To qualify for exemption, employees must meet three tests for each exemption: An exempt employee must earn a minimum amount.  The minimum amount must be paid on a salary basis.  In addition, exempt employees must perform certain executive, administrative or professional job duties set forth in the regulation.

This section of the seminar provides information on the salary level requirement.

The minimum salary level required for exemption is $455 per week,  which must be paid “free and clear” – that is, the $455 can not include the value of any non-cash items that an employer may furnish to an employee, like board, lodging or other facilities (for example, meals furnished to employees of restaurants).  For employers that have adopted pay periods longer than one week, the equivalent of the $455 per week salary level is $910 for biweekly pay periods; $985.83, for semimonthly pay periods; and $1,971.66, for monthly pay periods.

The regulations also recognize that highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more, which must include at least $455 per week paid on a salary or fee basis, are exempt if they customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

Total annual compensation includes commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period, but does not include credit for board, lodging and other facilities, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits.

Special rules allow for prorating the annual compensation if employees work only part of the year, and allow the employer to make one final payment within one month after the end of the year to satisfy the required $100,000 annual amount.  Employees whose compensation does not equal $100,000 by the end of the year can still be tested for exemption on the standard duties tests.

The highly compensated test is not available for non-management production line workers and non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers, laborers and other employees who perform work involving repetitive operations with their hands, physical skill and energy.

The phrase “customarily and regularly” means a frequency that must be greater than occasional but which may be less than constant.  Tasks or work performed “customarily and regularly” include work normally and recurrently performed every workweek; it does not include isolated or one-time tasks.  If a highly compensated “white collar” employee customarily and regularly performs one or more exempt duties, detailed analysis of all the job duties performed is not necessary.  For example, an employee may qualify as a highly compensated executive employee if the employee customarily and regularly directs the work of two or more other employees, even though the employee does not meet all of the other requirements in the standard test for exemption as an executive.

In addition to the minimum salary level, an exempt employee also must be paid on a salary basis.

Generally, “salary basis” means that an exempt employee must regularly receive, each pay period and on a weekly or less frequent basis, a “predetermined amount” of compensation that cannot be reduced because of variations in the quality or quantity of work performed.  But for a few identified exceptions, the exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked.  However, exempt employees need not be paid for any workweek when they perform no work.

An employee is not paid on a salary basis if the employer makes deductions from the predetermined salary, for example, for absences caused by the employer or because of the operating requirements of the business.  If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.

One important point to note is that deductions are allowed for certain types of absences are for “one or more full days.”  This means a deduction may be taken from the salary under this language only in full-day increments.  Deductions for partial-day absences violate the salary basis rule generally, except those occurring in the first or final week of someone’s employment or for unpaid leave taken under the Family and Medical Leave Act.  So, for example, if an employee is absent for one and a half days to handle personal affairs, the employer may only deduct for the one full-day absence.  The employee must receive a full day’s pay for the partial day worked to meet the salary basis rule.  Other examples of improper deductions are listed on this slide, including:  a deduction of a day of pay because the employer was closed due to inclement weather; a deduction of three days of pay because the employee was absent from work for jury duty; and a deduction for a two day absence due to a minor illness when the employer does not provide wage replacement benefits for such absences.

What is the effect on an employee’s exemption status if an employer makes improper deductions from the salary?  If the facts show that the employer had an actual practice of making improper deductions from salary, the exemption will be lost, and overtime pay due for hours worked over 40 per week during the time period in which improper deductions were made, to employees in the same job classifications and who work for the same managers responsible for the actual improper deductions.  Employees in other, different job classifications, or working for other, different managers, would not lose their exempt status.  Isolated or inadvertent improper deductions, however, will not result in the loss of exempt status if the employer reimburses the employee for the improper deduction.

A key term here is actual practice.  Factors considered when determining an actual practice include, but are not limited to: the number of improper deductions; the time period during which the employer made improper deductions; the number and geographic location of both the employees whose salaries were improperly reduced and the managers responsible for making the improper deductions; and whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.

This slide includes an example to illustrate the effect of improper deductions.  In the example, a manager who supervises two engineers and one chemist has docked the pay of an engineer on each of 12 days when the engineer arrived late for work during the last 3 months.  Because this is an actual practice of making pay deductions, the exemption would be lost for the engineer whose pay was actually docked and for the other engineer supervised by that same manager.  However, the exemption is not lost for the chemist supervised by the manager who made the improper pay deductions or for the engineers who are supervised by another manager.  The employer would owe overtime pay for all hours worked over 40 per week during the 3 months that the manager made the improper pay deductions.

The regulations provide a safe harbor for employers who have a clearly communicated policy prohibiting improper deductions.  If an employer (1) has such a clearly communicated policy which prohibits improper deductions and includes a complaint mechanism, (2) reimburses employees for any improper deductions, and (3) makes a good faith commitment to comply in the future, then the employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints.

The best evidence of a clearly communicated policy is a written one distributed to employees before the improper pay deductions occur, for example, by providing a copy of the policy to employees when they are hired, publishing it in an employee handbook or distributing it to employees over the employer’s Intranet.

A number of common payroll and recordkeeping practices are allowed that do not call into question whether someone is paid on a salary basis.  For example: taking deductions from exempt employees’ accrued leave accounts; requiring exempt employees to keep track of and record their hours worked; requiring exempt employees to work a specified schedule; and implement bona fide, across-the-board changes in schedules.

Another common question that arises is whether exempt salaried employees may be paid additional compensation, without affecting their exempt salaried status.  An employer may provide additional compensation besides the minimum guaranteed salary to an exempt employee without losing the exemption or violating the salary basis test, as long as the employment arrangement includes a guarantee that at least the minimum $455 weekly amount will be paid on a salary basis.  For example, an exempt employee guaranteed at least $455 each week on a salary basis may also receive additional compensation for working beyond the normal workweek, which may be paid on any basis such as a flat sum, bonus payment, a straight-time hourly amount, time and one-half, or any other basis, and can include paid time off.  Similarly, the exemption is not lost if an exempt employee who is guaranteed at least $455 each week on a salary basis also receives additional compensation in the form of commissions on sales or a percentage of the profits.

In addition, an employer can calculate an exempt employee’s earnings on an hourly, daily or shift basis, without losing the exemption or violating the salary basis requirement, if the employer guarantees that at least the minimum weekly required amount will be paid on a salary basis regardless of the number of hours, days or shifts worked, and there is a “reasonable relationship” between the guaranteed amount and the amount actually earned.

“Reasonable relationship” means the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.  For example, an exempt employee guaranteed at least $500 per week and who normally works four or five shifts each week, may be paid $150 per shift without violating the salary basis requirement.  The reasonable relationship requirement applies only to situations where the employee’s pay is computed on an hourly, daily or shift basis; it does not apply, for example, to an exempt store manager paid a guaranteed salary of $650 per week who also receives a commission on store sales or profits, which in some weeks may equal or even exceed the guaranteed salary without violating the salary basis requirement.

Administrative and professional employees may also be paid on a fee basis rather than on a salary basis.  An employee is paid on a “fee basis” if the employee is paid an agreed sum for completing a single and unique job, regardless of the time required to complete the work.  Payment on a “fee basis” is not available for a series of non-unique jobs repeated an indefinite number of times for which payment on an identical basis is made over and over again.  Payments based on the number of hours or days worked and not on the accomplishment of a single, unique task are not payments on a fee basis.

To test whether a fee payment meets the minimum level required, consider the time worked to complete the job and determine if the payment is at a rate that would yield at least $455 per week if the employee worked 40 hours.  For example, an artist paid $250 to paint a portrait that took 20 hours to complete meets the minimum salary requirement since the rate would yield $500 if 40 hours were worked.

The salary level and salary basis requirements described in this seminar do not apply to outside sales employees, licensed or certified doctors, lawyers and teachers.  Employees in these occupations are exempt regardless of their salary.  In addition, Section 13(a)(17) of the FLSA exempts hourly paid employees in certain computer-related occupations if they are paid at least $27.63 per hour.

Let’s take a few minutes to review the salary requirements for exemption.  To qualify as exempt, most employees must be paid at least $455 per week on a salary basis.  Generally, an exempt employee paid “on a salary basis” must regularly receive a predetermined amount each pay period, which is not reduced due to variations in the quality or quantity of work performed.  While exempt employees do not have to be paid for any workweek when they perform no work, except for a few identified permissible exceptions, exempt employees must generally receive their full predetermined salary for any week in which they perform any work regardless of the number of days or hours worked.  Certain highly compensated “white collar” employees performing office or non-manual work and paid total annual compensation of $100,000 or more, if it includes at least $455 per week paid on a salary or fee basis, may be exempt if they customarily and regularly perform at least one of the exempt duties or responsibilities in the standard tests for exemption as an executive, administrative, or professional employee.

In addition to the salary requirements, exempt employees must perform executive, administrative or professional duties set forth in the regulations.  The next section discusses the duties requirements for the executive exemption.

In addition to the salary requirements, the administrative exemption applies only if: the employee’s primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. These elements contain a number of important terms that are defined in the regulations.  Let’s look at them.  We have already discussed the definition of “primary duty”.

The phrase “management or general business operations” refers to the type of work the employee performs.  To meet this requirement, the employee must perform work that is directly related to assisting with the running or servicing of the business.  This type of work is different, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.

Work “directly related to management or general business operations” includes, but is not limited to, work in such areas as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; advertising; marketing; research; safety and health; human resources; public relations; legal and regulatory compliance; and similar activities.

An exempt administrative employee’s primary duty must be the performance of work directly related to the management or general business operations of the employer or the employer’s customers.  The regulations explain that the term “employer’s customers” means that employees who are acting as advisors or consultants to their employer’s clients or customers also may be exempt.  This would include, for example, those working as tax experts or financial consultants.

Exercising “discretion and independent judgment” generally involves an employee comparing and evaluating possible courses of conduct, and acting or making a decision after the various possibilities have been considered.  The term “matters of significance” refers to the level of importance or consequence of the work performed.  In determining whether or not an employee exercises discretion and independent judgment, all the facts involved in the particular employment situation must be considered.  The term implies that the employee has authority to make an independent choice, free from immediate direction or supervision.  However, employees can exercise discretion and independent judgment even if their decisions or recommendations are reviewed, and occasionally reversed, at a higher level.

The regulations list a number of factors to consider in determining whether an employee exercises discretion and independent judgment with respect to matters of significance.  These factors (listed on the next three slides) include, but are not limited to, whether the employee: has authority to formulate, affect, interpret, or implement management policies or operating practices; carries out major assignments in conducting the operations of the business; performs work that affects business operations to a substantial degree; has authority to commit the employer in matters that have significant financial impact; has authority to waive or deviate from established policies and procedures, without prior approval; has authority to negotiate and bind the company on significant matters; provides consultation or expert advice to management; is involved in planning long- or short-term business objectives; investigates and resolves matters of significance on behalf of management; and whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances.

The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources.  The exercise of discretion and independent judgment also does not include clerical or secretarial work, recording or tabulating data, or performing other mechanical, repetitive, recurrent or routine work.  For example, an employee who simply tabulates data is not exempt as an administrative employee, even if they are called a “statistician.”

Using a manual, however, does not automatically disqualify an employee from the Section 13(a)(1) exemptions.  Exempt employees may use manuals, guidelines or other established procedures containing or relating to highly technical, scientific, legal, financial or other similarly complex matters that can be understood or interpreted only by those with advanced or specialized knowledge or skills. The Section 13(a)(1) exemptions are not available for employees who simply apply well-established techniques or procedures described in manuals or other sources within closely prescribed limits to determine the correct response to an inquiry or set of circumstances.  These rules of the use of manuals applies to all of the Section 13(a)(1) exemptions.

The regulations contain a number of examples to illustrate when employees meet the duties requirements for the administrative exemption.  For example, although exempt status depends on the actual job duties performed by the employee, insurance claims adjusters generally meet the duties requirements for the administrative exemption if they perform work such as interviewing insureds, witnesses and physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and making recommendations regarding coverage of claims; determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation.

Financial services employees may meet the duties requirements for the administrative exemption if their duties include collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products.  However, a financial services employee whose primary duty is selling financial products does not qualify for the administrative exemption.

Similarly, some human resources employees may be exempt administrators, while others are not.  Human resource managers who formulate, interpret or implement employment policies generally meet the administrative duties requirements, but personnel clerks who “screen” applicants to obtain data regarding minimum qualifications and fitness for employment, but make no hiring decisions, generally are not exempt administrative employees.

Other examples of employees who may meet the duties requirements for the administrative exemption include:  an employee who leads a team of other employees assigned to complete major projects; an executive assistant or administrative assistant to a business owner or senior executive of a large business who has been delegated authority regarding matters of significance; and management consultants who study the operations of a business and propose changes in organization.

In contrast, employees who generally do not qualify as exempt administrative employees include: employees performing ordinary inspection work involving well-established techniques and procedures; examiners and graders who perform work involving comparison of products with established standards; comparison shoppers who merely report the prices at a competitor’s store; and public sector inspectors or investigators.

I want to end this section with a brief review of the duties requirements for the administrative exemption.  The administrative exemption is available only if the employee’s primary duty is performing work directly related to the management or general business operations of the employer or the employer’s customers; and the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

There are two general types of professional exemptions:  one applying to employees who are learned professionals; the other to those employees who are creative professionals.  I am going to discuss learned professionals first.

In addition to the salary requirements which we already discussed, the learned professional exemption applies only if the employee’s primary duty is the performance of work requiring advanced knowledge in a field of science or learning which is customarily acquired by a prolonged course of specialized intellectual instruction.  We have already discussed the meaning of “primary duty.”  The next set of slides explores the definitions of the other key terms in the learned professional duties test.

The regulations explain that work requiring “advanced knowledge” means work that is predominately intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment.  An exempt professional employee generally uses the advanced knowledge to analyze, interpret or make deductions from varying facts or circumstances.  Work involving routine mental, manual, mechanical or physical work is not work requiring advanced knowledge.  Advanced knowledge cannot be attained at the high school level.

Fields of science or learning are occupations with recognized professional status, as distinguished from the mechanical arts or skilled trades.  Fields of science or learning include: law, theology, medicine, pharmacy, accounting, teaching, architecture, engineering and the physical, chemical or biological sciences.

This phrase “prolonged course of specialized intellectual instruction” means that the learned professional exemption is limited to professions where specialized, academic training is a standard prerequisite for entering the profession.  The best evidence that an employee meets this requirement is possession of the appropriate academic degree.

The learned professional exemption is not available for occupations that may be performed with only the general knowledge acquired by an academic degree in any field; knowledge acquired through an apprenticeship; or training in the performance of routine mental, manual, mechanical or physical processes.  The exemption also does not apply to occupations in which most employees acquire skill by experience.

The word “customarily” means that this exemption is also available to employees in such professions who possess substantially the same knowledge level and perform substantially the same work as the degreed employees, but who attain the advanced knowledge through a combination of work experience and intellectual instruction.  Such employees may include the occasional lawyer who has not gone to law school, or the occasional chemist who does not have a degree in chemistry.

The learned professional exemption applies to any employee who holds a valid license or certificate permitting the practice of medicine, including osteopathic physicians, podiatrists, dentists and optometrists.  The exemption is also available to an employee who holds the requisite academic degree for the general practice of medicine and is engaged in an internship or resident program.

Registered nurses who are registered by the appropriate State examining board generally meet the duties requirements for the learned professional exemption.  However, many registered nurses receive overtime pay because they are paid by the hour, not on a salary basis as required for exemption.  Licensed practical nurses generally do not qualify as exempt learned professionals.

Registered or certified medical technologists, dental hygienists and certified physician assistants also generally meet the duties requirements for the learned professional exemption if the successfully complete four years of study in an accredited college or university.

Other exempt learned professionals include: lawyers, teachers, accountants, pharmacists, engineers, actuaries, chefs, athletic trainers and funeral directors or embalmers.

Employees who do not meet the requirements for the learned professional exemption include: accounting clerks and bookkeepers who normally perform a great deal of routine work; cooks who perform predominantly routine mental, manual, mechanical or physical work; paralegals and legal assistants; and engineering technicians.

Let’s now turn to the second type of professional exemption, the creative professional exemption.

In addition to the salary requirements, the creative professional exemption applies only if the employee’s primary duty is the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.  Because we already looked at “primary duty,” the two terms we still need to look at are “recognized field of artistic or creative endeavor” and “invention, imagination, originality or talent.”

The recognized fields of artistic or creative endeavor include music, writing, acting and the graphic arts.  Thus, exempt creative professionals include musicians, composers, conductors, novelists, screen writers, actors, painters and photographers.

The requirement of “invention, imagination, originality or talent” distinguishes the creative professions from work that primarily depends on intelligence, diligence and accuracy.  The creative professional exemption also does not apply if the employee’s work can be produced by a person with general manual ability and training.  Since the duties of employees vary widely, the determination of exempt creative professional status must be made on a case-by-case basis, based on the extent of the invention, imagination, originality or talent exercised by the employee.

Journalists cannot meet the educational requirements for the learned professional exemption.  In addition, journalists, reporters and other employees of newspapers, magazines, television and other media are not exempt creative professionals if they collect, organize and record information that is routine or public or if they do not contribute a unique interpretation or analysis.  Journalists also are not exempt if their work product is subject to substantial control.  However, journalists may be exempt if they perform on-air in radio or television, conduct investigative interviews, analyze or interpret public events, or write editorials, opinion columns or commentary.

I want to end this section with a brief review of the duties requirements for the professional exemption.  The learned professional exemption is available only for employees whose primary duty is the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.  The creative professional exemption is available only for employee’s whose primary duty is the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.