I apologize for the long post in advance, but I’ve been receiving many questions about exempt vs. non-exempt classification of employees lately. This article is the first in a series of articles to help employers tread through this technical area, hopefully in a manner that makes it at least somewhat easier for employers to understand.
California law presumes that all employees are non-exempt employees, meaning that they are not exempt from the Labor Code requirements, such as overtime pay, meal and rest breaks, and minimum wage. Exempt employees are designated as such because they are “exempt” from certain wage and hour requirements due to their duties and pay. However, the employer bears the burden when classifying an employee as exempt, and simply providing a title to an employee does not make them exempt. The employee must meet very specific requirements for each applicable exemption, and if the requirements are not met the employer must comply with all wage and hour requirements – such as overtime pay, etc…. It is also important to note that some exemptions only exempt the employee from specific Labor Code provisions (for example, the inside sales exemption only exempts the employee from overtime pay requirements, but the employer is still required to provide meal and rest breaks).
There are many exemptions, and many nuances to each exemption, so employers should perform this analysis very carefully and receive advice from an experienced attorney or HR professional when classifying employees as exempt.
In my experience, here are the most common exemptions that arise in a workplace under California law and the requirements to meet each one:
1. Executive/managerial exemption
In order to meet the executive (managerial) exemption, the employee must meet all of the following requirements:
- Employee’s duties and responsibilities involve the management of the enterprise in which he or she is employed or of a customarily recognized department or subdivision of the enterprise;
- Employee customarily and regularly directs the work of two or more other employees;
- Employee has the authority to hire or fire other employees, or whose suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status or other employees is given particular weight;
- Employee customarily and regularly exercises discretion and independent judgment in performing his or her duties;
- Is “primarily engaged” in duties that meet the test of the exemption;
- Earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.
The term "primarily engaged in" means that more than one-half of the employee's work time must be spent engaged in exempt work and differs substantially from the federal test which simply requires that the "primary duty" of the employee falls within the exempt duties. Therefore, to qualify for this exemption, the employee must spend more than 50% of their work time on exempt duties.
2. Administrative exemption
To meet the administrative exemption, an employee must meet all of the following requirements:
- Employee spends more than one-half of their work time performing office or non-manual work directly related to management policies or general business operations for the employer or the employer’s customers;
- Employee “customarily and regularly” exercises discretion and independent judgment in carrying out job duties as to matters significant to the employer’s business;
- Performs his or her job only under general supervision and works along specialized or technical lines requiring special training, experience, or knowledge; and
- Is paid a salary equivalent to no less than two times the state minimum wage.
3. Computer professional exemption
To be an exempt computer professional, the employee must meet the following requirements:
1. The employee is primarily engaged in work that is intellectual or creative and requires the exercise of discretion and independent judgment.
“Primarily” is defined as requiring more than 50% of the employee’s work time be spent on these types of duties.
2. The employee is primarily engaged in duties that consist of one or more of the following:
- The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications.
- The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to, user or system design specifications.
- The documentation, testing, creation, or modification of computer programs is related to the design of software or hardware for computer operating systems.
3. The employee is highly skilled and is proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, and software engineering.
4. The employee’s hourly rate of pay, or annual salary if paid on salaried basis, meets a minimum threshold amount set by California’s Division of Labor Statistics and Research (DLSR). For 2015, the DLSR set the amounts at $41.27 per hour or annual salary of not less than $85,981.40 for full time employment, and paid not less than $7,165.12 per month.
4. Commissioned inside sales exemption
To qualify as an exempt commissioned inside sales employee, an employee must meet the following requirements:
- Employee’s earnings must exceed one and one-half times the California minimum wage; and
- More than half of the employee’s compensation must be commissions.
Employers must note that this exemption is only for the overtime requirement, and other wage and hour requirements such as minimum wage, meal and rest breaks, time recording requirements still must be met.
5. Outside salesperson exemption
To qualify as an exempt outside salesperson the employee must:
- Be at least 18 years old;
- Must customarily and regularly work more than 50% their work time away from the employer’s place of business; and
- Must be engaged in selling tangible items or obtaining orders or contracts for products, services, or use of facilities.