the following example:

Sally is initially hired by XYZ Corporation (XYZ) as an exempt employee to primarily perform office or non-manual work that is directly related to management policies and general operations. Furthermore, Sally was given significant authority to regularly exercise discretion when making decisions as to how she handles and resolves significant tasks before her while assisting executives.

Three years ago, XYZ experienced healthy growth. Sally is a team player, and without being asked by XYZ’s management, but at the request of her coworker, Sally begins assisting with customer service functions, sales order review, and other tasks where she is not permitted to regularly use her discretion or exercise authority, such that Sally now spends about 55% of her time performing these additional activities.

As a result, Sally is no longer an exempt employee. Sally’s efforts are appreciated and accepted by XYZ, but XYZ fails to reconsider whether she should be classified as an exempt employee.

Because of XYZ’s failure to periodically evaluate Sally’s classification, XYZ is exposed to significant liability for back-due overtime wages owed to Sally. Additionally, if Sally sues for back-due overtime wages and is successful, XYZ will be required to pay Sally two times the amount of back-due overtime wages owed to her, plus her attorney fees and court costs.

 

What steps you should take to protect your business:

As you can see, misclassifying employees can have significant adverse effects on a business, all of which are highly preventable. In order to reduce the likelihood that such liability will arise, employers should:

(1) annually review the exempt and nonexempt classifications of its employees;

(2) implement a written overtime policy that requires any overtime to be approved in advance by a direct supervisor;

(3) maintain written job descriptions for each employee; and

(4) on an annual basis, require each employee to submit written job descriptions detailing the activities each employee regularly performs.

By taking these simple steps above, employers have the opportunity to significantly decrease their exposure to liability related to an improperly classified employee.