United States: FLSA Experts, Please Help. Can A Small Biz Have All Exempt Employees?

Perusing LinkedIn, as I often do over morning coffee, I saw this plea on one of the human resources groups I follow. Not having the time to read it carefully, I put it aside in my "fodder for future blog posts" folder. Like most of the people who responded quickly with advice for the human resource professional who sought help from her colleagues, my first thought was "big red flag." How can a company operate with all leaders and no workers, with all executives and no support staff? The reality is that very few businesses of any size can realistically classify all of its workers as exempt.

A couple of years ago when the US Department of Labor announced its proposed revisions to the Fair Labor Standards Act (FLSA) salary test, companies dutifully reviewed their salaried exempt positions to determine whether reclassification was needed. What we learned in assisting clients with these reviews was that the most significant issues were not with what the so-called exempt employees were being paid; most were making in excess of $455 per week (although not necessarily as much as the $913 proposed by the DOL). The real problem was that many employees were likely misclassified because they did not meet the duties tests which were not going to be addressed by the proposed regulations.

As the HR professional learned, very few businesses can realistically operate with all exempt employees. Perhaps one executive could manage a business of only exempt outside sales employees. Maybe an accounting or law firm could employ only CPAs or lawyers with an answering machine taking all phone calls and the professionals doing their own administrative work, filing, billing and collections (not a place I would want to work). All of this prompted a look back at the most frequent classification mistakes we find in helping clients with classification issues.

Inside Sales Employees

Outside sales employees are exempt from the minimum wage and overtime requirements of the FLSA. Inside salespeople are not. Period. Regardless of the amount of money an inside sales employee makes on a weekly or monthly basis, these individuals are not exempt. Outside sales employees spend the majority of their time on the road traveling to customer locations to make sales. Employees who spend the majority of their time in the office (whether it is the company's headquarters or a remote employee's home) taking orders by phone or computer or cold calling are non-exempt inside sales employees even if they sometimes travel to customer locations or trade shows. There are exemptions for certain retail sales employees or employees of car dealerships, but for the most part, if these employees are being paid by salary, commissions or a combination of the two, their weekly pay must be at least minimum wage and they must be paid overtime at their "regular" rate of pay which is calculated via a formula which takes into account all forms of remuneration they receive. For a well-paid salesperson, this could be a big hourly number.

Non-Executive Executives

For an employee to be exempt as an executive a four prong test must be met, three prongs of which relate to the employee's duties. 1) The employee's primary duty must be managing a business or a recognized subdivision or department of a business; 2) he or she must customarily and regularly direct the work of two or more full time employees; and 3) the employee must have authority to hire, fire, and control essential aspects of the career of the employees being managed. Often businesses make the mistake of focusing on the fact that an individual manages two or more employees than on the other equally important prongs. Management of an enterprise or department must be the individual's primary duty. This takes line managers, forepersons, or working supervisors out of the equation.

Administrators Who Aren't Exempt Administrators

The administrative exemption is one of the most difficult to evaluate because it is the most subjective. Once the salary threshold is met, two additional prongs must be met. The employee's primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or its customers and must include the exercise of discretion and independent judgment over matters of significance. Employees who meet the administrative exemption are generally at the level of CFO, COO, Director of Human Resources, Director of Information Technology but not at the level of accounts payable, staff accountant, or human resources generalist. The independent discretion must involve significant decisions including managing the budget of a department, establishing policies, making capital purchases (as contrasted with ordering office supplies). The work is not typically routine in nature or subject to oversight by anyone other than a high level executive. Again, this type of work must be the primary responsibility of the individual such that the routine work is being done by others.

Why is it that companies have such difficulty with the classifications for exemptions? First, the various duties tests have not kept pace with the current world economy which operates on a 24/7 basis with remote employees juggling many tasks and responsibilities, responsibilities which change on a daily basis. Technology has made it possible for executives who used to rely on a team of administrative, albeit not administratively exempt, employees to make appointments, type letters, and answer phones to do much of that themselves. The former secretary is now an administrative assistant whose time has freed up to take on more responsibility for higher level tasks, but that still doesn't make him exempt.

At some point, the DOL will need to confront this issue and modernize its duties tests. In the meantime, however, entrepreneurial businesses being run by millennials still need to follow the same archaic rules which governed "our fathers' workforces". Although it may not make a lot of sense, it is critical for these businesses to toe the line and follow the tests because the financial risks of non-compliance are great.

It will be the extremely rare business which will have all exempt employees. So, yes, it is possible for a small business to have all exempt employees, but I haven't come across one yet.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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