There are numerous legally imposed requirements as to payment of employees which must be met or the employer faces significant sanctions that range from interest to penalties. Class actions involving employees denied these benefits are increasingly common in California. Such requirements as overtime pay, lunch breaks, rest breaks, etc. are rigidly enforced by the Courts and while the individual claim may be minor, when classes of employees are combined by plaintiff’s counsel, the damages can be extreme and the cost of defense stunning.
Some employees are not entitled to such legally imposed requirements and those employees are “exempt” from those protections. Usually, such employees are considered managers or professionals whose hours are not subject to this particular protection by the law.
Therefore, the classification of an employee as exempt or not is a crucial issue for any business and this article shall discuss the definitions which can be surprisingly complex.
Where Federal and State law conflict with respect to exempt versus non-exempt categorization, the more stringent law applies. Not surprisingly, California law is generally more stringent than Federal law. The employer has the burden of proof to show that an employee is properly classified as exempt.
There are several guiding principles under California law applicable to whether an employee is exempt or non-exempt from overtime pay that must be considered. The job title has little weight; rather, whether the employee is primarily engaged in exempt work is determinative. The key factor in the analysis is the actual duties and work performed by the employee in a work week.
Additionally, most exempt employees customarily and regularly exercise discretion and independent judgment in their jobs, meaning they compare and evaluate possible courses of action and make decisions after considering the options.
Also, an exempt employee generally must earn a minimum monthly salary of no less than two times the state minimum wage for full-time employment (full-time being forty hours per week).
Exempt employees are not covered by most other California wage-and-hour laws, such as those pertaining to rest breaks, meal periods, alternative work week schedules, requirements for time keeping, and so on.
Classes of Exempt Employees:
Following are the primary employee exemptions under California law:
A. Executive Exemption. This exemption is applied to managerial employees. A person employed in an executive capacity means any employee:
1. Whose duties and responsibilities involve the management of the enterprise in which he or she is employed or of a customarily recognized department or subdivision thereof; and
2. Who customarily and regularly directs the work of two or more other employees therein; and
3. Who 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 of other employees will be given particular weight; and
4. Who customarily and regularly exercises discretion and independent judgment; and
5. Who is primarily engaged in duties, which meet the test of the exemption.
B. Administrative Exemption. The administrative exemption applies to a wide variety of employees and is the most common exemption. A person employed in an administrative capacity means any employee:
1. Whose duties and responsibilities involve either:
a. The performance of office or non-manual work directly related to management
policies or general business operations of his or her employer or his or her employer's
b. The performance of functions in the administration of a school system, or educational
establishment or institution, or of a department or subdivision thereof, in work
directly related to the academic instruction or training carried on therein; and
2. Who customarily and regularly exercised discretion and independent judgment; and
3. Who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity, or
4. Who performs, under only general supervision, work along specialized or technical lines requiring special training, experience, or knowledge, or
5. Who executes, under only general supervision, special assignments and tasks, and
6. Who is primarily engaged in duties which meet the test for the exemption.
C. Outside Salesperson Exemption. An employee who customarily and regularly works more than half the working time away from the employer's place of business selling tangible or intangible items or obtaining orders or contracts for products, services, or use of facilities.
D. Professional employee exemption. An employee that is licensed or certified by the State of California and is primarily engaged in the practice of one of the following recognized professions: law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting.
E. Inside Salesperson. An inside salesperson is not exempt from overtime pay. Compliance with California law for an inside salesperson is perhaps the most difficult for employers to meet. A commissioned inside sales representative is exempt from overtime compensation if:
(a) total compensation exceeds 1.5 times the minimum wage for each hour worked during the pay period; and
(b) at least 50% of total compensation comes from commissions.
Since the compensation must exceed the 1.5x minimum wage amount for every hour worked in a week, this exemption has the unique requirement of the employer’s accurately tracking of work hours each week to ensure the inside sales representative qualifies for the exemption. Whether the sales commission structure is comprised of a base salary plus commissions, pure sales commissions, a draw provided against future commissions or some combination of these, the exemption also requires that each paycheck exceeds the 1.5x minimum wage times the number of hours worked figure to qualify.
The second requirement for the exemption to apply in the case of an employee paid a fixed salary plus an additional amount of earned commissions is that the amount of sales commission payments exceed the total amount of salary payments for a chosen representative period.
The representative period a company chooses to establish the more than 50% commissions and less than 50% salary ratio must be at least one month and not longer than one year.
Appropriate classification is critical not only for the employee but for the employer. Indeed, even if the employee does not protest, even if the employee seems to agree to an exempt status, this is a requirement imposed by law and the penalties and interest can be many times the actual monies not paid. The usual case arises when a disgruntled employee, often terminated, makes a claim that full overtime or meal breaks were not provided and for those employers with numerous employees, there is a chance that plaintiff’s counsel, often paid via contingency, will seek to have an entire class declared.
Since the process of determining whether there is a class itself requires months in State or Federal Court and can costs tens or even hundreds of thousands of dollars in defense costs, many employers find themselves confronted with a business-destroying claim that requires a settlement even if the employer feels the claim is unjustified. The cost of defense simply does warrant the chances of victory.
It is far better to take the time to initially carefully analyze and fully implement the proper classifications to avoid such claims at a later time and if in doubt, to presume that the employee is nonexempt. This is the practice of increasing numbers of California employers. However, some of the classifications above are less ambiguous than the “administrative” classification and in those cases, characterizing the employee as exempt is certainly appropriate.