Start-Up Launchpad Blog

Don't be Penny Wise and Pound Foolish - Advice for New Employers Regarding Employee Classifications - May 8, 2017

Kelsey K. Crosse

Photo of three white collar employees discussing with article titleEntrepreneurs wear many hats, from providing a quality product or service to managing employees. New employers frequently expose themselves to liability when they think that ignorance is a defense that they can use if an employee files a lawsuit or makes a claim. While the law penalizes knowing and willful violations, it does not provide a defense for mere ignorance. As a result, employers must understand their obligations under the law.


Employers should determine how to classify employees as either exempt or non-exempt. Generally, in order for an employee to be exempt employee he/she must perform certain duties on a regular basis that meet a particular exemption (the duties requirement) and the employee must be paid a fixed income that satisfies the exempt salary threshold (compensation requirement). The Fair Labor Standards Act (FLSA) overtime rules are riddled with exceptions.


This blog serves as a starting point for new employers on the nuts and bolts of some of the most frequent exemptions, and the duties requirements associated with them.


White Collar Exemptions

The FLSA overtime requirements do not apply to employees employed in an executive, administrative, or professional capacity. These three areas, referred to as the "White Collar" exemptions, are the most common exemptions.


To satisfy the compensation requirements for the white collar exemptions, employees must generally be paid on a salary basis of no less than $455 per week or $23,660 annually.  Last year, the Department of Labor (DOL) issued a rule to increase the compensation requirement to $913 per week or $47,476 annually. However, a federal court issued an order preventing this new rule from becoming effective. So for now, the compensation requirement has not changed. Regardless of which monetary threshold applies, this amount must not be subject to reduction because of variations in the quantity or quality of the work performed.


In addition to the compensation requirement, exempt employees also must satisfy the duties requirement.


Executive

To satisfy the executive exemption the employee's primary or most important activity must be the management of the company which may include:

  • supervising other employees
  • interviewing, selecting, and training employees
  • setting and adjusting pay rates and work hours
  • directing work of other employees
  • conducting employee performance appraisals
  • planning for work to be done
  • planning and controlling the budget
  • monitoring or implementing legal compliance measures
  • determining the merchandise to be bought, stocked, and sold
  • handling employee complaints and grievances
  • disciplining employees

    This list is not exhaustive. Also, the employee must regularly direct the work of at least two or more full-time employees or their equivalent.  Further, the employee must have the authority to hire or fire employees, or the employee's suggestions and recommendations as to hiring, firing, or promotions must be given particular weight.


    Administrative

    In order for an employee to satisfy the administrative exemption, the employee's primary duty must be office or non-manual work directly related to the management or general business operations of the employer (such as running or servicing of the business). For example, employees working in areas or departments such as accounting, marketing, human resources, labor relations, research, or quality control generally perform work related to management or general business operations.


    The employee's primary duty must also include the exercise of discretion and independent judgment with respect to matters of significance.  This requires that the employee has authority to make an independent choice, free from immediate direction or supervision.  However, employees can exercise discretion and independent judgment even if their decisions or recommendations are reviewed at a higher level.


    Professional

    There are two general types of exempt professional employees:  learned professionals and creative professionals.


    To satisfy the learned professional exemption, the employee's primary duty must be the performance of work that requires advanced knowledge typically acquired by a prolonged course of specialized academic instruction.  The advanced knowledge must be in a field of science or learning.  Learned professional employees can be found in law, medicine, teaching, engineering, science, and other similar fields and are often, doctors, accountants, lawyers, computer systems analysts, among others.


    To satisfy the creative professional exemption, the employee's primary duty must be to perform work that requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor (as opposed to routine manual, mechanical, or physical work).  Artistic or creative endeavors typically include fields such as music, writing, acting, the graphic arts, and other similar fields.


    Non-exempt (typically hourly) employees

    Non-exempt employees are entitled to a minimum wage of not less than $7.25 per hour.  Currently, Iowa's minimum wage is also $7.25 per hour, but a few municipalities in Iowa have increased the minimum wage. Unlike exempt employees, non-exempt employees must be paid at a rate of one and one-half (1.5) times the employee's regular rate of pay for all hours worked in excess of 40 hours per week.


    How to Avoid Costly Mistakes?

    Analyze each employee's actual job responsibilities rather than his/her job title. Employers cannot circumvent wage and hour laws by simply labeling a secretary as an Executive Director. Annually review employee job responsibilities to ensure that they still qualify for a particular exemption. Many of the exemptions analyze an employee's primary duty by considering the amount of time spent performing exempt work, the employee's freedom from direct supervision, the relative importance of the employee's job responsibilities, and how the employee compares with other employees. What would each employee consider to be his/ her main job responsibility?


    Next, new employers should understand when it can make deductions from the compensation owed to exempt employees. Because exempt employees have an elevated status, employers can only deduct from their wages in certain circumstances.


    Finally, if you are unsure about how to classify your employees, seek advice of a labor and employment attorney. Properly classifying employees with the advice of an attorney can save significant time and resources in avoiding lawsuits and DOL complaints.