March 21, 2014

President Aims to Redefine Exempt Employees and Expand Overtime Pay: Here’s the Problem

is your exempt employee REALLY exempt from overtime?

The employment law landscape suffered a political earthquake this March, when President Obama signed an executive order designed to make it more difficult for employers to classify employees as exempt from overtime pay, and to raise the base salary required for exempt employees. This move dovetails with his recent efforts to raise minimum wage and the highly-publicized statement, “If you have to work more, you should get paid more.” While an extended process is required before these changes could possibly go into effect, let’s talk about how they could cause problems for small businesses without necessarily achieving any intended goals. And first, a refresher on the current model – in which “exempt” status is already difficult for small businesses to justify.

You’re probably aware of the main difference between hourly, exempt salaried and non-exempt salaried pay models: Properly classified exempt salaried employees are not entitled to overtime. The word “exempt” means that these employees are exempt from the Fair Labor Standards Act (FLSA) requirement that they be paid for working more than 40 hours per week. But…even under the current rules, the FLSA does not automatically allow all salaried employees to be classified as both salaried AND exempt. There’s a reason for this, and it has to do with why “exempt” status exists: to acknowledge that more highly paid and autonomous professional, executive, or administrative employees may choose to work longer hours to accomplish goals or advance their careers.

On the flip side of that hard-earned dollar, the purpose of making “exempt employee” status hard to qualify is to protect workers who are not as highly paid or autonomous. For non-exempt workers, the overtime pay requirement is supposed to ensure that hours above and beyond the normal call of duty (40 hours/week) are compensated at a high enough rate to make their extra working time, and that extra time away from their private lives, worthwhile.

If you’ve heard me or any of our CEDR HR advisers discuss the importance of getting exempt/non-exempt classification correct, you know it’s not as easy as waving a wand, pointing it at an employee, and making them exempt. After all, what about those workers who make in-between wages and have some autonomy and some high-level responsibilities?

Employees must actually qualify for exempt status, meaning that employers must first consider whether they meet a set of FLSA requirements for exemption. This list of requirements includes two tests, each containing about 25 questions/indicators. Why are there two tests? Because the Department of Labor and the IRS each have their own, of course – and while the two tests do resemble each other, they are not exactly the same. I know, it’s nuts. If you feel like getting your HR nerd on, here’s the DOL test.

Official exemption criteria aside, let’s look at how this often works in the real world, because it’s already somewhat odd. Here’s a brief example in a typical medical office, under current rules:

Let’s say you have an office manager who meets most of the test factors, but who works in a practice with only 3 employees. She will not be able to pass one of the key requirements of the test, because she does not manage 2 or more employees (or engage in other business operations activities that are NOT production-related work) for more than 50% of her time, i.e., as a “primary” job duty. Therefore, we would advise that she be paid hourly, or on a salary plus overtime basis.

But let’s reconsider what happens if that SAME office manager, with the SAME duties, works in a practice with 10 employees, with 3 of them in the front office under her command. Now she does manage 2 or more employees as a primary function of her job (more than 50% of her time), so she is eligible for the exempt classification, and she can be paid a fixed salary with no overtime.

As you can see, small businesses already face a hardship of sorts under the current model, because the fact that management is a primary job duty of the latter employee and not of the former is dependent only on the size of the practice. All other job functions may be identical, yet only the smaller practice has to pay its OM overtime. Hmm – that’s an unfairness visited upon the smaller practice, not the employee. I wonder if there are any more of those? Stay tuned for more sarcasm in Part 2 of this story.

How does this relate to the recent headline news? Because if the rules are rewritten, “exempt” status could become even harder to qualify, making life even more difficult for small businesses. To find out what this means to you as a small business employer, click HERE for Part 2 of our coverage.

Friendly Disclaimer: This information is general in nature, and is not intended to replace good counsel about a specific issue with either your attorney or your favorite HR expert

Friendly Disclaimer: This information is general in nature and is not intended to provide legal advice or replace individual guidance about a specific issue with an attorney or HR expert. The information on this page is general human resources guidance that is believed to be current as of the date of publication. Note that CEDR is not a law firm, and as the law is always changing, you should consult with a qualified attorney or HR expert who is familiar with all of the facts of your situation before making a decision about any human resources or employment law matter.

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Please note: CEDR Solutions specializes in providing expert HR support to owners and operators of independently owned medical and dental practices.