Exempt Vs. Non-Exempt: What are the Rules? (Q&A Part 1 of 2)

Classifying some employees as exempt from overtime means employers have to be careful—they must meet all of the initial exemption requirements, and also not take any actions that could jeopardize that exempt status (such as making improper pay deductions for exempt employees). This challenge raises many questions for employers, such as how to handle situations where exempt employees do not work the expected hours—can their PTO bank be deducted for hours missed? What about the opposite situation—how should an employer pay for extra hours worked if they want to compensate this time?

These were just some of the questions addressed by Austin E. Smith in a recent BLR webinar. Check out these answers and more below, and then read Part 2 of this series on employer questions on handling exempt vs. non-exempt employees.

Q. Can we deduct a negative PTO balance from the final paycheck of an exempt employee?

A.Under the Fair Labor Standards Act (FLSA) at the federal level, the answer is perhaps. We could deduct that paycheck under federal law as long as we don’t violate the salary basis test and salary level required to be an exempt employee. Otherwise, the employer risks losing the exemption. Additionally, for any employee – exempt or non-exempt – the paycheck cannot be taken below minimum wage either. State law, however, varies. Some states require written agreements, and some even prohibit such deductions.

Q. With the salary level test for an exempt employee, what are we testing? When we look at whether our employees are making $455 a week or $23,660 a year, what are we assessing?

A.If we want to classify someone as exempt, the salary level test outlines the minimum amount that the person must make to qualify as exempt. If they don’t make that much ($455 per week or $23,660 per year – may be more for specific exemptions), then they are not exempt and none of the other exemption qualifications matter.

Q. If a full-time exempt employee works additional hours beyond 40 in another exempt role, can we pay them straight time instead of overtime as long as the pay they would have received for the first 40 hours is more than $455 per week (and thus meets the salary level qualification for exemption)?

A.If we have a full-time exempt employee and the employee is properly classified as exempt (meaning: we’ve met the salary level test, the salary basis test, and the primary duties test for the employee’s primary role), and that person works additional hours in a different role, you’re probably able to pay that person as you see fit for that additional work.

If they’re already making a guaranteed amount over $455 per week, you’d have the latitude to pay them straight time pay for the additional work as a bonus or incentive without affecting their status. You could pay them an overtime rate if you’d like. The real question is whether the person definitely qualifies as exempt in their primary job. If so, you’re actually not bound to pay them any additional pay at all for extra hours worked.

Q. Can you require an exempt employee to make up hours to reach 40? For example, if they worked 36 hours one week and they don’t want to take their PTO time, can the employer require them to make up the hours?

A.This leads us to the question of “quality and quantity” of work for an exempt employee. An exempt employee should not be paid based on the quantity or quality of work. If the employee worked 36 hours in a week, yet the expectation is 40 hours, the employer probably can’t require more because that would imply the employee is being paid based on the quantity of work, which could mean they will no longer be exempt. This would be essentially the same as saying you’re docking them for not working 40 hours, which wouldn’t be allowed either.

The employer would be able instead to discipline people for not working the expected hours. They could be written up for not meeting expectations. But making them make up the time would probably run afoul of the salary basis test since that would no longer be paying them a salary irrespective of the quantity of work in a given week.

Q. Can the employer have a policy that requires an employee to use PTO time to supplement any hours less than 40 that they are not at work?

A.Yes. Now we’re looking at a situation where the employee can take the time away from work without docking pay. On the other hand, if the employer does not have any work for the employee and asks them to not work a portion of a week, that is a different situation and the employer cannot require the employee to use PTO in circumstances where work is not available—the employer would need to pay the exempt employee for that whole week.

If the employee chooses to not work, then you could probably make them use PTO. That said, after the employee runs out of PTO, you’re back to the situation above where the employer can’t make them take the time unpaid because that’s treating them as an hourly person.

For more information on exempt vs. non-exempt classifications for employees, order the webinar recording of “Exempt vs. Nonexempt: How to Find and Fix Misclassification Mistakes.” To register for a future webinar, visit http://store.blr.com/events/webinars.

Attorney Austin E. Smith is a shareholder at the Denver office of Ogletree Deakins. In addition to his litigation practice, which focuses on wage and hour, workplace safety, and traditional labor matters, Mr. Smith also focuses on helping employers avoid potential liabilities down the road.