The Risks of Losing an Exemption

The Fair Labor Standards Act (FLSA) dictates minimum wage and overtime requirements, but it also allows for exemptions when specific requirements are met. Employers utilize these exemptions for qualified positions by classifying the employee as exempt—which means that individual will no longer be subject to overtime pay requirements. As long as all the qualifications within the regulations are met, this all goes as planned. However, there are several ways that employers can inadvertently put the exempt status at risk.

Putting an exemption at risk is quite a big deal. Even a single employee losing exempt status could trigger a look into all employees with the same or similar role to see if any other infractions are discovered. On top of that, an employer that is caught with a misclassified employee can be subject to providing back pay in the form of missed overtime for up to 2 years back (or even 3 years if the misclassification is deemed as willful misclassification)[i]. The employer may also be subject to penalties in some cases.

Clearly, it’s important to keep exempt and nonexempt classifications accurate and current. Here are a few of the ways employers risk losing an exemption:

  • Not having a formal sick leave policy and instead docking pay for missed time when employees are away from work for an illness.
  • Docking pay for partial-day absences for any reason. Employers need to remember that for partial-day absences, usually PTO can be used instead so that pay is not docked. If the exempt employee is out of PTO, then this needs to be handled as a disciplinary item, not as a pay deduction.
  • Finding other reasons to pay a salaried, exempt employee less than his or her full salary in a given workweek. For example, docking pay for being late or docking pay when the employer was closed, such as during weather-related closures may raise a question.
  • Misclassifying an employee as exempt. For example:
    • Labeling an employee exempt even if he or she actually only performs routine work and does not meet the qualifications required for the exemption (or only performs the exempt duties occasionally and not as a standard part of the job).
    • Classifying an employee under the professional exemption due to his or her qualifications or licensing but employing him or her in a capacity that does not otherwise meet the exemption requirements.
    • Assuming an employee meets the exemption requirements of “independent judgement and discretion” when in fact, he or she is simply applying rules or following the judgement of others.
    • Simply labeling all nonhourly employees as exempt without a full assessment of whether the true job duties and salary levels meet the requirements.
    • Switching any employee to exempt status as soon as he or she reaches a specific pay level.
    • Basing exemption status on job titles only rather than on the actual job requirements.
    • Any other situation in which an employee is labeled as exempt but does not actually meet the exemption criteria.
  • Requiring salaried employees to make up missed hours of work and docking pay if they do not. (Being paid on a salaried basis requires the full amount to be paid regardless of the number of hours worked that week.)
  • Implementing unpaid furlough time of anything less than a full week. (Full-week furloughs may be allowed as long as no work is performed.)
  • Using pay deductions as punishment for minor infractions. (Pay deductions are only allowed as penalties for infractions of safety rules of major significance or in situations of unpaid disciplinary suspension in full-day increments.)
  • Deducting pay when work quality or quantity expectations are not met.

Tips for Employers

In addition to avoiding the above scenarios, there are also some tips for employers who want to stay on the right side of the regulations regarding exempt employees. Here are a few:

  • Have a written policy on allowed deductions from exempt employee pay. While this is not protection in and of itself, having such a policy and routinely following it can show good faith if there is ever an accusation of improper deductions.
  • Run audits for improper pay deductions and remedy any problems found. Follow up to ensure that the situation leading up to such a deduction does not recur.
  • Conduct more thorough audits to ensure that all exempt employees actually meet the exemption requirements.

This article does not constitute legal advice. Always consult legal counsel with specific questions.

[i] http://www.dol.gov/dol/topic/wages/backpay.htm


About Bridget Miller:

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.