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Overtime and Minimum Wage Employee Exemption

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Employers avoid paying overtime or minimum wages to employees using a variety of methods. If a person is not an employee of a business but is instead a independent contractor, that person is not entitled to minimum wages or overtime. A person can also be “exempted” from overtime or minimum wage requirements through various federal regulations set forth in the Fair Labor Standards Act. However, an employee exemption does not mean they are not legally entitled to minimum wage and overtime pay.

Independent Contractor

To determine whether an individual is an independent contractor or an employee, courts primarily use the “economic realities” test which considers the economic dependence on the relationship between the individual and the employer. The economic realities test does not require complete dependence on a business for a workers income. The issue is whether a worker depends on the business for their continued employment during the period the business operates. The economic realities test is a highly specific test that requires an analysis of multiple factors including: (1) the skill and initiative required by the work; (2) the degree of control exercised by the alleged employer; (3) the permanence of the relationship; (4) the worker’s opportunity for profit and loss through managerial skill; (5) the extent of the relative investments in equipment and material; (6) the extent to which the service rendered is an integral part of the employer’s business.

Determining if a person is an “employer” versus an “independent contractor” is just the first step. Even if a person is an employee, they are not automatically entitled to overtime compensation or minimum wages. There are many exemptions that limits an employee’s ability to receive overtime or minimum wages.

Executive Exemption

In general, executive employees are exempt from the overtime provisions of the Fair Labor Standards Act and North Carolina Wage and Hour Act if that employee is (a) compensated on a salary basis making more than $455 per week, (b) has primary duties managing an enterprise or managing a customarily recognized department or subdivision of the enterprise, (c) customarily and regularly directs the work of two or more full-time employees or their equivalent, (d) has the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

“Primary duties” are the primary, principal, or most important duties that an employee performs. The employee’s primary duty is based on all facts in a particular case, with an emphasis on the employee’s job as a whole.

“Management of the enterprise,” requires that supervisory tasks are not directed by higher management to such a degree that it negates the employee’s actual authority. Tasks commonly associated with management includes training employees, managing production or sales records, evaluating employees’ performance, disciplining employees, planning work to be done, safety of plants, planning the budget, controlling supply flow, and monitoring or implementing legal compliance measures, interviewing, hiring, and training employees, setting and adjusting pay schedules of employees, handing employee complaints, disciplining and firing employees, apportioning work amongst various employees, stocking and shelving certain inventory, controlling the flow and distribution of materials or merchandise and supplies, planning and controlling budgetary constraints, monitoring compliance, conducting performance appraisals, promoting employees, and purchasing inventory and equipment.

“Customarily and regularly directs” the work of two or more employees factor requires the employee to regularly direct the equivalent of two full-time employees. The determination of an employee’s authority generally comes down to a factual finding of whether they actually possess authority to hire, fire, or direct the hiring or firing of other employees. Even if higher management can overrule the employee, if an employer “seriously considers the recommendations,” that may be enough.

Administrative Exemption

For an employee to qualify for the administrative exemption, the employee must (a) be paid on a salary or fee basis of at least $455 per week, (b) the employee’s primary duty must be performing office or non-manual work directly related to the management or general operations of the business or its customers, and (c) the employee’s primary duties must include the exercise of discretion and independent judgment regarding matters of significance.

An employee’s “primary duty” is the same for the executive exemption. The principal or most important duty that the employee performs based upon all facts of a particular case.

To perform work “directly related to management or general business operations,” the employee must directly assist with the running or servicing of the business. This does not apply for employees working on a manufacturing production line or selling products in a retail store. Employees performing work directly related to management or general business operations include work in functional areas such as legal and regulatory compliance, tax, finance, accounting, budgeting, auditing, insurance, quality control, marketing, advertisement, procurement, purchasing, personnel management, human resources, employee benefits, labor relations, public relations, government relations, computer network, internet and database administration.

To exercise “discretion and independent judgment,” an employee must evaluate possible courses of conduct to make decisions. To determine whether an employee exercises discretion and independent judgment, all facts of an employee’s employment is analyzed. The employee must have the authority to make an independent choice, free from immediate direction or supervision. Even if an employee’s decisions are reversed does not mean that the employee is not exercising discretion and independent judgment. According to the Department of Labor, factors include whether the employee:

  • has authority to formulate, affect, interpret, or implement management policies or operating practices;
  • carries out major assignments in conducting the operations of the business;
  • performs work that affects business operations to a substantial degree;
  • has authority to commit the employer in matters that have significant financial impact; and
  • has authority to waive or deviate from established policies and procedures without prior approval.

The exercise of discretion and independent judgment requires more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources.

“Matters of significance” refer to the level of importance of the work performed or the level of consequence to the employer. Just because an employer will experience financial loss if an employee fails to properly perform his job does not make the work significant for purposes of the administrative exemption.

Learned Professional Exemption

For an employee to qualify for the learned professional exemption , the employee must a) be paid a salary of at least $455 per week on a fee or salary basis, b) the employee’s primary duty must be the performance of work requiring advanced knowledge (defined as work which is predominantly intellectual in character and which includes work requiring the exercise of discretion and judgment), c) the employee’s advanced knowledge must be in a field of science or learning, and d) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

“Work requiring advanced knowledge” must be predominantly intellectual in nature. Generally, a professional employee uses advanced knowledge to analyze, interpret, or make deductions from a range of varying circumstances and includes consistently exercising discretion and judgment.

A “field of science or learning” includes law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, chemical and biological sciences, and pharmacy. This is distinguishable from jobs in mechanical arts or skilled trades where the knowledge is not in a field of science or learning.

“Customarily acquired by a prolonged course of specialized intellectual instruction” requires specialized academic training as a prerequisite to enter into the profession. Therefore, occupations in which most employees acquire their skill by experience rather than by advanced intellectual instruction will not qualify for the exemption.

Creative Professional Exemption

A creative professional will be exempted from overtime requirements if a) the employee is paid at least $455 per week on a fee or salary basis and b) the employee’s primary role is performing work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

The requirement of “invention, imagination, originality, or talent” distinguishes creative professionals from those who depend on intelligence, diligence and accuracy. The requirements of the creative professional exemption are generally met by actors, musicians, composers, soloists, painters, and writers.

Computer-Related Professional Exemption

For the computer-related professional exemption to apply, the employee must a) be paid at least $455 per week on a fee or salary basis, or at least $27.63 an hour if paid hourly, b) be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled computer worker, and c) the employee’s primary duty must consist of:

  • 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, creating, testing, or modification of computer systems to user or system design specifications;
  • The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
  • A combination of the above duties requiring the same level of skills.

Importantly, this exemption does not apply for employees who manufacture or repair computer hardware and related equipment.

Highly Compensated Employees

The Department of Labor has special rules for highly compensated workers. To qualify for overtime exemptions under the highly compensated employee exemption, an employee must a) earn at least $100,000 per year at at least $455 per week on a salary b) have a primary duty of office or non-manual work, and c) customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee as explained above.

“Customarily and regularly” means greater than occasionally but may be less than constant. This generally includes work performed every workweek and will not include isolated or one-time tasks.

Outside Sales Exemption

For an employee to be exempt as an outside sales employee, they must meet two qualifications. First, the employee’s primary role must be making sales or obtaining orders or contracts for services or for the use of facilities for which consideration will be paid by the client or customer. Second, the employee must customarily and regularly performs his or her primary duties away from the employer’s place(s) of business.

“Customarily and regularly” means greater than occasionally but may be less than constant. This generally includes work performed every workweek and will not include isolated or one-time tasks.

“Away from the employer’s place of business” means making sales at a customer’s place of business or home. An employee will not qualify as an outside sales employee if he or she makes sales by mail, telephone or internet, unless it is secondary to in-person calls. Any fixed site used by a salesperson will be considered the employer’s place of business for purposes of the outside sales exemption.

If you are improperly labeled as an independent contractor or exempt employee, contact the employment attorneys at Maginnis Howard. We handle wage and hour issues dealing with overtime, minimum wage, unpaid bonuses, commissions, and any other employment problems with unpaid wages across the state of North Carolina. Call our office at (919) 526-0450 or send a message through our confidential contact page.