Understanding exempt vs. non-exempt designations
By Phillip Jones
February 1, 2023
Running an equipment and event rental business often comes with uncertainty. Will the customer bring back the equipment on time? Will it be in one piece? Is there enough staff to support the busy season? Or even, will it rain on the customer’s wedding day?
While some uncertainty is unavoidable, employers and business owners should be prepared to comply with federal employment laws. Among other things, the Fair Labor Standards Act (FLSA) requires employees be paid overtime at one and one-half their regular rate of pay for hours worked over 40 in a week. So, if you have an employee making $8 per hour, then they should be paid $12 per hour for each hour worked beyond 40 hours a week. Some employees, however, are excluded or exempt from mandatory overtime pay if they meet certain narrowly construed, highly technical regulatory “exemptions.”
There are many exemptions to the overtime requirement, including exemptions for livestock auction workers, taxicab drivers and country elevator workers. While there are no odd, specific exemptions for the equipment and event rental industry, there are common exemptions which may apply. However, when it comes to common “white-collar” exemptions — the administrative and executive exemptions — there are typical mistakes made by employers.
First, to qualify under most white-collar exemptions, an employee must satisfy “salary level” and “salary basis” tests. To meet the salary level test, the employee must earn a base salary of at least $684 per week, which is the equivalent of $35,568 per year. Under the salary basis test, an exempt employee’s salary cannot be reduced because of variations in the quality or quantity of work performed.
There are limited exceptions where an employer may make permissible deductions from an employee’s pay, like certain absences from work; however, making deductions that are not permitted is a common way for employees to lose exempt status. This is all to say an employee paid to unload or setup equipment on an hourly basis is likely not exempt. An exempt store manager who has his or her pay docked for poor performance will likely lose their exemption status. In both scenarios, the employee should receive overtime pay.
Each exemption also has its own “duties” test. Job titles or written job descriptions do not determine whether an employee is exempt from overtime pay. Rather, job duties actually required by the position will be analyzed. So, just giving a cashier the title of cashier executive officer will not make them eligible for an executive exemption. Similarly, not all managers and supervisors are exempt. Each position must satisfy both the duties and salary tests.
Next, the employer will bear the burden of proving an employee’s exemption status, if challenged. Employers should begin with the assumption that all employees are non-exempt, and should receive overtime pay, and only classify employees as exempt if they properly fit within one or more exemptions.
This issue also varies by state and is constantly in flux. While the FLSA applies at the federal level, many states have their own state laws regulating exemptions, including Alaska, California, Colorado, Maine, New York and Washington, among others. Employers should comply with the law that best protects the employee, typically the state law.
The federal government also has proposed numerous revisions to the popular white-collar exemptions over recent years. Notably, the Department of Labor recently announced plans to increase the salary threshold, meaning, fewer employees would be exempt under the salary tests unless they receive a likely substantial raise. Employers should stay up to date on the department’s plans.
Executive exemption. To qualify as an executive, an employee must have a primary duty of managing the enterprise, or a customarily recognized department or subdivision thereof; customarily and regularly direct the work of two or more employees; and have the authority to hire or fire other employees, or whose suggestions or recommendations regarding hiring, firing, advancement, promotion or any other change in job status are given particular weight.
This exemption typically applies to supervisors and managers, such as a regional or store manager. Note, there also is a separate highly-compensated employee exemption for employees with total compensation of at least $107,432 per year and which satisfy their own duties test.
Micromanagement is the most common and significant error that employers make with respect to the executive exemption. Micromanaging dilutes the perceived importance of the alleged executive’s duties, and it creates doubts as to the individual’s relative freedom from direct supervision. Similarly, employers should let supervisors and managers be formally involved in the hiring and firing process by signing off on key employment decisions and receiving the same interviewer or hiring training as higher levels of management.
As discussed earlier, the employee’s actual job duties matter. Employers should avoid having managers of one-person “departments” where the manager does not regularly supervise two or more employees. If the equipment manager oversees five coordinators but has no say in their hiring or firing and must get approval to discipline or schedule shifts, then the equipment manager is likely not an executive, even if they do make $80,000 a year.
Much of the recent litigation over the executive exemption has involved alleged misclassification of store managers and assistant store managers. Oftentimes, these individuals perform a significant amount of non-exempt manual labor, such as stocking shelves and running cash registers, concurrently with their exempt management responsibilities. Although concurrent exempt and non-exempt duties are not fatal to the exemption, performance evaluations should focus on exempt duties as the primary duties of the job. In cases where application of the executive exemption is questionable, consider whether a different white-collar exemption might apply or whether the most prudent approach, particularly with assistant managers, would be to start paying the individuals on an hourly basis and treating them as non-exempt moving forward.
Administrative exemption. To qualify for the administrative exemption, the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operation of the employer or the employer’s customers and require the exercise of discretion and independent judgment with respect to matters of significance. This exemption is typically applied to back-office support staff members who are not involved in making the employer’s product or delivering the service sold, such as employees in departments like human resources, accounting and payroll.
Administrative employees must primarily perform office or non-manual work. An event specialist primarily responsible for setting up and tearing down events is not likely to be an administrative employee, even if they submit an inventory report at the end of each shift. Clerical or secretarial work; activities such as recording or tabulating data; or performing mechanical, repetitive, recurrent or routine work will not satisfy the administrative exemption. Notably, and perhaps surprisingly, employees whose primary job involves sales are not administratively exempt; however, employees making sales outside of the office — “outside sales employees” — or those primarily working in marketing may be exempt.
Employees do not need unlimited authority or unfettered discretion to be administratively exempt; however, they should be free to exercise independent discretion and judgment. Routine decision-making or strictly adhering to company policies or manuals is typically insufficient. While policies and manuals may be used as a guide, and even strictly followed for highly technical problems, the employee should be able to make recommendations on matters of significance. Although, the employer does not have to follow these recommendations.
While there are numerous exemptions, each with their own definitions, tests and pitfalls, overtime pay does not need to be an overly confusing topic. Remember, on base-line, employees should first be considered non-exempt and receive overtime pay. Then, the employer should conduct a detailed analysis of the employee’s pay and actual job duties to determine whether an exemption applies. Litigation over exemption misclassification is often costly. So, when in doubt, consult trained counsel to determine exposure and proper classification.
Phillip Jones is an attorney with Ogletree Deakins, Atlanta. The American Rental Association (ARA) has a partnership with Ogletree Deakins to provide human resources help and guidance to ARA members. Learn more at ARArental.org/manage-business/HR.