Are Exempt Positions More Valued Than Nonexempt Positions?

Do you wonder why businesses have exempt and nonexempt employee categories?  More than that, do you know how your employee positions should be classified?

These exempt and nonexempt employee categories are set by the Fair Labor Standards Act (FLSA), which is a federal law. The U.S. Department of Labor Wage and Hour Division is responsible for enforcing this Act.

It is important to get this right because failing to comply with the FLSA can lead to costly litigation and the law even provides for civil and, in extreme cases, criminal penalties. You may be interested in this recent news story about Houston-based CEMEX which illustrates how alleged noncompliance and litigation can cost a business.  According to a press release, the U.S. Department of Labor took legal action to secure more than $5 million in alleged overtime wages from CEMEX, charging them with violating the FLSA.

A Little FLSA History

The FLSA was actually passed in 1938 so it’s a very old regulation. The purpose of it was really to ensure that there are, like its name implies, fair labor standards.  The most common stipulation that people know about, other than the minimum wage requirement, is the overtime pay requirement. If you think back to the times of the Great Depression, the Act was passed when the economy was still recovering and it was really meant to fuel employment and to create more jobs.

The thinking behind this law was: if employers were burdened with additional pay requirements for overtime work, the result would be increased jobs. If employers had work available and they weren’t sharing it, but instead making their current employees do double the amount of work, they were going to be discouraged by having to pay those employees overtime since they were not hiring more people to do that work. 

Even though most of the nation’s workforce is covered under the overtime provisions — at least according to the U.S. Department of Labor — only a portion of jobs are considered exempt from the overtime requirements and not required to receive overtime pay. That is why we commonly refer to these employees as “exempt.”

Why do some people perceive that exempt employee positions are valued more than nonexempt employee positions?

While a nonexempt employee is entitled to receive overtime pay, some employees feel like being classified as nonexempt means their position is less important. I believe this viewpoint is a misperception, and I don’t agree with it. Exempt and nonexempt employees alike are integral to a company’s success. Employees are not classified as exempt or nonexempt because of the level of importance of their job, but because of the criteria set by the law.

Similarly, many employers have the misconception that they can save money by classifying a job position as exempt with salary status. Again, the exempt classification is based on whether or not the job position meets the FLSA legal requirements for exempt status, not what the employer may desire. If the position does not meet the exemption requirements and it is misclassified, there can be major and costly consequences for employers. 

One key difference between exempt and nonexempt employees is that, in most cases, when positions are classified as exempt, such classified employees are paid a salary. Understandably, many employers would prefer positions that are classified as exempt because of the consistency of salaried pay which allows for easier administration, planning and recordkeeping. For instance, exempt employees aren’t required to track the time they work. Their salary isn’t based on the number of hours they work; their pay is based on the type of work they’re performing. While that may make it easier to administer pay, it does not change the fact that an employee must meet the exemption test or be paid overtime.  

Also understandably, employers see it as a plus that overtime pay is not required for exempt positions, which may make them want to classify as many positions as they can as exempt.  On the other hand, a nonexempt employee has to be paid for each hour that they work, including an overtime premium for any hours worked over 40 in one work week (and for more than 8 hours a day in a few states). A variety of state laws can also impact this requirement. 

In short, classifying employee positions for overtime exemption purposes is complicated and it can be a risky process because of the legal ramifications. Also, it is important to recognize that some states have more stringent labor and overtime laws than those of the federal government. For more information about state and federal labor laws, visit www.dol.gov/esa/contacts/state_of.htm and www.dol.gov/.

Classifying employee positions is complicated and it can be a risky process because of the legal ramifications.