When Is An Employee Exempt From The Overtime Provisions Of Federal Wage & Hour Law?

Employers and employees have many misperceptions regarding who may be covered by the overtime pay requirements of federal wage & hour law¹. For example, an oft-cited misperception is that office workers are not covered (i.e. exempt from eligibility for overtime compensation), but that manual laborers are covered. In fact, sometimes office workers are exempt and sometimes they are not; and sometimes manual laborers are exempt and sometimes they are not, depending on the employee’s specific responsibilities.

It is important for both employers and employees to have a firm grasp of these exemptions. Employers need to know who is exempt so that they don’t inadvertently run afoul of the law, triggering liability for not only unpaid overtime wages but also penalties and attorney’s fees associated with non-payment of overtime. Employees need to know whether they are exempt so that they may act to protect their rights if they are not exempt but are being paid as though they were.

This article will address four commonly misunderstood exemptions: administrative, executive, highly compensated employee and computer related work. (A handful of other exemptions exist that are not addressed in this article.) Although each requirement within an exemption must be satisfied for that exemption to apply, each of these exemptions stands alone. Thus, an employee only has to qualify for one of these exemptions in order to be exempt from eligibility for overtime compensation.
It is the employer’s burden to prove that an employee is exempt from overtime compensation.

1. Administrative Employee Exemption

Under federal law, a bona fide administrative employee is exempt from eligibility for overtime compensation. To qualify for this exemption, the employee must (1) earn no less than $455 per week; (2) be responsible for performing “office or non-manual work directly related to the management or general business operations of the employer”; and (3) exercise “discretion and independent judgment with respect to matters of significance”. All three criteria must be satisfied. The fact that an employee has an “administrative” title doesn’t resolve the issue of whether the employee is exempt. Instead, the employee must have a level of responsibility sufficient to satisfy these criteria – which many administrative employees do not meet.

a. Earnings Threshold of $455 Per Week

The earnings threshold of $455 per week must be met as to all weeks of employment, and cannot be affected by the quantity or quality of work available to the employee. It should be readily determinable whether an employee meets this threshold.
The other two criteria for exemption have been the subject of litigation and are somewhat subjective.

b. Work Directly Related to Management or General Business Operations of the Employer

Applicable federal regulations specify that the employee’s work must be “directly related to assisting with the running or servicing of the business”, which can include work in functional areas and personnel management. This means that working at a desk in an office, for example as a secretary, doesn’t necessarily qualify an employee for the administrative employee exemption. Instead, a court must examine whether the employee has some role in managing the business. Examples of responsibilities that may satisfy this requirement include personnel management, accounting, budgeting, purchasing, marketing, and procurement. This requirement is very important for employers to bear in mind, as many employers make the costly mistake of assuming that administrative personnel are exempt when they don’t have enough responsibility for running the business to qualify as exempt.

c. Exercise of Discretion and Independent Judgment With Respect to Matters of Significance

Applicable federal regulations specify that the third requirement, that of exercising discretion and independent judgment, “involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.” The employee must do more than simply apply by rote rules or formulae that are set forth in an employee manual, as such work does not sufficiently involve the exercise of discretion.

Factors to be considered in determining whether an employee satisfies this requirement include “whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; [and] whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business.” In other words, to satisfy this requirement, the employee must have a role in making decisions that involve managing the operations of at least one part of the business.

The fact that the employee’s decisions can be overruled by a superior does not negate exempt status.

2. Executive Employee Exemption

Under federal regulations, a bona fide executive employee is exempt from eligibility for overtime compensation. An easy way to think of this exemption is that the exempt employee must be a “boss’ – of the business, a division of the business, or a department. Specifically, the employee must (1) earn no less than $455 per week; (2) have the primary duty of managing the business or a department; (3) customarily and regularly direct the work of two or more other employees; and (4) have the ability to hire and fire or to influence decisions regarding changes in status of other employees. Each of these criteria must all be satisfied for the executive employee exemption to apply.

a. Earnings Threshold of $455 Per Week

As with the administrative exemption, the earnings threshold for the executive exemption must be met each week and must not be dependent on the quality or quantity of work available to the employee.

b. Employee Must Be Primarily Responsible for Managing the Enterprise or a Department or Recognized Division.

Examples of management duties that may qualify an employee for the executive exemption include interviewing, hiring, training, disciplining, managing work flow, and overseeing a budget. The court is likely to examine the employee’s duties as a whole to determine whether the employee’s true primary duty is regular (as contrasted with occasional) management of the enterprise or a department or division. Someone who spends the majority of most days performing the sorts of duties listed above will likely be exempt. Someone who only occasionally steps in to perform some of these duties (perhaps when the actual manager is out of the office) likely will not qualify for the exemption. The employee’s title alone will not resolve this issue.

c. Employee Must Supervise At Least Two Full Time Employees.

An exempt employee must have supervisory responsibility. This means supervising at least two full time employees, at least four part time employees, or some combination.

d. Employee Must Have Authority to Hire and Fire.

An exempt employee must have a say in the hiring and firing of personnel under his/her supervision. This does not mean that the employee must have the final say, but the employee must have input into the process, and the level of input must be more than occasional suggestions. Thus, a department head who has input into the hiring, firing and disciplining of employees under his or her supervision will likely satisfy this requirement even though a higher level member of management must approve (and can overrule) the department head’s recommendations.

3. Highly Compensated Employee Exemption

An employee who is paid at least $100,000.00 in annual salary and who performs at least one of the duties outlined above for the administrative and executive employee exemptions will be exempt from overtime eligibility even though the other criteria for the administrative and executive exemptions are not met. This seems to be the Department of Labor’s way of saying that someone who earns at least $100,000.00 annually is compensated well enough to be expected to occasionally work more than forty hours a week without receiving extra pay for doing so.

4. Computer Related Work Exemption

Under federal regulations, an employee who works in the computer field will be exempt from overtime eligibility where the employee (1) meets the earnings threshold; (2) works in one of certain specified capacities in the computer field; and (3) has computer related responsibilities as his/her primary duties.

a. Earnings Threshold

To be exempt, an employee who performs computer related work must be paid a minimum of either $455 per week or $27.63 per hour. This slight variation on the compensation requirements from the administrative and executive exemptions seems to acknowledge that some who perform computer related work may work irregular hours and as a result are often paid hourly rather than on a salaried basis.

b. Work Must Be As a Computer Systems Analyst, Software Engineer, Computer Programmer, or in Some Similar Capacity.

This requirement should be self-explanatory. If the employee is performing the sorts of duties that only someone with the skills of a computer systems analyst or a computer programmer could perform, this criterion is satisfied.

c. Primary Duties Must Be Computer Related.

Although the employee can have other duties, the main portion of his/her work day must be devoted to work such as computer systems analysis or design, development, analysis, testing, and related tasks with respect to computer programs or systems. Simply repairing or manufacturing computer hardware does not satisfy this requirement. Likewise, simply using a computer to perform one’s work without actually engaging in systems analysis or programming also does not satisfy this criterion. In effect, this exemption tries to distinguish between someone whose job it is to develop or manage the inner workings of a computer or computer system (likely exempt) and someone who merely uses a computer to assist in performing the employee’s actual responsibilities (only exempt if another exemption applies).

The analysis set forth in this article is provided for general understanding only and should not be considered legal advice. Counsel should always be consulted for advice regarding a specific situation.