What is an 'exempt' employee?

An employee with a contractor raised the following topic: Some of the employees in our company are paid on an hourly basis. They receive overtime pay for working more than 40 hours per week. However, many of the employees are paid on a salary basis and do not receive overtime pay. The company says that these employees are "exempt" from the wage laws. What exactly does this mean?

The Fair Labor Standards Act, enacted during the Great Depression, is the primary federal wage protection law. It establishes the minimum hourly wage and requires employers to pay workers time-and-a-half for all hours worked in excess of 40 hours per week. The act also includes "equal pay" and other requirements. However, it is subject to several exceptions.

The most important exception exempts "any employee employed in a bona fide executive, administrative or professional capacity...or in the capacity of outside salesman." [See 29 U.S.C. : 213(a)(1).] Although Congress did not define those terms, it directed the secretary of the Labor Department to do so in regulations.

Under the regulations, an employee is employed in a bona fide executive capacity if the employee:

* Manages the enterprise in which he is employed or a recognized subdivision.

* Regularly directs the work of at least two other employees.

* Has the authority to hire or fire other employees or has influence over such decisions.

* Regularly exercises discretionary powers.

* Devotes no more than 20 percent of his time (or 40 percent if a retail or service employee) to other activities.

* Is paid on a salary basis at a rate of not less than $155 per week. Alternatively, under the so-called short test, an employee is considered an executive if he meets the first two criteria of the longer test and is paid a salary basis of at least $250 per week. (See 29 C.F.R. : 541.1.)

An employee is employed in a bona fide administrative capacity if he:

* Performs "office or non-manual work directly relating to management policies or general business operations."

* Regularly exercises discretion and independent judgment.

* Regularly and directly assists a proprietor or an employee employed in a bona fide executive or administrative capacity, or works only under general supervisionalong specialized or technical lines.

* Devotes no more than 20 percent (or 40 percent if a retail or service employee) to other activities.

* Is compensated on a salary basis at a rate of not less than $155 per week.

Alternatively, under the short test, an employee is considered an administrative employee if he meets the first criterion and is paid a salary of at least $250 per week. (See 29 C.F.R. : 541.2.)

Although job titles do not determine how the employee is categorized, the types of employees who are likely to fall within this exemption include executive and confidential assistants to officers of a corporation, insurance experts, wage-rate analysts, investment consultants, credit managers, purchasing agents, personnel directors and account executives. (See 29 C.F.R. : 541.201.)

An employee is employed in a bona fide professional capacity if the employee:

* Uses "knowledge of an advanced type in a field of science or learning;" performs "original and creative" artistic work; teaches in an educational establishment or is a computer systems analyst, computer programmer, software engineer or similar employee.

* Exercises discretion and judgment.

* Devotes no more than 20 percent of his time to other activities.

* Is compensated on a salary basis at a rate of not less than $170 per week.

Using the short test, an employee is considered a professional employee if he meets the first criterion and is paid a salary of at least $250 per week. [In the case of a computer specialist, the salary component of the tests is met if the employee is compensated on an hourly basis at a rate in excess of 6.5 times the minimum wage (See 29 C.F.R. : 541.3).]

An employee is considered an outside salesman if the employee:

* Is employed for the purpose of, and is regularly engaged away from the employer's place or places of business, making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer.

* Devotes no more than 20 percent of his time to other purposes.

For executive, administrative and professional employees to be exempt from the overtime and minimum wage provisions of the act, they must be compensated on a "salary basis." This standard is defined at 29 C.F.R. : 541.118 and generally requires the employer to pay the employee on a regular basis without withholding amounts due to variations in the quality or quantity of the work performed by the employee. [See 29 C.F.R. : 541.118(a).]

Moreover, if the employee is willing and able to work, the employer may not withhold the employee's salary because work is not available. Deductions may be made if an employee misses a day or more of work for personal reasons, as well as for absences due to sickness and disability, if pursuant to a bona fide compensation plan. [See 29 C.F.R. : 541.118(a)(2), (a)(3).] Deductions for personal and sickness absences of less than one day are not generally permitted.

Because qualified executive, administrative and professional employees are exempted only from the overtime and minimum wage provisions of the act, employers still must comply with other parts of the act, including the equal-pay provisions. [See 9 C.F.R. : 541.5(b).] Thus, where an exempt administrative employee and another employee perform "substantially equal work" they must be compensated at a comparable wage rate.

-- Peckinpaugh is a member of the government contracts section of the law firm Winston & Strawn, Washington, D.C.