Avoid These Misconceptions About Overtime Exemptions

Employers often have misconceptions about overtime exemptions under the Fair Labor Standards Act (FLSA). Legal experts recommend that employers understand and steer clear of these misunderstandings to ensure wage and hour compliance.

Brian B. Kelly, an attorney with Greenberg Traurig in San Francisco, highlighted these common myths:

• Misconception One: “If the job title sounds senior enough, the employee is safely overtime exempt.” In reality, job titles are not directly relevant to an exempt classification analysis; job duties are, as well as salary basis and salary threshold.
• Misconception Two: “I’m pretty confident that this employee almost never works more than 40 hours per workweek, so I don’t want to deal with the hassle of having them track time and paying them hourly.” In fact, even small amounts of overtime can create expensive unpaid wage liability, which can likely be alleged on not only an individual basis, but potentially also a collective, class, or representative basis as well.
• Misconception Three: “The employee agreed to be paid a salary and be treated as overtime exempt.” In general, overtime exempt status cannot be arranged by contract and being paid by salary alone does not result in exempt status.

Salary-Basis Test

Another common misconception is that if an employer properly classifies an employee as exempt from overtime, the employer can pay the employee using any method other than a salary basis — such as hourly deductions for periods in which no work is performed, said Brian Long, an attorney with Seyfarth in Los Angeles.

The three basic tests an employee's job description must satisfy to qualify as a white-collar job exempt from overtime pay requirements under the FLSA are:

• A salary-level test, which requires that the employer pays the employee a minimum of $684 per week.
• A duties test, which requires that the job must have as its primary duty the job functions described under one of the exemptions.
• A salary-basis test, which requires that the employer pays the employee a predetermined amount of at least the required minimum without regard to the quality or quantity of work.

A common misconception about overtime exemption rules is that all salaried employees are automatically exempt, said Brett Coburn, an attorney with Alston & Bird in Atlanta. 

“In fact, an employee being paid a salary doesn’t guarantee exemption,” he said. “Instead, employees must meet both a salary-basis test — which addresses both the amount of the salary and the way the salary is paid; that is, no deductions from salary other than those expressly permitted by the statute — and specific duties tests under the FLSA.” 

Many salaried employees fail the duties requirement, Coburn said.

Toolkit: Complying with U.S. Wage and Hour Laws

Other Common Misunderstandings

Employers also often misunderstand the administrative exemption, said Kyle Nelson, an attorney with Seyfarth in Seattle.

“The primary mistake is overemphasizing small or unimportant discretion exercised by the employee,” he said. “The discretion must be independent judgment on matters of significance. Frankly, this can be a close call.”

Toolkit: Understanding Overtime Exemptions Under the FLSA

As for the highly compensated employee exemption, Long noted that while the FLSA recognizes the exemption, California does not. 

New York doesn’t recognize this exemption either, Coburn said. 

It’s a common mistake to think that if an employee qualifies for a white-collar exemption under federal law, the employer does not need to worry about checking state laws, cautioned James Coleman, an attorney with Constangy, Brooks, Smith & Prophete in Fairfax, Va., and Washington, D.C.

Even under the FLSA, a common misunderstanding is that highly compensated employees are always exempt, Coburn said. An employee is not exempt solely based on if they are paid a high salary. While there is an exemption for highly compensated employees, it should be noted that there still is a salary basis and duties test for this exemption. It is not a salary threshold analysis alone. For employees that may qualify for the highly compensated employee exemption, the standard is a relaxing of the duties analysis, not a total disregard.

“While the FLSA does provide a highly compensated employee exemption, these individuals must still perform at least one of the exempt duties of an exempt, administrative, or professional role,” Coburn said. High pay alone does not ensure exemption.