Properly Classifying Employees as Exempt, Nonexempt

In this episode of The Workplace podcast, CalChamber employment law experts Matthew Roberts and Ellen Savage discuss how to properly classify employees as either exempt or nonexempt for wage and hour purposes — a top source of litigation between employees and employers.

The first place to start, Savage says, is by understanding the literal meaning of the term “exempt,” which is that employers are exempted from having to follow many of the wage and hour laws, such as overtime pay, keeping time cards and penalties for failure to take meal and rest breaks.

Conversely, a nonexempt employee is someone who’s not exempted from those laws.
But employers can’t simply stick an exempt label on all employees to avoid dealing with wage and hour laws, Savage says, emphasizing that for an employee to truly be exempt, employers must make sure the employee actually fits into one of the exemptions allowed under the law.

“The California and the federal regulations both have what we call, ‘white collar exemptions,’ and those are available for certain high level administrative, managerial, professional employees,” she says, adding that some other exemptions for outside sales and a few other categories also exist.

For this episode, Roberts and Savage dive into the white collar exemptions, and Savage notes that the best rule of thumb when determining if an employee is actually exempt is to start with the assumption that all positions are nonexempt. Then, the employer tries to establish that a position meets the tests for one of the exemptions under the law.

Whether looking at federal or California regulations, exemptions are determined using a two-part test: the duties test followed by the salary test.

Under federal law, employers must look at the employee’s “primary duties.” For the managerial exemption, for instance, Savage says the employee’s primary duty must be “managing the enterprise or managing a department or subdivision of the enterprise.” In addition, the employee must “customarily and regularly” direct the work of two or more full-time employees and have the authority to hire or fire (or, if they don’t have the authority to hire or fire, their suggestions about hiring or firing carry weight with the organization).

Both the administrative and professional exemptions each have their own separate job duty tests, that Savage describes as “seriously meaty” — and some even have educational requirements.

California also uses this two-part test, but the rules for California employees are much stricter. Savage looks again at the managerial exemption, and in California, not only must the employee meet all of the aforementioned duties, but they also must spend at least 51 percent or more of each work week actually doing those specific exempt duties.

Also in California, employers must use the state’s salary test, not the federal government’s. “The rule for our exempt employees is that they have to be paid a weekly salary that’s equal to two times the statewide minimum wage,” Savage says. “That currently works out to $64,480 annually. That’s a salary that has to be paid no matter what to maintain the exemption.”

Roberts and Savage then move into answering some frequently asked exemption-related questions on the Labor Law Helpline, including:

  • Do salaries of exempt employees who work in a jurisdiction with a local minimum wage that’s higher than the state minimum wage need to be changed to account for the higher wage? No. In California, the salary test for exempt employees is two times the state minimum wage, which is laid out in black-and-white in California Labor Code section 515(a).
  • If we have an exempt employee with performance issues who’s not working full-time hours (they’re taking long lunches, showing up late, leaving early), can we deduct their pay? Under most circumstances, we don’t pay our exempt employees based on the number of hours they work; we pay them their full salary each week for getting their job done.
  • Can we have exempt employees clock in and out to document their hours at the workplace? There isn’t anything in the law that says it’s not allowed, but we have to be careful that we’re not using those clock-ins and clock-outs to calculate the exempt employee’s pay. But maybe you need to know who’s in the building for safety reasons, or tracking time is necessary for purposes of a federal contract where you have to report hours or, like lawyers, time is tracked to bill clients. If that’s the case, it’s generally going to be OK.
  • Can an exempt employee be converted back to a nonexempt employee? Yes, but use caution, as the employee may not be accustomed to tracking their time, paying attention to off-the-clock work or being required to clock out by a specific time for meal breaks. And other employees who do similar work but remain exempt may raise an eyebrow. “There are a lot of areas where we can end up backing into trouble without really thinking about it,” Savage says. “It’s definitely something to think carefully about.”
  • Can an exempt employee switch to being a part-time employee with a prorated salary? No. You can’t go below that minimum salary floor and remain exempt. That minimum salary test is the absolute minimum for exempt status here in California, no matter how many hours are worked. There’s no salary proration allowed for part-time work.
  • Are employees with specific positions or job titles considered exempt? A person’s title or name of their position is absolutely irrelevant to whether they’re an exempt employee. When classifying any employee as exempt, you want to make sure they’re truly doing more exempt work than not.