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Non-Exempt vs. Exempt Employees Expected Changes and What That Means To You

As you may know, employees are generally classified into one of two employment classifications;

non-exempt and exempt. The main difference between these two classifications is that non-exempt employees receive over time and exempt employees do not. However, there are rules for which employees can be classified as exempt and the penalties for improperly classifying an employee can be steep.

There are 2 main criteria for classifying an employee as exempt:

  1. Do they pass the “primary duties” test which addresses whether an employee’s duties meet one of the exemption categories?
  2. Are they paid the minimum salary?

The problem now, is that the rules aren’t always so clear. In addition, many people argue that the minimum salary requirements have not kept up with inflation.

 As an example; restaurant managers are often times classified as exempt employees under the “executive” exemption. (Don’t get hung up on the title, it is the duties listed in this category that allows them to qualify). This definition arguably works because restaurant managers are usually paid more than $455 per week (the minimum salary) and have the primary duty of managing the enterprise, a department or a subdivision of the enterprise. However, restaurant managers often spend a great deal of time performing position functions such as cooking or bartending. The question then becomes, “do they spend enough time performing management duties to be classified as exempt”?

Currently, the regulations do not say how much time must be spent on exempt duties for an employee to be classified as exempt. The more time they spend performing these duties, the harder it would be for an employee to claim that they were misclassified and are entitled to overtime pay. The new regulations are expected to more clearly define some of these issues.

With all of the attention given to minimum wage in the past 4 years, it is not surprising that the new regulations will also be addressing the minimum pay requirements. According to a white paper issued by the white house; the minimum salary for exempt employees was set at $255 per week in 1975. In 2004, that threshold was raised to $455 a week which equates to $23,660 per year. Considering that some exempt employees are expected to work 60 hours or more a week, these employees are earning less than $7.58 per hour which is well below minimum wage in many states.

The white paper referenced above states that $455 per week equates to $561 today; which is below today’s poverty line for a worker supporting a family of four, and well below the 1975 levels in inflation adjusted terms. The tone of this paper has experts speculating that the new minimum salary will be set between $40,000 ($769.23/week) and $60,000 ($1,153.85/week). California raised its’ minimum salary threshold for exempt employees to $41,600 beginning in 2016. This may be an indicator to where the federal level will fall.

On May 5, 2015, Labor Secretary Perez announced on the DOL blog that the Department of Labor has sent its proposed rules to the Office of Management and Budget (OMB) and stated that the public will have an opportunity to weigh in and help them craft a final rule.

Be prepared. If you have employees who do not meet the minimum salary requirements and you are not able to give them a raise, you may need to convert them to non-exempt and pay overtime. Please do not underestimate the effect that this may have on your employees. Most employees view being an exempt employee as having higher status and changing your practice may undermine employee morale. Other options may be available based on your specific situation.

SERPEO can help! Call us to help assure you have a plan in place to keep you up to date on the ever-changing employer landscape.


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