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When a new hire comes on board, you must determine whether to classify him or her as exempt or nonexempt under the FLSA. The key consideration: Exempt workers aren’t eligible for overtime pay. Rather, they’re paid for the job they do, not the hours they keep.

In light of recent changes to the FLSA regulations, all employers should carefully review their employee classifications. The new DOL regulations have changed the definition of who’s exempt and raised the minimum salary level that qualifies a worker as exempt from overtime. Generally, two requirements must be met before you can classify someone as exempt:

1. You pay the worker on a salary basis.
2. The worker holds a position with certain duties designated by the DOL as appropriate for exempt status. These positions include executive, administrative, professional, computer and outside sales as well as some highly compensated workers.

Remember: An exempt worker must meet both the salary and the duties tests.

The DOL offers two online, interactive e-law tools, “FLSA Coverage and Employment Status Advisor” and “FLSA Overtime Calculator Advisor,” to help employers determine the status of a particular position. Safeguard your organization by using them to classify new positions and audit your existing classifications. Access them at www.dol.gov/elaws/advisors.html. For detailed information on exemptions, go to www.dol.gov/elaws/esa/flsa/screen75.asp.

Salary basis

Being paid on a salary or fee basis is the quid pro quo of exempt employees. They aren’t paid overtime for working more than 40 hours a week; in exchange, their employer must provide a guaranteed salary, which can’t be reduced when they work fewer than 40 hours.

This reflects the understanding that exempt employees have the discretion to manage their time and are not answerable for hours worked or the number of tasks performed. Rather, they’re paid for the general value of the services they provide. In addition, you may not deduct pay for time when work isn’t available if the salaried worker is ready, willing and able to work.

Under the DOL’s revised regulations, the minimum salary a worker must earn to qualify as exempt is $455 per week, $910 biweekly (every other week), $985.83 semimonthly (every 1st and 15th of the month), $1,971.66 monthly or $23,660 annually.

Other characteristics of being paid on a salary basis:

• You pay the employee a set salary even if she works only part of the week.
• You can’t dock her pay as a disciplinary measure unless the employee has committed a serious safety infraction (breaking a rule designed to prevent endangering the facilities or other workers). The new regulations state that you may deduct for “unpaid disciplinary suspensions of a full day or more imposed in good faith for infractions of workplace conduct rules,” such as sexual harassment or workplace violence. (You’ll need, however, a written policy that you apply uniformly to all workers.)
• The employee can’t be docked for a partial-day absence.
• You must pay the employee for any day he’s ready, willing and able to work.
• The DOL recently issued opinion letters “clarifying” when you must pay exempt workers for weather-related closings and delays. Essentially, if you shut down the office for at least a full day but less than a full week, no deductions should be made. However, if your company tells exempt workers that they must take the day as a vacation day and they have available vacation time, you may dock pay without risking exempt status. The DOL explained that nothing requires employers to give vacation days, so by its logic, employers are free to set the rules for when they take time off. If a worker doesn’t have a vacation day left, no deduction should be made. The answer is different if the office is open but the employee doesn’t come to work for an entire day: Then you may deduct from her salary the equivalent of a day’s pay. If she simply shows up late, you can’t make a deduction. (FLSA2005-46 and FLSA2005-41)

Make sure you abide by the salary rules. If you don’t, the employee is no longer exempt, no matter what his duties and responsibilities are. Destroying his exemption can make you liable for two years’ overtime pay for any hours worked beyond 40 per week.

Duties tests

Workers who earn at least $455 a week may be exempt from overtime pay if they meet the appropriate tests for their classification: executive, administrative or professional. The last category is subdivided into learned professional and creative professional. In addition, special tests control the classification of certain computer employees and outside sales employees.

The rules also create a new exemption category for “highly compensated” employees. Essentially, any employee earning more than $100,000 a year and who regularly performs even one of the exempt duties of an executive, administrative or professional employee is precluded from earning overtime.

Exempt executive employee

To qualify for the executive exemption, an employee must earn a minimum of $455 per week and meet the following tests:

• Primary duty: manages the enterprise or a customarily recognized department or subdivision of the enterprise.
• Customarily directs the work of two or more other employees.
• Has authority to hire or fire other employees or whose suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status of other employees must be given particular weight.

A rule of thumb: The executive should devote substantial time to supervision. That includes interviewing, selecting and training workers, setting and adjusting pay rates and hours, handling complaints and disciplining employees, directing work and determining what materials, supplies, machinery or tools to buy, sell or stock. That’s not to say that an executive can’t perform other tasks such as stocking shelves or serving food. If the worker remains responsible for the success or failure of the operations under her management while performing nonexempt work, she may be an executive. In addition, if she controls when nonexempt work is performed, her exemption is valid.

The more time the employee spends doing the work of the enterprise as opposed to directing the work, the more likely he is an “executive” in name only and thus eligible for overtime pay. Take, for example, a court case involving an “executive” who was the manager at a car wash. He spent 95 percent of his workday washing cars instead of directing others’ work and little or no time managing the business. The court ruled that he wasn’t exempt.

The new regulations also clarify that the phrase “directs the work of two or more employees” means two full-time workers or their equivalent. Thus, an executive could supervise four part-time workers and meet the qualifications, but not one full-time and one part-time employee.

The final requirement is new: Executives must do more than supervise to be classified as exempt. They must have actual authority over those they supervise or at least have some say in those decisions. It doesn’t matter if the final decision rests with a higher-level manager. Factors that weigh in favor of meeting this requirement include:

• Whether recommendations on hiring and firing are part of the executive’s job description.
• Whether the executive frequently makes suggestions and recommendations.
• How often his suggestions and recommendations are followed.

Exempt administrative employee

To qualify for the administrative exemption, an employee must earn a minimum of $455 per week and meet the following tests:

• Primary duty: performs office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.
• Exercises discretion and independent judgment with respect to matters of significance in performing her primary duty.

The new regulations specify that selling goods or services in retail isn’t work directly related to the management or general business operations of the employer. Examples that do meet the test include working in tax, finance, accounting, budgeting, auditing, insurance, quality control, purchasing, procurement, advertising, marketing, research, safety and health, human resources, labor relations, governmental relations, computer networking, Internet and database administration, and legal and regulatory compliance. In addition, if you have employees who perform the same sort of functions for your customers, they may also be exempt. Thus, if you employ tax experts or financial consultants who advise your customers, they’re probably exempt provided they meet the salary requirement.

The administrative exemption applies only if the employee also exercises discretion and independent judgment. In general, independent judgment means that the employee compares and evaluates possible courses of action and makes a decision after considering the options.

The employee must have the authority to make an independent choice, free from immediate direction or supervision. Even though her decisions may be revised or reversed after review, she’s still exercising independent judgment. However, the term means more than the use of a skill in applying well-established techniques, procedures or specific standards described in manuals or other sources.

Examples of jobs that qualify for the administrative exemption:

• Insurance adjusters who analyze claims and make recommendations on litigation or settlement.
• Financial service industry workers who analyze customer assets, needs and investments and make recommendations, but not employees whose primary responsibility is to sell a financial product.
• Executive or administrative assistants who, without specific instructions or prescribed procedures, have delegated authority regarding matters of significance.
• Human resource managers who formulate, interpret or implement employment policies.
• Purchasing agents with authority to bind the company on significant purchases.
• Employees of educational establishments who serve as administrators, principals and department heads. Specialists such as counselors, social workers and dietitians don’t qualify under this exemption but may fall under the learned professional exemption.

Examples of workers who don’t qualify for the administrative exemption include inspectors who follow strict guidelines such as electrical or building codes and comparison shoppers who report competitor prices.

Exempt professional employee

The specific requirements for exemption as a bona fide professional employee are summarized below. These employees fall into two general categories: learned professionals and creative professionals.

Learned professional exemption

To qualify for the learned professional exemption, an employee must earn a minimum of $455 per week and meet the following:

• Primary duty: performs work requiring advanced knowledge, defined as work that’s predominantly intellectual in character and requires consistent exercise of discretion and judgment.
• Has advanced knowledge in a field of science or learning that is customarily acquired by a prolonged course of specialized intellectual instruction.

In other words, a learned professional performs work that usually involves analysis, interpretation or making deductions from facts and circumstances. The learned professional works with his intellect, not with his hands. The regulations go so far as to state that the advanced knowledge can’t be attained in high school but must ordinarily be in specialized academic training at a higher level. That doesn’t always mean a four-year degree, however; the test is whether the academic training is a standard prerequisite for entrance into the profession

The types of learning cited in the regulations include the traditional professions of law; medicine; theology; accounting; actuarial computation; engineering; architecture; teaching; physical, chemical and biological sciences; pharmacy and similar occupations. The list will be open to expansion as new professions are created and academic training and specialized degrees are offered in the fields of science and learning. If an advanced specialized degree becomes the standard for a particular occupation, that occupation will become a learned profession. Therefore, it’s a good idea to keep on top of developments in professional fields and regularly review your job descriptions and minimum training requirements against national standards. Otherwise, you may miss the opportunity to classify professionals as exempt from overtime.

The revised regulations go to great lengths to demonstrate what types of professions the Labor Department believes fit in the learned professional category:

• Doctors and lawyers who hold advanced academic degrees in medicine or law, are licensed in their professions and actually practice their profession. The exemption also covers doctors engaged in internships and residency programs who have completed the requisite academic degree for the general practice of medicine. They include medical doctors, osteopathic physicians, podiatrists, dentists and optometrists. The salary requirement doesn’t apply to doctors or lawyers.
• Teachers employed by educational establishments whose primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge. Teachers may be certified by a state agency or may work in private schools or other settings without certification, so certification alone is not the sole standard. The salary requirement doesn’t apply to teachers.
• Registered or certified medical technologists who have completed three academic years of pre-professional study at an accredited college or university, plus a fourth year of course work in a school of medical technology approved by the American Medical Association.
• Nurses who are registered by their state board of nursing as RNs and have completed a specialized academic degree as a prerequisite for being licensed. (Check with your state to see if that includes a two-year associate degree as well as a four-year bachelor’s degree.) Under the regulations, licensed practical nurses (LPNs) or other paraprofessionals don’t meet the learned professional exemption.
• Dental hygienists who have completed four years of pre-professional or professional studies at an accredited college or university approved by the American Dental Association.
• Physician assistants who have completed four years of academic training and graduated from a program certified by one of two professional associations.
•  Accountants who are certified public accountants or hold jobs similar to public accountants. Accounting clerks and bookkeepers who do routine financial work aren’t included in this category.
• Chefs with four-year academic degrees in the culinary arts. However, cooks who perform routine mental, manual, mechanical or physical work don’t qualify for this category.
• Athletic trainers who have completed four years of academic training in a specialized program accredited by the Commission of Accreditation of Allied Health Education Programs and are certified by their professional board.
• Funeral directors and embalmers licensed by and working in a state that requires a four-year academic degree program accredited by the American Board of Funeral Service Education. (Check with your state board of funeral directors for its requirements.)

The regulations exclude most paralegals or legal assistants from the exempt professional category because entry into this field doesn’t require an advanced academic degree. Most paralegals have two-year associate degrees or certificates rather than four-year specialized degrees in the field. Exception: If you hire someone in another learned profession to work as a paralegal, she’s probably exempt (for example, a registered nurse who’s hired as a paralegal to help evaluate medical malpractice claims).

Note: The DOL issued an opinion letter to clarify whether medical coders who work at home are exempt or hourly workers. Because medical coders have no recognized educational program at the college level, the DOL concluded that they aren’t professionals. (It’s not enough that they have a professional certification program available.) This opinion may signal reluctance on the DOL’s part to expand the professional category beyond well-recognized professional jobs. (FLSA2005-35)

Creative professional exemption

To qualify for the creative professional exemption, an employee must earn a minimum of $455 per week and meet the following:

• Primary duty: performs work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. The exemption doesn’t apply to work that a person could perform with general manual or intellectual ability and training.
• Works in a recognized field of artistic or creative endeavor, including music, writing, acting and the graphic arts.

Unfortunately, it’s hard to assess whether someone is a creative professional since educational background isn’t a prerequisite. Rather, the exemption hinges on whether the person holding the position is engaged in a creative endeavor. Thus you should carefully review your own job descriptions before placing someone in the creative professional exempt category.

Generally, the following are exempt creative professionals:

• Actors.
• Musicians, composers and soloists.
• Painters and artists who are given general guidelines as to subject matter.
• Cartoonists who are given only the title or underlying concept for a cartoon and must rely on their own creative ability to express the concept.
• Essayists, novelists, short-story writers and screenplay writers.
• Writers in advertising agencies.
• Journalists working for newspapers, magazines, television and other media who contribute a unique interpretation or analysis to a news product or those who appear as on-air personalities, conduct interviews, or serve as narrators or commentators.

Examples of workers who don’t qualify for the creative professional exemption: reporters who only rewrite press releases, report on routine community events like school board meetings and the like; animators who illustrate cells for motion picture cartoons; photographers who only retouch photos.

Computer-related professional exemption

To qualify for this exemption, a computer employee must meet all the following tests:

• Be compensated either on a salary or fee basis at a rate not less than $455 per week or, if paid on an hourly basis, earn at least $27.63 per hour.
• Must be a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below.
• Primary duty must consist of:

1. Application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications.
2. 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.
3. Design, documentation, testing, creation or modification of computer programs related to machine operating systems.
4. Or a combination of the aforementioned duties that requires the same level of skills.

No specific educational requirement applies to this exemption. The Labor Department says, however, that workers who simply use computers to aid in their work, such as drafters and others in computer-aided design, don’t qualify. This exemption also doesn’t include those who repair computers or assemble them.

Outside sales employee exemption

Outside sales employees also may be exempt if their primary duties are one of the following:

• Making sales or
• Obtaining orders or contracts for services or use of facilities for which a consideration will be paid by the customer and
• Who are customarily and regularly engaged away from the employer’s place or places of business while selling or obtaining orders or contracts for services.

Essentially, an outside sales employee spends most of her time away from the employer’s office facilities “on the road” making sales calls. The person doesn’t lose exempt status by performing a few tasks that aren’t directly related to sales. For example, she may restock display cases, attend sales conferences, write sales reports and revise sales catalogues as work incidental to the main task of getting orders.

The outside sales exemption doesn’t apply to salespersons who work in house or may work from a home office. The regulation specifies that “outside sales does not include sales by mail, telephone or the Internet . . .” unless the person is following up on a personal sales call. The crucial factor distinguishing outside salespeople from others is the emphasis on face-to-face selling.

Under the regulations, a driver who also sells may be an exempt outside sales employee if he:

• Provides the only sales contact between the employer and the customers visited and takes orders, delivers them from the truck then or later and is paid based on the volume of goods sold.
• Obtains or solicits orders along the route or solicits new customers during his stops.

Not everyone who drives a truck full of goods qualifies. For example, drivers who stock vending machines or drivers who get the occasional order or simply deliver and set up displays are not exempt outside salespersons.

No minimum salary requirement applies for outside sales employees. Many are paid straight commission rather than a salary. This includes insurance and real estate salespeople as well as your local milkman (if your area still has one).