Do You Have to Pay Your “White-Collar” Employees Overtime?

As a business owner, you might want to avoid paying overtime to your employees if you don’t have to; however, many businesses make the mistake of assuming that employees are exempt from overtime rules because they are paid a salary or they have a certain job title such as “manager” or “sales.”

The Fair Labor Standards Act (FLSA) is the federal law that governs overtime pay, minimum wage, record-keeping, and youth employment standards that affect employees in the private sector and government. If you fail to follow the rules laid out in this statute, your business could seriously suffer down the road. You might get stuck with expensive lawsuits, financial penalties, back wages fees, and interest. Overtime exemptions will be the focus of this blog.

The Word “Exemption” Defined

An exemption means that an individual or a company does not need to do something that others are required to do.

The FLSA Overtime Exemptions

Section 13(a)(1) lists several exemptions to employee overtime. These exemptions are sometimes called the “white-collar” exemptions because they relate to different categories of employees such as executives, administration, and sales who typically work in offices or other professional environments. The law provides specific requirements for each category and details when an employee is exempt from overtime rules.

Executive Exemption

This exemption is reserved for employees who are high-level managers. You cannot just give employees the title of manager and claim they are exempt from overtime. To qualify for the executive exemption, an employee must generally meet all of the following requirements:

1. Salary level test: The employee’s minimum salary requirement should be at least $913 per week or $47,476 per year. (disclaimer: the minimum salary requirements stated herein is subject to change every year and the number shown here may no longer be accurate. Please check dol.gov for the latest updates).
2. Salary basis test: Up to 10 percent of an employee’s salary level may be satisfied with non-discretionary bonuses or commission, but at least 90 percent of the salary level must be paid on a salary basis.
3. Duties test:
   • The employee’s main duties must relate to managing the business or a department of the business.
   • The employee must regularly manage at least two full-time employees or the part-time equivalent.
   • The employee must have the authority to hire, fire, and promote the employees they manage, or upper levels of management must give their recommendations significant consideration.

Administrative Exemption

This exemption applies to employees who are responsible for keeping the business running. This is often one of the exemptions where employers make the most mistakes when classifying employees. The employees who fall under the administrative exemption are usually responsible for making important and relatively high-level decisions.

To qualify for the administrative exemption, an employee must meet the following requirements:

1. Salary level test: The employee’s minimum salary requirement should be at least $913 per week or $47,476 per year. (disclaimer: the minimum salary requirements stated herein is subject to change every year and the number shown here may no longer be accurate. Please check dol.gov for the latest updates).
2. Salary basis test: Up to 10 percent of an employee’s salary level may be satisfied with non-discretionary bonuses or commission, but at least 90 percent of the salary level must be paid on a salary or fee basis.
3. Duties test:
   • Their primary duty must involve nonmanual labor that is directly related to the management or general business operations.
   • They must routinely exercise independent judgment and use their own discretion on important matters.

For example, receptionists would not qualify for an administrative exemption because they do not make independent decisions about high-level matters; however, a marketing director may qualify.

Outside Sales Exemption

This exemption only applies to employees working in outside sales. This is different from working in a sales department. For example, employees at a mattress store may be responsible for making sales, but they will not qualify for the outside sales exemption because the customers come to them.

To qualify for this exemption, an employee must satisfy the following requirements:

1. Salary level test: Outside sales means the employee is going to potential customers to make sales. Outside sales employees are often paid on 100 percent commission. The salary level test that applies to other white-collar exemptions do not apply to outside sales.
2. Salary basis test: For the reasons stated under the salary level test above, the salary basis test does not apply to outside sales employees.
3. Duties test:
   • The employee must be primarily focused on making sales, obtaining orders, or securing contracts for services from the company.
   • The employee must regularly conduct his or her work away from the employer’s place of business.

California is strict about the enforcement and interpretation of the different white-collar exemptions. If you have any questions about the white-collar overtime exemption rules, it is best to get legal help before you have a problem. Ensuring that all of your employees are properly classified will give you peace of mind and could save you from legal action costing tens, or even hundreds of thousands of dollars.