Exempt vs. Non-Exempt Status

I am always amazed by the number of managers who continually make the mistake of assigning exempt status to anyone in the company who has management-related duties... or my favorite, equating “salary” with “exempt”!

Just because the employee is paid by salary or is called a "manager" does not make the employee exempt! It seems that the mistake made most often is calling an employee a manager in order to avoid paying overtime. In order to ensure you properly classify an employee as a manager, you need to evaluate whether the employee’s management-related duties actually fit into one of the exempt classification tests under the federal Fair Labor Standards Act (FLSA). Incorrectly classified managers could lead to class action lawsuits to back overtime pay.
For example if your managers spend almost no time performing managerial tasks; instead, perform customer service, cleaning, and sales duties you may have a real problem meeting the exemption classification. If your “managers” lack real authority over their departments and employees, and are required to confer with their district managers before making management decisions then they may not be exempt. The main question is, what is the employee’s main duty?

Time alone is not the only test for determining an employee's "primary duty," especially when, as in this case, the performance of managerial and non-managerial duties overlap. Courts have determined that when managerial duties are more critical to the success of the business than non-managerial duties they are most likely exempt.
So what are the tests? Managers do not need to be an ultimate decision-maker in order to be considered exempt employees. Additionally, a managers' exempt status is not jeopardized just because there is someone else higher up on the corporate ladder that has the final say in hiring, firing, and other employment decisions.

The Department of Labor (DOL) has stated that a manager meets the executive exemption test "even if a higher-level manager's recommendation has more importance and even if the employee does not have authority to make the ultimate decision as to the employee's change in status." The DOL looks at whether it is part of the manager's job duties to make such recommendations, and the frequency with which such recommendations are made, requested, and relied upon. Alternatively, to meet the administrative exemption test, a manager must exercise discretion and independent judgment. The fact that a higher-up may review and revise or reverse a manager's decisions does not mean that the manager is not exercising discretion and independent judgment.

When making a determination the DOL will evaluate the manager’s duties to evaluate if the manager:
· 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; or
· has authority to waive or deviate from established policies and procedures without prior approval.

Be sure to seek assistance from qualified advisors in order to evaluate all employees that are classified as exempt, to guard against paying back overtime wages which can run into the millions of dollars. In this case, a penny spent can save your entire business from financial disaster.