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The Murky Rules Surrounding Overtime Exemptions

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Architect working in officeMikolaj Molenda--Getty Images/Flickr RM

The Department of Labor (DOL) recently announced its biggest changes to overtime regulations in more than a decade, essentially doubling the salary threshold at which workers are eligible for time-and-a-half if they work more than 40 hours per week.

And while many small–business owners are struggling with the new cap of $47,476 annually, which the Obama administration says will make millions of additional workers eligible for overtime starting Dec. 1, some may find what the DOL left unchanged about overtime regulations even more nettlesome.

Overtime regulations are part of the Fair Labor Standards Act (FLSA) of 1938, which by law the Labor Department can update periodically at its own discretion. In addition to hours and salary tests for workers, there are job duties tests that small–business owners must use to determine whether employees are exempt from overtime. In its most recent update, the DOL essentially left its duties tests as they’ve been since 2004.

 

Yet various labor experts estimate upwards of 70 percent of businesses are not in compliance with the FLSA. And payroll processor ADP suggests that in recent years the most prevalent reason for wage and hour litigation claims stem from misclassification of exempt versus non-exempt worker status that could lead overtime. So it’s important to pay attention here.

“Small businesses have often been challenged by understanding these tests, which are fairly complicated,” says Bruce Millman, office managing shareholder at Littler Mendelson, a law firm that specializes in employment and labor law.

Generally speaking, in order to be exempt from overtime, employees must be classified as white-collar workers with executive, professional, or administrative duties.

Here’s a closer look at how DOL defines those exemptions:

1) Executive employees. The primary duty for executive employees must be management of business, or a recognized department in a business. “Management is your primary duty, and you have to customarily and regularly direct work for two or more employees,” Millman says, adding exempt executive workers must also have the autonomy to hire or fire employees, or make significant recommendations about them.

2) Professional employees. these workers have advanced degrees, beyond a bachelor’s degree, and must be performing work that involves advanced knowledge. Some examples include architecture, accounting, engineering, law, or medicine. But some creative fields can also be exempt under this category, depending on how much they can exercise invention, imagination, or originality, per the DOL. These workers might include actors, musicians, painters and writers.

3) Administrative worker. This category is probably the murkiest, and perhaps the most complicated for business owners to understand, Millman says. Such workers must perform office or non-manual work, and that work must be related to either the management or general business operations of the employer, or the employer’s customers. Further, their work must involve the exercise of judgment in matters of significance. So, for example, a store manager who helps customers and sometimes stocks shelves may not be exempt. A human resources professional who makes screening decisions about which employees to bring on, but who is not involved in the actual decision to hire, might be, Millman says.

Related:Related: Why Obama’s New Overtime Rules Could Be a Wet Blanket for Small Businesses

“The whole system of how employees are classified needs to be a much simpler test,” says Bryan Pate, the chief executive and founder of ElliptiGo, an elliptical bicycle manufacturer with 22 employees, based in San Diego. Many of his employees are recent college graduates who don’t fit into the neat boxes the DOL has laid out in its exempt worker matrix, Pate says.

4) Highly paid employees. Highly paid employees who perform non-manual work are also exempt. The DOL recently bumped its threshold for these workers up to $134,000 from $100,000.