Episode 172: Properly Classifying Employees as Exempt, Nonexempt

Welcome to the Workplace, a podcast by Cal Chamber. I'm Matthew Roberts, the Labor Law Helpline Manager and Employment Law Council with the California Chamber of Commerce. Hello listeners. Daylight Savings time has come and gone and that means the unofficial start of spring in my book. Now that we've all had some time to adjust to new policies and compliance related to the new laws that we got in January, it's time for us to shift gears to audit our existing practices and a spring cleaning of sorts. One compliance area that many employers continue to struggle with, that we see at both our trainings and on the helpline, is our employers properly classifying their employees as either an exempt or non exempt employee for wage and hour purposes. So much so is this an issue that it's actually making national news and continues to be a top issue that employees will sue their employers over. So to help provide some practical tips and discuss what issues she is being seeing out there in the real world, we welcome back Ellen Savage, one of Cal Chamber's excellent employment law experts on the Labor Law Helpline. Thanks for joining me today, Ellen.

Always glad to be here with you, Matt.

Awesome. So I think the best place to start with this concept really is to talk generally about what we mean when we say an exempt employee and when we say exempt employee. How does an employer get to that stage where they can call the employee exempt?

Well, Matt, let me say up front that the topic of exempt versus non exempt status could easily be a full day seminar. So I'm just going to touch on a couple of the highlights here with you. First, it really helps to understand what the term exempt literally means, which means that we as employers are exempted from having to follow lots of the wage and hour laws we normally have to pay attention to, like overtime pay, like keeping time cards and a big EU here in California, of course, those pesky penalties for failing to take meal and rest breaks. So conversely, a non exempt employee, that's someone who's not exempted from those laws. Now we can't just stick an exempt label on all our employees because we just don't want to deal with all those pesky laws. And we'll talk a little bit more about that in a minute. But we have to make sure the employee fits into one of the exemptions allowed under the law. So 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. There are some other exemptions for outside sales, a few other categories. We just don't have time to dive into those too deep today. So then how do we figure out if an employee is actually exempt? So the best rule of thumb is to start with the assumption that all positions are non exempt and then we try to establish that a position meets the tests for one of the exemptions under the law. Unfortunately, we can't just say, hey, we'll pay you a salary so you're now exempt. Of course, if it were that easy, we wouldn't need a full day seminar on it, now would we?

MATT that's right, Ellen and that's really where some of the news was being made are employers who are doing almost exactly that, they're sticking a label on the employee as a manager, they're paying them a quote unquote salary. That's all I have to do. And unfortunately, as we'll go through this today, Ellen, that really isn't all we have to do. But I really like that you highlighted that there are, you know, two different sets of regulations here. We have federal and then of course here in California we like to do our own things, so we have our own rules here. But a lot of our employers are multi state so we'll see some issues where the federal will apply to your employees in those states and California will apply to our employees in our state. So let's start federal then. Ellen what does the federal baseline white collar exemption test require?

So we always look at exemptions in terms of a two part test. First the duties test, then the salary test. So if we start with the job duty test, under federal law, we look at what the employee's primary duties are and no, I'm putting air quotes around primary duties here, Matt for example, the managerial exemption, the employee's primary duty has to be, quote, managing the enterprise or managing a department or a subdivision of the enterprise. In addition to that though, they have to and here come the air quotes again, Matt. Customarily and regularly direct the work of two or more full time employees and have the authority to hire or fire. Also maybe at the very least, if they don't have the authority to hire or fire, their suggestions about hiring or firing have to really carry weight with the organization.

Right? That's the test. If you want to use the managerial exemption, which is what a lot of these employers were trying to use. There are also, as you said, the administrat exemption and the professional exemption. And each of those have their own separate job duty test related to that specific exemption. And what's really neat, at least for this to get employers started, is that the US Department of Labor puts out really helpful fact sheets on these federal exemptions that you can actually then review and get started with this process. Right, Ellen?

Absolutely. Those worksheets are very helpful to figure out the federal exemptions. They don't cover the California exemption, so that's important. But for our purposes in this short podcast, let's just say that being an administrative assistant is generally not going to meet the administrative exemption. Having a job where you look and act professionally isn't necessarily going to cut it in terms in and of itself. For the professional exemption. All of the exemptions have some seriously, what do I say, meaty job duties tests, and even some of them have educational requirements involved. But in addition to those duties tests, we also have to look, Matt, at the salary test for the federal exemption, which is that the employee has to receive a set salary of at least $684 a week, which translates to $35,568 annually.

Yeah, Ellen, and what strikes me about the federal test, as we've talked about it, is just how low that salary threshold is. If could you imagine trying to pay a salaried employee here in California 35,000 a year, probably going to have some difficulty filling that position. But you know, this was the federal test, right? This is for those of us who aren't subject to state laws that have their own test like we do here in California. And that low salary threshold is just one area that federal law and California law differ here, right?

Yeah, the salary test is important. But before we get to the salary difference, it's really important to know that California also uses that same two part salary and duties test. But the rules for our California employees are much stricter and on. I'm guessing no one listening to this podcast is at all shocked by the fact that California is more stringent than the feds. So for the job duty test, for example, if we take the managerial exemption in California, you gotta meet all the same duties we just talked about in terms of managing people and having that authority for hiring and firing. But here in California, we have to make sure that the employee spends at least 51% or more of each work week actually doing those specific exempt duties. And where we're going to trip up with this here in California is with what we call the working manager. For example, in a fast food restaurant, you've got like an assistant manager who maybe manages five people during the shift, but they spend too much time flipping burgers, running the cash register, emptying trash, whatever needs to get done. And so they don't meet that 51% threshold of doing true managerial work. There was a big case, it was an assistant store manager about 10 years ago, big Safeway grocery store. And the manager spent too much time when things were busy jumping in, bagging groceries, doing a cleanup on aisle nine or whatever. And the court of appeals said, no, she didn't hit that 51% mark, so she should have been non exempt. And that can be a really expensive mistake.

Yeah. And as you can imagine, it really can, because that's what these exemptions do is they keep you from paying overtime to those managers, they keep you from providing compliant rest and meal breaks. And if it comes back on the back end, like we saw in the grocery store cases, where you have misclassified them, now you're on the hook for all of those. And much as the U.S. department of labor has put out these fact sheets on the federal exemption, California employers have kind of a similar resource in what's known as your wage orders for your industry that provide you with the specific job duties, or at least the nature of the job duties that this exempt employee needs to do 51% of the time in order to at least meet that first part of the test. Of course, the job duty test is just one aspect. Let's go back to the salary test again.

Okay, so salary test here in California, again, no one's going to be shocked that the salary test is far higher here in California than it is for that federal exemption, that 35,000 or so in California. 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. So annually, what we do is we take two times the current minimum wage of $15.50, we get to 31, we multiply that times 20, 80 hours, the number of hours in a typical full time year that currently works out to 64,480 annually. That's a salary that has to be paid no matter what to maintain the exemption in California, you can't use a lower salary and then make it up with commissions or bonuses or other forms of pay, for example, which actually can be allowed under the federal tests, but not here in California. And of course, always remember, with the state minimum wage pegged to inflation scheduled to go up every year, that salary minimum is going to go up along, you know, each year along with it.

So this was an excellent roadmap. Right. So this first highlights, you know, we don't just put an exempt label on somebody, pay them some kind of salary, and think that we're okay, but the roadmap's not really enough. Ellen. Right. And one of the benefits of having you on the show is that you're hearing in real time from employers about tricky issues that they're having to navigate within this area of loss. So let's have some fun and let's run through some common questions we are hearing. And I'll start with this one. Our employer works in a jurisdiction in California that has one of those pesky local minimum wage ordinances. And of course, those ordinances are always higher than the statewide minimum wage. Do we have to change our exempt employee salaries to account for the local minimum wage?

So the good news is, Matt, this is a pretty straightforward answer for your exempts. You don't have to worry about those local higher minimum wages. In California, the salary test for your exempts is two times the state minimum wage. We actually have that laid out in black and white in California labor code section 515A.

Excellent. All right, let's move on to a question, or I guess a series of questions that reads more like a law school fact pattern than anything else. But it is common what we get here. So we have an exempt employee, they're having performance issues and they're not working what we would consider full time hours. Right. Ellen. They're taking long lunches, they're showing up up late, they're leaving early. First, can we deduct their pay for them not always being here in say, our scheduled hours or in our quote unquote full time hours.

So 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. There are some limited exceptions where we can deduct from their pay if they say, choose to take a full day off to go to Disneyland or they don't do any work at all in a full seven day work week, they're on vacation or something like that. That's pretty rare. There are some sort of complicated rules that allow us to pull from vacation or sick or PTO banks in partial day increments. But I would say that's probably a subject for another podcast, Matt.

Right. I think really that's the thrust of this exemption is you're paying them a set salary to do a job and that's where we're leaving of deducting their pay. So let's do what lawyers like to do and play devil's advocate and change some facts a little bit here. What if we don't deduct from their pay. But we do want to ensure that they're coming here for our, quote unquote, full time hours. Can we have the exempt employees clock in and out to document the hours that they're here at the workplace?

So I actually do get asked a lot about whether it's okay to have exempt employees clock in and out. And you know, there actually isn't anything in the law that says it's not allowed. But what we have to be careful of is that we're not using those clock ins and clock outs to calculate the exempt employee's pay. But maybe there are other reasons we want them to clock in and out. Maybe for safety reasons. You need to know who's in the building. Maybe an exempt employee is tracking their time for purposes of a federal contract where you have to report hours. Or maybe like lawyers, they have to track their time to bill clients. If that's the case, it's generally going to be okay.

Okay, so then lastly, we just don't want to deal with the exemption for this employee. They're creating too many problems and we'd like to convert them back to a non exempt employee. Can we do that?

Yeah, we actually can. We can say, hey, we're going to reclassify you as non exempt. We're going to pay by the hour. If you do that, be careful because you're talking about an employee who's not used to tracking their time. They're not used to paying attention to off the clock work, so they're taking work home. Maybe they're not used to getting out the door on time for a meal break. So there's a lot of areas where we can end up backing into trouble without really thinking about it. Also, you might have other employees who do similar work and suddenly they're still classified as exempt and they're going to be saying, hey, wait a minute, how come I'm not getting overtime and meal breaks and rest breaks? So it's definitely something to think carefully about.

Okay, so let's turn the tables then. Let's say the employee wants to go part time, but they are an exempt employee. You see this oftentimes with longer tenured employees who maybe want to transition into more of a part time role as they kind of start what you would consider, you know, early retirement. But they're still primarily engaged in exempt duties. Right? The job duties test is not a problem. What we want to do is we want to prorate their salary to reflect the fact that they're really only going to spend 20 hours a week with us as opposed to 40. Can we do that?

Well, you know, you can't drop below that minimum salary floor, at least not to have them remain exempt. That minimum salary test that we talked about is a hard floor. It's 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.

All right. And lastly, we often get questions about specific positions or job titles and whether that, you know, specific position or job title is exempt. How do we often handle this on the helpline, Ellen?

So really what it comes down to is a person's title or the name of their position is truly absolutely irrelevant to whether they're an exempt employee. So this is an example I often use. I'm going to hire someone as a janitor at my factory. They're going to be sweeping floors, emptying the trash. I can give them the title manager of sanitation. I can even call them king of sanitation. It's not going to make them exempt. So that kind of circles us back to what we started with here, how this is in the national news right now. All of these assistant managers, like in retail and restaurants, they're given the title of assistant manager. They're working 50, 60 hours a week. They're not getting overtime paying. They're not really doing a lot of exempt work. But because of their titles, these companies are classifying them as exempt. And unfortunately, now they're getting sued and losing.

And I think that last point really highlights, you know, this is a job by job, position by position, employee by employee evaluation. When you're going to do these exemptions, you're going to want to make sure that each individual employee is doing exactly what you said, which is more exempt work than they're not. So, Ellen, thank you so much for joining us today to help clean up our understanding of exempt employees.

Oh, thanks for having me, Matt. Always enjoy it.

And thank you listeners for joining this discussion on the workplace. Please comment, share and subscribe to Cal Chambers podcast by visiting calchamber.com SAM.