I. Executive Exemption

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Auditor Guidance: Employee’s Classification As Exempt or Non-Exempt Under The Fair Labor Standards Act

Use this document as a general guide to identify whether employees clearly and unmistakably qualify for an exemption to the FLSA’s overtime requirements. This is not a definitive checklist. This document is based on the FLSA regulations as of September 2015. These regulations are subject to change in the coming months. If the regulations are revised, data received from the job description and/or manager interviews may not be accurate, or the position is “borderline,” please consult counsel.

I. Executive Exemption

Answer the following to determine if this employee can be deemed exempt under the FLSA’s Executive Exemption (Provide comments below at the end of this section, where necessary):

1. Is the employee compensated on a salary basis at a rate of not less than $455 per week (exclusive of above-base compensation)?

2. Is the employee’s primary duty management of a department or division of the enterprise?

To determine if the employee is engaged in management functions; answer the following questions. Does the employee:

a.  Interview and play a key role in selecting employees?

b.  Train other employees?

c.  Play a key role in setting and adjusting employees’ rates of pay and hours of work?

d.  Direct the work of employees?

e.  Maintain production, sales records or metrics for use in supervision/control?

f.  Evaluate/appraise employees’ productivity and efficiency?

g.  Play a key role in handling employee complaints and grievances?

h.  Discipline employees?

i.  Plan the work of employees?

j.  Determine the work techniques to be used?

k.  Apportion the work among the employees?

l.  Plan and control the budget for a particular division or business unit?

m.  Play a key role in monitoring or implementing legal compliance measures?

3. Does the employee customarily and regularly direct the work of two or more full-time employees or their equivalent? (Equivalent means the aggregate hours of part time employees is equal to or exceeds 80 hours per week. Equivalent does not mean contractor, subcontractor, independent contractor or temporary outsourced employee.)

4. Does the employee have authority to hire or fire other employees or make suggestions and recommendations regarding the hiring, firing, advancement, promotion, or any other change of status of other employees that are given particular weight?

To determine if the employee’s recommendations are given particular weight, answer the following questions:

a.  When personnel decisions are being made in the employee’s group, is it part of the employee’s regular duties to make such suggestions and recommendations (beyond simply being an evaluator in the annual/semi-annual review process)?

b.  When personnel decisions are being made in the employee’s group, how frequently are such suggestions and recommendations made or requested beyond simply being an evaluator in the annual/semi-annual review process? Routinely? Occasionally? Rarely?

c.  How frequently are such suggestions and recommendations relied upon? Routinely? Occasionally? Rarely?

Note: the fact that a higher level manager’s recommendations have more importance or that the employee does not have the ultimate authority to make the decision with respect to the subordinate’s change in status does not destroy the exemption.

II. Administrative Exemption

Note: This is the most misused white collar exemption. Remember that “non-exempt” is the norm and the default. To meet the administrative exemption, the individual must not only be rather autonomous, but also must be making judgment calls and decisions on matters that are important to the company. Don’t let the fact that each individual’s job is “important” to the functioning of the organization cloud your assessment of whether they conduct the high-level decisioning required by this exemption.

To determine if the employee may be exempt under the FLSA’s Administrative Exemption, answer the following questions:

1.  Is the employee compensated on a salary or fee basis (i.e. an agreed sum for a single job) at a rate of not less than $455 per week (exclusive of above-base compensation)?

2. Is the employee’s primary duty office work directly related to the management or general business operations of [COMPANY] or [COMPANY’S] clients?

To determine if the employee is directly related to management or general business operations, answer the following questions:

a.  Is the work performed by this employee directly related to assisting with the running or servicing of the business (as distinguished from creating or selling [COMPANY’S] products or services)?

Note—work directly related to management or general business operations includes, but is not limited to, work in functional areas such as: tax, finance, accounting, budgeting, auditing, insurance, quality control, purchasing, procurement, advertising, marketing, research, safety and health, personnel management, human resources, employee benefits, labor relations, public relations, government relations, computer network, internet and database administration, legal and regulatory compliance, and similar activities.

b.  Is the work performed by this employee directly related to the management or general business operations of [COMPANY’S] clients?

3. Does the employee’s primary duty include the exercise of discretion and independent judgment with respect to matters of significance?

·  To determine if the employee exercises discretion and independent judgment with respect to matters of significance, answer the following questions (generally, employees who meet two or three of these factors are exercising discretion and judgment with respect to matters of significance; although a case-by-case analysis is required):

a.  Does the employee have authority to formulate, affect, interpret, or implement management policies or operating principles?

b.  Does the employee have authority to commit [COMPANY] in matters that have significant financial impact?

c.  Does the employee have authority to waive or deviate from established policies and procedures without prior approval?

d.  Does the employee have authority to negotiate and bind the company on significant matters?

e.  Does the employee provide consultation or expert advice to management?

f.  Is the employee involved in planning long or short-term business objectives?

g.  Does the employee investigate and resolve matters of significance on behalf of management?

h.  Does the employee represent the company in handling complaints, arbitrating disputes or resolving grievances?

Note—the exercise of discretion and judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered. It also implies that the employee has authority to make an independent choice, free from immediate direction and supervision. However, employees can exercise discretion and judgment even if their decisions or recommendations are reviewed at a higher level. “Matters of significance” refers to the level of importance or consequence of the work involved.

Note—Factors which federal courts have found relevant in assessing whether an employee exercises discretion and independent judgment include:

·  the employee’s freedom from direct supervision;

·  personnel responsibilities;

·  troubleshooting or problem-solving activities on behalf of management;

·  use of personalized communication techniques;

·  authority to handle atypical or unusual situations;

·  authority to set budgets;

·  responsibility for assessing customer needs;

·  primary contact to public or customers;

·  the duty to anticipate competitive products or services and distinguish them from competitor’s products or services;

·  advertising or promotion work;

·  coordination of departments, requirements, or other activities for or on behalf of [COMPANY] or [COMPANY’S] clients or customers.

III. Professional Exemption

Note: This is not a “go to” exemption. In most industries, very few professions would be best analyzed under this test. Degrees in marketing, communications, or other liberal arts will not be sufficient to meet this exemption.

To determine if the employee is exempt as a Learned or Creative Professional under the FLSA, answer the following questions:

1. Is the employee compensated on a salary or fee basis (i.e. an agreed sum for a single job) at a rate of not less than $455 per week?

2. Is the employee’s primary duty the performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction?

Note—work requiring advanced knowledge means work that is predominantly intellectual in character, and includes work requiring the consistent exercise of discretion and judgment (as distinguished from the performance of routine mental, manual, mechanical or physical work).

·  “Field of science or learning” includes the traditional professional of law, medicine, accounting, actuarial computation, engineering, and other similar occupations (as distinguished from the mechanical arts or skilled trades).

·  “Prolonged course of specialized instruction” means where specialized training is a standard prerequisite for entrance into the profession (generally, the possession of an appropriate academic degree). An MBA alone would likely not qualify someone for the Professional Exemption. If [COMPANY] categorically requires a specific degree for a particular position, the position potentially may qualify for the professional exemption.

Commonly Exempt Professions

·  Lawyers

·  Accountants

·  Pharmacists

·  Engineers

·  Actuaries

·  Chefs

Commonly Non-Exempt Professions

·  Licensed Practical Nurses

·  Accounting clerks and bookkeepers who normally perform routine work

·  Paralegals and legal assistants

·  Engineering technicians

3. Is the employee’s primary duty work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor?

Note—work in a recognized field of artistic or creative endeavor includes such fields as music, writing, and the graphic arts. It generally includes actors, musicians, composers, conductors, soloists, painters (who are at most given the subject matter of their painting), cartoonists who rely on their own creative ability to express the concept, essayists, novelists, short-story writers, screen play writers who choose their own subjects, persons holding more responsible writing positions in advertising agencies, journalists whose primary duty is performing on the air in radio, television or other electronic media, or who conduct investigative interviews or analyze or interpret public events, write editorials, opinion columns, or other commentary, or act as a narrator or commentator.

IV. Computer Employees Exemption

To determine if an individual is an exempt Computer professional under the FLSA, answer the following questions:

1. Is the employee compensated on a salary or fee basis (i.e. an agreed sum for a single job) at a rate of not less than $455 per week, or is the employee compensated on an hourly basis at a rate not less than $27.63 an hour?

2. Does the employee’s primary duty consist of:

a.  the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications?

b.  the design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications?

c.  does the employee perform a combination of the aforementioned duties, the performance of which requires the same level of skills?

Note—the exemption for employees in computer occupations does not include employees engaged in the manufacture or repair of computer hardware or software and related equipment. Nor does it apply to employees whose work is highly dependent upon, or facilitated by, the use of computers and computer software programs (e.g., engineers, drafters, and others skilled in computer-aided systems design software),but who are not primarily engaged in computer systems analysis and programming or other similarly skilled computer-related occupations.

·  Note also, the highly compensated exemption does not apply to computer employees.

V. Outside Sales Exemption

To determine if an employee is an Outside Sales employee under the FLSA, answer the following questions. (Provide comments at the end of this section, where necessary):

1. Is the employee’s primary duty the making of sales or obtaining orders or contracts for services or for the use of facilities for which consideration will be paid by the client or customer?

Note—“sale” or “sell” includes any sale, exchange, contract to sell, consignment for sale, shipment for sale or other disposition. Sales also include the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property. Exempt outside sales work includes not only the sales of commodities, but also obtaining orders or contracts for services or for the use of facilities, which includes selling of time on radio or television, the solicitation of advertising for newspapers and other periodicals, and the solicitation of freight for railroads and other transportation agencies. Contracts for services include employees who sell or take orders for a service, which may be performed for the customer by someone other than the person taking the order.

In determining the “primary duty” of an outside sales employee, work performed incidental to and in conjunction with the employee’s own outside sales or solicitations, including incidental deliveries and collections, shall be regarded as outside sales work. Other work that furthers the employee’s sales efforts also shall be included as exempt work including, for example, writing sales reports, updating or revising the employee’s sales or display catalogue, planning itineraries and attending sales conferences. Promotion work actually performed incidental to and in conjunction with an employee’s outside sales or solicitations is exempt work.

2. Is the employee customarily and regularly engaged away from [COMPANY’S] place of business or places of business in performing such primary duty?

VI. Highly Compensated Employees

Note: Maryland state law does not specifically recognize this exemption.

To determine if an employee is exempt under the FLSA’s “Highly Compensated Employees” exemption, please answer the following questions:

1. Is the employee’s total annual non-discretionary compensation at least $100,000?

NB—Total annual compensation may also include commissions, nondiscretionary bonuses and other nondiscretionary compensation. Discretionary bonuses, however, are not included in computing total annual compensation.

2. Does the employee’s total annual non-discretionary compensation include at least $455 per week paid on a salary or fee basis (i.e. an agreed sum for a single job)?

3. Does the employee customarily and regularly perform any one or more of the exempt duties and responsibilities of an executive, administrative, or professional employee, identified above in Sections I, II, or III?

Note—this section only applies to employees performing office or non-manual work. It also does not apply to employees who are computer employees.

This guidance document was prepared by Holland & Knight LLP and Jackson Lewis PC for MDSHRM Conference participants in attendance at the presentation: “Self-Auditing Your HR Practices and Procedures.” If you have any questions regarding the use of the guidance in conducting an audit of your company’s HR practices, please do not hesitate to contact Jacqueline Tully (703-483-8300, ) or Kara Ariail (703-720-8097).