Classification of Employees as Exempt/Non-Exempt

In order to promote employment growth and encourage flexible workplace policies, Congress and the administration should work closely with all stakeholders to comprehensively reexamine the Fair Labor Standards Act, or FLSA, to bring it in line with 21st Century workplace realities.

The dual purpose of the FLSA is to provide a minimum wage and ensure that workers who are not otherwise exempt are paid time-and-a-half overtime for hours worked in excess of forty in a given workweek. Most employees who are exempt are "white collar" employees who must be paid a salary. The “white collar” regulations have created numerous difficulties for employers in determining which employees are subject to overtime requirements and which are exempt. The rules governing the exemptions are riddled with ambiguities and imprecisions that employers, the courts and even the Department of Labor struggle with in applying them to a real workplace.

For example, the FLSA regulations state that to be an exempt professional (such as an accountant or an engineer), an employee must perform work involving the “consistent exercise of discretion and judgment.” Often, as new graduates start their first jobs, they exercise very little discretion or judgment. Instead, they follow the highly complicated rules and principles of the profession and/or directions from those to whom they report, until they acquire sufficient experience on the job. The quandary faced by the employer is determining at what point new engineers and accountants who, by every other standard—including lucrative starting salaries—would clearly be considered a professional, cross the threshold into the blurry FLSA definition of a professional. Even the Department of Labor, which enforces the FLSA, has trouble distinguishing between who should be exempt and who should be nonexempt, as demonstrated by a recent action brought against the Department involving the exempt status of more than 1,900 employees.

Meanwhile, the private bar has taken advantage of the law’s lack of clarity by pursuing highly lucrative class actions against employers who struggle to ascertain what is required. Thus, the number of FLSA lawsuits has quadrupled from about 1,500 per year in the early 1990s to over 6,000 in 2009, and this does not count the number of cases brought under state laws which often vary from the federal law. Faced with the uncertainties of the law, companies often settle these cases, with a median settlement cost of $7.4 million for federal cases and $10 million for state cases.

Just because they do not receive overtime does not mean that exempt employees earn less than they would if they were non-exempt employees. The overtime provisions of the FLSA only determine how employees are paid, not how much. The amount an employee is paid is determined by a variety of factors, including market rates, education, experience, performance and so forth. Employers will generally establish compensation for an employee based on these factors. If an employee is exempt, the employer will provide a salary that reflects these factors. That salary will also likely be shaped by the number of hours contemplated in the job. If the job involves significant amounts of time beyond a normal forty hour workweek, which many white collar jobs do, the salary will reflect that as part of the objective of attracting and retaining the talent needed to meet the company’s needs.

For this reason, when employees are forced to be reclassified from exempt to non-exempt status, there is often bitter resentment. They realize it will mean little, if any, extra pay (possibly even less) while knowing they will have less flexibility in their scheduling and ability to take advantage of the virtual workplace. In addition, in many workplaces, being exempt is viewed, rightly or wrongly, as a status symbol which many employees aspire to achieve. Yet, employee resentment against being reclassified is a bitter pill the employer and its employees have to swallow—employee preference has no bearing on his or her exempt status.

Because of the increasing disconnect between the law and the modern workplace, it is imperative that stakeholders work with policymakers to reach agreement on which employees continue to need the law’s overtime protections and establish clear lines distinguishing between exempt and non-exempt employees. It starts with a dialogue, which we are ready to commence with other stakeholders.