Did we make a bad call in switching these exempt workers to nonexempt status?

Expert attorney Nancy Delogu tackles a question we hear quite often – is exempt to nonexempt a good idea?

Q: “We have a new HR Director. He moved four of our 10 management team members from exempt to nonexempt status. Two of those staff have the exact same title and job responsibilities a one member who he left exempt. He said that the one he left exempt worked on-site with the five people she supervises, while the other two only had two or three people they supervised and most of those supervised were at different locations than where the supervisors are placed. All four reclassified team members are responsible for coordination and oversight of component areas with expertise in those areas. When there are questions, they are the experts. This new situation has negatively impacted the team, and those staff now have to work diligently to not go over 40 hours. Can you clarify why they should not be exempt?” – Kimber, Kansas

A: The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, there is a provision of the FLSA that provides an exemption from both minimum wage and overtime pay for employees employed as “bona fide” executive, administrative, professional and outside sales employees. Employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $684 a week to qualify as exempt. Job titles do not determine exempt status. (Kansas has its own overtime laws, but these apply generally to very small employers who are exempt from the FLSA. Based on the numbers of workers you describe, it does not seem likely the Kansas law applies to your business.)

The situation you describe suggests that your employer previously classified these workers as exempt “executive” employees, because one of the requirements for classifying a worker as exempt pursuant to this section looks at the amount of time the individual spends managing others’ work. Specifically, the U.S. Department of Labor will not consider an individual eligible for exemption under the FLSA unless all of the following tests are met:

  • The employee must be compensated on a salary basis (this means more than that the individual is simply promised a salary) at a rate not less than $684* per week;
  • The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
  • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
  • The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

“Primary duty,” from the federal agency’s perspective, means the “principal, main, major or most important duty that the employee performs.” Determining the scope of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole. Of course, I do not have enough information to say why the HR Director has deemed some colleagues nonexempt, but it seems likely that their primary duties may be more aligned with the provision of specialized expertise – valuable, but not relevant in determining if someone is an exempt executive – rather than directing and managing other workers. “Managing” means, among other things, interviewing, selecting, and training employees; setting and adjusting their rates of pay and hours of work; directing their work; appraising employees’ productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures. Particularly because the two workers managed you describe are remote, it may be there are concerns that these individuals are mostly self-directed.

Payroll Handbook D

In any event, there is no need to limit the number of hours worked now that certain colleagues are nonexempt; rather, the business may wish to reconsider compensation arrangements (i.e., base hourly rate) and agree to pay overtime wages when overtime hours are performed. Although this is difficult to budget for mid-year, that may provide a more satisfactory allocation of job duties going forward.