Can a Business Operate Legally with Only Exempt Employees? The Employee Classification Corn Maze (NH Society of CPAs)

December 27, 2018

Published in the NH Society of CPAs Newsletter (12/20/2018)

Routinely on LinkedIn and various human resource association list serves, questions pop up which pique the interest of employment law practitioners.  In other words, an attorney might look at a question and say, “Wait, what?  Did she really ask that?”  It then sends one down the road of following a conversation which unfolds like a trip through a haunted corn maze on Halloween Eve.  When I saw a question on Linked In from a human resource professional asking whether a small business could have only exempt employees, my first thought was “big red flag.”  How can a company operate with all leaders and no workers, with all executives and no support staff?  The reality is that very few businesses of any size can realistically classify all workers as exempt. Perhaps one executive could manage a cadre of outside sales employees.  Maybe an accounting or law firm could employ only CPA’s or lawyers with an answering machine taking all calls and the professionals doing their own administrative work, filing, billing and collections. 

When the US Department of Labor announced its proposed revisions to the Fair Labor Standards Act (FLSA) salary test a couple of years ago, companies dutifully reviewed their salary structures to see whether changes were needed. These reviews opened the eyes of many to the fact that the biggest problem was not the salaries exempt employees were being paid; most were making well in excess of $455 per week (although not necessarily as much as the $913 proposed by the DOL).  The real issue was that many employees were misclassified because they did not meet the duties tests which were not modified by the proposed regulations.

First, it bears reviewing the basics.  Exempt means that one is exempt from the minimum wage and overtime requirements of the FLSA.  Exempt employees almost always must be paid a salary.  A non-exempt employee may be paid on an hourly, flat rate, piecework, or salary basis.  However, that individual must be paid the equivalent of minimum wage for every hour worked and time a half for every hour over forty (40) in every work week.

The following are some of the most common areas we see mistakes.

Inside Sales Employees

Outside sales employees are exempt.  Inside salespeople are not, regardless of how much they earn.  Outside sales employees spend the majority of their time travelling to customers to make sales.  Employees who are usually in the office (company headquarters or an employee’s home office) taking orders or cold calling are inside sales employees even if they sometimes travel to customer locations or trade shows.  Whether paid by salary, commission or a combination, they must earn at least minimum wage and be paid overtime at their “regular” rate of pay which is calculated via a formula taking into account all forms of remuneration.  For a well-paid salesperson, this could be a big hourly number. 

Non-Executive Executives

An executive must meet a four prong test, the first is being paid by a minimum salary of $455 per week. The others relate to the duties:  1) The primary duty must be managing a business or a subdivision or department of a business; 2) one must customarily and regularly direct the work of two or more full time employees; and 3) the employee must have authority to hire, fire, and control essential aspects of the career of the employees being managed.  Businesses do make the mistake of focusing on the number of workers  an individual manages to the exclusion of the other equally important prongs.  Management of an enterprise or department must be the individual’s primary duty.  This takes line managers, forepersons, or working supervisors out of the equation.

Administrators Who Aren’t Exempt Administrators

The administrative exemption is one of the most subjective. The primary duty must be the performance of office or non-manual work directly related to the management or  business operations of the employer or its customers and must include the exercise of discretion and independent judgment over matters of significance.  Roles like CFO, COO, HR Director, and IT Director are usually exempt. Staff accountants, human resources generalists, and general office staff are not.  The independent discretion must involve significant responsibility like managing a budget, creating policy, or making capital purchases (not ordering office supplies).  The work is not routine or managed by anyone other than a high level executive. 

Why do companies have difficulty with these classifications? First, the duties tests, like the salary test, have not been modified since 2004.  Jobs and business operations in the current global economy do not fall neatly into these strict tests.  Technology, flexibility, remote work, and employees with multiple roles have changed the workplace.  The former secretary is now an administrative assistant whose time has freed up to take on more responsibility for higher level tasks, but that still does not make him exempt.

The DOL will eventually have to modernize the tests.  In the meantime, entrepreneurial businesses need to follow the same archaic rules which governed “our fathers’ workforces”.  Although it may be frustrating, it is critical for  businesses to toe the line and follow the tests because the financial risks of non-compliance are great.  No employer wants to receive a bill for unpaid overtime from the DOL, especially with added penalties and liquidated damages.  A relationship with a good employment attorney is essentially to finding the way out of the maze.