Due to the ever-increasing amount of litigation being filed over the “mis-classification” of an employee as exempt vs. non-exempt, it is critical to evaluate each job and determine the proper classification for compensation purposes. If an employee is mis-classified as exempt when they legally should be “non-exempt”, an employee could assert several “wage and hour” related claims for missed meals, missed breaks, overtime, improper paystubs among other claims, and recover statutory penalties which could result in substantial liability. If in doubt, classify employees as non-exempt and require that they maintain a daily time card recording their actual hours worked, and require that they record their meal periods. Below is a summary of the requirements for an exempt classification.
EXEMPT STATUS
An exempt employee is usually an executive, administrative or professional employee. Other exempt employees include some inside and outside salespeople. Exempt employees are not paid for overtime hours worked and are not regulated as to meals and breaks under both state and federal law. Exempt employees must meet the salary basis test AND the duties test.
A. Salary Basis Test for Exempt Employees
To be classified as “exempt”, employees must earn a minimum monthly salary of no less than two times the state minimum wage for full-time employment (which is 40 hours per week). Simply designating an employee as “salaried does not automatically make them “exempt.
1.Exempt Employees Receive Pre-Determined Amount
The exempt employee must receive a pre-determined amount constituting all or part of his/her compensation for each pay period. The amount cannot be reduced because of variations in the number of hours worked or quality of the work performed. Again, this is the general rule for the executive, administrative and professional exemptions. The employee must generally receive his/her full salary for any week in which he/she performs any work without regard to the number of days or hours worked. As a general rule, you need not pay an exempt employee for any workweek in which he/she performs no work.
2. Minimum Salary for Exempt Employees
The minimum monthly salary for most exempt executive, administrative and professional employees is no less than two times the state minimum wage for full-time employment. (There are other criteria for certain professions such as licensed physicians and surgeons, and computer professionals). To calculate this amount multiply the state minimum wage by two and then multiple by 2080 (the number of hours a full-time employee works in one year). While the City of Los Angeles and some other California cities and local jurisdictions have a higher minimum wage rates than the State of California, for the exempt salary basis test, the California minimum wage is used.
California minimum wage is as follows:
| Effective Date | Employers With 25 or Less Employees | CA Minimum Salary Basis for Exempt Employees 25 or Less | Employers With 26 + Employees | CA Minimum Salary Basis for Exempt Employees 26 or More |
| 1/1/2017 | $10/hr | $3,466.67/month $41,600/annually |
$10.50/hr | $3,640/month $43,680/annual |
| 1/1/2018 | $10.50/hr | $3,640/month $43,680/annually |
$11/hr | $3,813.33/month $45,760/annual |
| 1/1/2019 | $11/hr | $3,813.33/month $45,760/annually |
$12/hr | $4,160/month $49,920/annual |
| 1/1/2020 | $12/hr | $4,160/month $49,920/annually |
$13/hr | $4,506.67/month $54,080/annual |
B. Duties Test: Primarily Engaged In Exempt Work:
To be exempt, the employee must be “primarily engaged” in exempt duties. To determine if the employee primarily engages in exempt work, the Labor Commissioner examines the work that the employee performs during the workweek. The Labor Commissioner also considers the amount of time the employee spends on exempt work, as well as your realistic expectations and the realistic requirements of the job. In general, the employee must spend more than 50 percent of his/her time performing exempt duties.
1.Beware of Managers Performing Nonexempt Duties – Working Managers
A manager who performed various non-exempt duties while simultaneously supervising staff will not be found to be ”primarily engaged” in the performance of exempt work and hence, not exempt. When a supervisor is multi-tasking and engaging in the performance of both exempt and non-exempt duties, the employer should examine the supervisor’s primary reason or purpose for undertaking the task in order to determine if the task is exempt or nonexempt.
Federal regulations provide some guidance on this issue: “If a task is performed because it is ‘helpful in supervising the employees or contribute[s] to the smooth functioning of the department for which [the supervisors] are responsible’ … the work is exempt; if not, it is nonexempt.”
2. Examples:
- Where the replenishing of stocks of merchandise on the sales floor is usually done by a nonexempt employee, the performance of this task by the manager or buyer of the department is nonexempt;
- A manager’s participation in making sales to customers is nonexempt, unless the sales are made for “supervisory training or demonstration purposes”
3. Job Title Irrelevant to Employee Status:
Job titles alone do not designate an employee as exempt or nonexempt. For example:
- An employee with job title such as Executive Assistant will not qualify as an exempt employee if the actual duties do not meet the exemption requirements.
- An employee who performs routine bookkeeping tasks does not become an exempt employee when given the title “controller” rather than “bookkeeper.”
4. Discretion and Independent Judgment
An exempt employee must “customarily and regularly exercise discretion and independent judgment.” Discretion and independent judgment involve comparing and evaluating possible courses of conduct and acting or making a decision after considering various possibilities. An employee with discretion and independent judgment must either:
- Have the power to make independent choices pertaining to matters of significance and free from immediate supervision; or
- Have the ability to make a recommendation for action that is subject to a superior’s final authority. The employee must possess sufficient authority for the recommendations to affect matters of consequence to the business or its customers.
To “customarily and regularly” exercise discretion and independent judgment is to use discretion and independent judgment frequently in the course of day-to-day activities. The phrase “customarily and regularly” signifies a frequency that is more than occasional but may be less than constant.
An employee who merely applies his/her knowledge in following prescribed procedures or in determining which procedures to follow, does not exercise discretion and judgment of the independent sort associated with exempt status. Almost every employee must make decisions requiring discretion; however, the discretion and independent judgment criteria requires that the decisions must involve matters of consequence of real and substantial significance to the policies or general operations of your business or customers. The tasks can be related directly to only a particular business segment, but must substantially affect the whole business.
This information is intended as a brief summary of employment law. While every effort has been made to ensure the accuracy of the information contained herein, it is not intended to serve as “legal advice,” or to establish an attorney-client relationship. If additional information is needed on any of the topics contained herein, please contact our office. All rights reserved. Elkins Employment Law ©2017.