Exempt -vs- Nonexempt
By Jack Ruffer

Editor's note: I a past Issue we dealt with Stress Management, and within that we discussed taking all the "compensatory" time off due you as a manager. We received the following letter from an office manager of a Management Co. After our initial response, we asked our Human Resource expert, Jack Ruffer, to answer her question.

Question:
Dear Ms. Julie Adamen:

My name is Dana and I'm the Office/Personnel Manager of a Property Management Company. We have 4 Property Managers - two are Certified Property Managers and two are Certified Community Association Managers. They were reading your May 2000 publication regarding "Stress Fractured." In that article you wrote about taking compensatory time off that "you accumulate throughout the month in attending those evening meetings." I was wondering what you were referring to.

It is my understanding that under the Federal Fair Labor Standards Act (FLSA), private employers are not permitted to offer compensatory time off (CTO) to non­exempt employees in lieu of paying overtime. Therefore, California employers subject to the FLSA are prohibited from offering employees CTO in lieu of overtime. Are the managers, whom you are referring to, exempt employees? At our company, three of the four Managers are non-exempt employees and therefore, we are required to pay them overtime for any hours worked over 8 in a day or 40 in a week. If they have an evening meeting scheduled, we ask that they come in later or leave earlier in the day so that they do not work over 8 hours in the day. However, as you would probably guess, they are usually too busy to do that. We (and they) would like them to be considered exempt employees, but their job duties do not warrant that designation. So, my other question would be... are most CPMs and CCAMs exempt employees? If so, under what exempt category do they fall under Administrative, Professional, Managerial or Executive?

We are aware that the evening meetings are tough on our employees and we would like to remove that stress from them. However, with the change in overtime laws effective 1/1/2000, the flexibility of offering them time off during the week decreased. If you have any suggestions or comments regarding the rules on CTO and exempt status designations, we would love to hear them.

I look forward to hearing from you soon.

Answer By Jack Ruffer:

Dana -

Your question regarding Compensatory Time Off (C.T.O.) has ramifications far beyond that specific issue and you’re not the only one who is confused. In an article in the June 2000 edition of HR News, a publication of the Society for Human Resource Management (SHRM), managing editor Robert W. Thompson discusses what he calls the Battle Brewing Over FLSA White-collar Exemptions. It appears that the Congress, the Department of Labor (DOL), the U.S. Chamber of Commerce and other interest groups agree there is “a pressing need for comprehensive reform of regulations governing which employees are exempt from wage and hour provisions of FLSA. One union official argued that because the salary floors have not been updated in 25 years, more than 90 percent of American workers could be classified as ‘exempt’ employees if they also meet DOL’s vague definitions of professional, executive or administrative employees.

A representative of the AFL-CIO likewise said the time is long past for updates of certain FLSA requirements -- specifically how much employees can earn in salary before they are eligible for ‘white-collar’ exemptions from the law’s overtime standards if they perform certain managerial duties.

Where the AFL-CIO representative differed from the Chamber of Commerce and SHRM witnesses was in whether it should be easier or harder for employees to get so-called ‘white-collar’ exemptions.

While the union official argued that many workers are improperly given white collar exemptions so they needn’t be paid overtime, other witnesses contended that it’s the employers who are often victimized by outdated FLSA regulations.

They argued that employers are subject to unreasonable legal liability because there is so much confusion over who is eligible for the exemptions. This is increasingly a problem, they contend, because more and more workers are exercising discretion and judgment on the job -- one criterion that an employee must meet to be considered exempt.

Dennis R. Sutphen -- a member of the SHRM Compensation and Benefits Committee -- strongly supported a 1999 General Accounting Office report recommending that DOL revise the salary basis, salary level and duty tests used to determine if an employee may be classified as exempt. He said DOL has failed to keep its FLSA regulations in step with the dramatic changes that have occurred in the American workplace since Congress enacted the law at the end of the Great Depression (1938).

Management and employee relations are noticeably different, working conditions have dramatically improved and there are now numerous types and ways to compensate employees for their hard work, some of which include overtime pay, health care benefits, pensions, 401(k) plans, paid vacations, paid personal leave, paid sick leave, profit sharing, stock options and bonuses, he said. Unfortunately, these strides in the work force over the last 62 years are not reflected in the FLSA.”

William J. Kilberg, a Washington, D.C. attorney now representing the Chamber of Commerce but formerly DOL’s solicitor from 1973 through 1976 said, “For the better part of two decades, the Department of Labor has been promising a comprehensive review of the exemption regulations, pledging each time that relief will be forthcoming in a matter of months. Every six months, the department moves the projected date for a notice of proposed rule making approximately six months into the future.”

Dana, as you can see it is difficult to answer your question precisely because of all the ambiguities addressed herein and because I'm not on site to observe directly what (duties/responsibilities/supervision) you and your colleagues are individually performing, nor do I have a copy of your job descriptions. Therefore, I cannot attest to the fact that you and your colleagues are correctly classified per the FLSA. That having been said, I can offer you the following discussion of the differences between exempt and nonexempt and offer you my opinion. You and your employer can then decide if the appropriate classifications have been assigned. From that decision the two of you can then determine if C.T.O. applies or not. There are provisions in the law (federal and state) for C.T.O. for nonexempt employees provided certain conditions are met. The larger question is whether or not you and your colleagues are correctly classified. I believe Julie's application of the C.T.O. option in her article, which prompted your question applied to a truly exempt manager, who supervised, at a minimum, at least two others.

Most employees are "nonexempt" (entitled to overtime) under the FLSA. Some are not. While there are several overtime exemptions, which are specific to particular industries or jobs, there are also some general exemptions for so-called "white collar" employees. Generally to be "exempt" (not entitled to FLSA overtime) requires that "white collar" employees meet both of two conditions:

They must be paid "on a salary basis" (the "salary basis test").

                                     -and-

Their job duties must be genuinely high-level "executive," "administrative," or "professional" (the "duties test").

Each of these requirements is quite technical under the FLSA. Employees (with one exception) must "pass" both the salary basis test and the duties test to be exempt.

The "Salary Basis Test"

"White collar exempt" employees must (with one specific exception not germane to our discussion here) be paid "on a salary basis" rather than "hourly" (in addition to performing exempt duties). "Hourly" employees are nonexempt no matter what their duties are.

Under the FLSA, being paid "on a salary basis" has a technical definition that may be different from the way "salary" is sometimes used in other contexts.

Do not assume that just because an employee is paid a "salary" (rather than a wage classified by the employer as an hourly wage) that this means the employee "passes" the salary basis test.

Under the "salary basis test," FLSA overtime exemptions are generally reserved for employees who are (a) paid the same amount each work period no matter how many actual hours they spend on the job, and (b) whose compensation is not "subject to reduction based on the quantity or quality of work."

"Salary basis" for FLSA purposes means that an employee has a "guaranteed minimum" amount of pay s/he can count on receiving for any work period in which s/he does "any" work. If an employee works one hour during a work period, s/he should still receive the full amount of the "guaranteed minimum" pay.

Employees are not paid "on a salary basis" if their guaranteed minimum pay may be reduced based on either the "quality or quantity" of work performed. This is sometimes called the "no docking" rule. Employees who are paid "on a salary basis" are therefore not generally subject to reductions in pay because of layoffs, suspensions without pay for (most) disciplinary violations, or (net) reductions in their guaranteed minimum pay for when they are on jury duty, or when they are on temporary military leave. Their pay is not based on the amount of time they spend at work, but rather for "getting the job done."

Actual pay reductions are not necessary before an employee will "fail" the salary basis test. Employees are not paid on a salary basis if their guaranteed minimum pay is "subject to" reduction for impermissible reasons. This means that there is a genuine likelihood of a reduction in the employee's guaranteed minimum "salary" and the employee knows it.

The "salary basis test" is subject to a variety of "exceptions" and interpretations that may not be readily apparent or easily grasped. For example, reducing "leave accruals" for absences is probably not the same as reducing "pay." Getting paid "more" for extra hours worked is not necessarily inconsistent with being paid "on a salary basis," since this would not reduce an employee's "guaranteed minimum" salary. Reducing pay for absences caused by illness that is offset by a bona fide sick leave plan is not inconsistent with being paid "on a salary basis." An exempt employee need not be paid for work periods in which s/he does "no work," so docking pay in weekly increments may not "defeat salaried status."

The one exception to the requirement that exempt employees be paid on a salary basis is for some "computer professionals" such as software engineers, systems analysts and high-level programmers. (Computer operators, troubleshooters, manufacturers, etc., are not considered computer professionals for purposes of this exemption). Individuals who meet the "duties test" for computer professionals may be exempt even if they are paid hourly, provided their hourly wage is at least 6.5 times the minimum wage.

The "Duties Test"

Under the "duties test," FLSA overtime exemptions are reserved for truly high-level, white-collar employees, in positions, which routinely involve discretionary decision-making at a "policy" level.

Do not assume that an employee "passes" the duties test merely because the employer has classified them as exempt, or because they have been given a high-sounding title. Some employees are incorrectly treated as exempt under the duties test that is really nonexempt.

Under the FLSA duties test, employees are "exempt" only if they perform relatively high-level "executive," "administrative," or "professional" duties (and are also paid "on a salary basis").

For any of these exemptions, "job titles" are relatively unimportant. If a secretary is called an "administrative assistant" s/he is still a secretary. And if the president of a company chooses to call herself the janitor, s/he is still an executive. What counts is what the employee actually does at the job on a day in, day out basis -- the job tasks.

The tests for these exemptions are complicated and there are few "bright lines." Generalizations are dangerous.

The "executive" exemption applies to "managers." A manager, under the FLSA, must regularly supervise two or more employees. However, supervisory responsibilities are not enough. To be exempt, an employee must also have "management" activities as his or her primary duty. S/he must be "in charge" (at least sometimes) of a recognized unit or subunit within the company or organization, and must "make decisions" on behalf of the company or organization which are of genuine importance to its business. Exempt executives may still perform a variety of "nonexempt" tasks, if "management" is nonetheless their primary duty. However, a "working foreman" is not considered an executive, and if an employee performs "production" work (non management, "line" work) or "clerical" work more than 50% of the time this is some indication that s/he is not an exempt executive.

The "administrative" exemption applies to relatively high level "support" or "staff" personnel within an organization, who perform (either) "office" or "non-manual" work. Exempt administrative employees' work is directly and primarily related to management policies or general business operations, and requires the exercise of judgment and discretion. Examples might be (true) administrative assistants, buyers, and planners -- although again it is important not to confuse job titles with actual job duties. With the same proviso, bookkeepers, "gal Fridays," many "executive secretaries" and most employees who operate machines or devices are not administratively exempt employees. It is also important to distinguish the exercise of judgment and discretion (exempt work) from the use of even high-level skills (nonexempt work) in performing job tasks. If an employee is engaged in "production" s/he is not an exempt administrator. ("Production" work means making the "product" the company or organization "produces," and is not limited to traditional manufacturing. A police detective, for example, is participating in "production work" for a police department, which is "in the business" of making criminal investigations.)

The "professional" exemption is usually reserved for practitioners of the traditional "learned professions" such as physicians, lawyers, teachers, accountants, and so forth. A "special rule" permits some computer experts to be considered professionals, as well (even if they are not paid "on a salary basis"). To be exempt an employee must actually be doing the work of the profession. A physician who is employed as a clerk is not professionally exempt.

In many cases, whether an employee's tasks fall under the duties required for one of the "white collar" exemptions will be obvious. In others, a highly detailed and fact-specific analysis may be required. Generalizations are dangerous. There are many instances of misclassification of employees as exempt who are really nonexempt based on their job duties.

"Salaried Nonexempt" Employees

An employee may be paid "on salary" and still be nonexempt and entitled to overtime. Just because an employee is paid "on a salary basis" does not necessarily mean that s/he is exempt. The terms are not synonymous.

Dana, there you have it as concise as I can make it. Whether the FLSA is purposely ambiguous is open to question but it certainly makes life in the workplace more challenging when you’re trying your level best to do the “right” thing but the law is so unclear.

Since there are no “bright lines” (remember, I’m not a lawyer nor have I visited your office to see for myself) my best guess is that most portfolio managers in the industry are, or should be, salaried nonexempt employees except for those who supervise, at a minimum, at least two other portfolio managers and are charged with exercising managerial discretion and judgment at a reasonably high level in the decision-making process. On site managers would almost always be exempt employees, in fact, I can’t think of an instance where they wouldn’t be. If this sends shudders throughout the CID management industry, I’m sorry, but that’s how I see it.

I hope this information/explanation has been useful/helpful. If I have confused you further, I apologize, but then remember, not even the people who write our laws and regulations (the Legislative and Executive Branches of our government) appear to agree on what the right answers are. They need to do something, and soon, to get the FLSA ready for the challenges of the 21st century, just six months hence.