By Tim Rusche, Jonathan Brophy and Jennifer Wiegley

It seems simple enough. You hire an employee as a manager, you call her a manager, you pay her like a manager – voila! You don’t have to pay overtime, right?  Not so fast.

Entrepreneurial lawyers and disgruntled employees frequently attack “exempt” classifications to recover overtime pay, missed rest break and meal period pay, and other penalties. To avoid being an easy target, it is critical that employers avoid common pitfalls (like reading this blog with less than rapt attention!) and take affirmative steps to protect the exemption.

The Test:

In addition to earning at least two times the minimum wage, generally speaking, the “executive exemption” requires employees to spend most (i.e., the majority) of their time on management tasks, to regularly exercise discretion and independent judgment, and to supervise at least two employees.  In addition, their recommendations for changes in employment status, like hiring and firing, must be given particular weight.

Common Pitfalls:

  1. Bigger Salaries Are Not Always Better.   Just because an employee receives a high salary does not make him or her exempt under California law.  Regardless of the size of salaries, employees still must meet the other requirements of the exemption.
  2. A Job Title By Any Other Name Would Smell As Sweet.  If an employee is not  actually performing managerial or related duties more than 50% of the time or meeting the other requirements of the exemption, neither an impressive job title nor a detailed job description will save the exemption.
  3. To Deduct, Or Not To Deduct, That Is The Question.  Employers cannot deduct from exempt employees’ salaries for poor performance, lack of work, or some kinds of missed work days.  Employers must consider alternatives to salary deductions for disciplinary measures in order to protect the exemption.
  4. Give Them An Inch And They Will Take a Mile. While discretion is the better part of valor, and the exercise of discretion and independent judgment is an essential element of the exemption, unfettered discretion can actually hinder an exemption defense.  Employers must allow exempt employees to exercise discretion, but when exempt employees are free to work as they please with zero oversight, employers can face an uphill battle when employees argue that they used their discretion to perform mostly nonexempt duties.
  5. Lean Is Good But Too Skinny Is Dangerous. While all businesses strive to run efficiently, employers should provide exempt employees sufficient resources so that they are not compelled to spend most of their time performing nonexempt work.
  6. Independent Contractors May Not Fit the Bill. Exempt employees must supervise at two least other employees. The supervision of independent contractors or employees of contractors may be attacked as insufficient.
  7. Allow Exempt Employees To Rule The Roost.  Oftentimes employers vest hiring and firing decisions in their Human Resources or other departments, or high atop the chain of command.  If an exempt employee’s recommendations regarding hiring and firing or other changes in employment status are regularly ignored, the employee may not qualify for the executive exemption.

Workplace Solutions:  How can you protect executive exemption classifications?  Below are a few tips:

  1. Remind Employees To Keep You Posted.  Provide written reminders to your executive employees, both upon hire and throughout their employment, that they need to alert someone in Human Resources if they think they are not spending most of their time on exempt tasks.
  2. Institute An Open Door Policy.  Consider implementing an open door policy that specifically instructs employees to raise any concerns about how much time they might be spending on nonexempt duties.
  3. Create Unique Job Descriptions.  Review job descriptions to ensure that an employee performing in accordance with that description would meet the test for the exemption.
  4. Conduct Periodic Training.  Institute periodic training for managers that specifically instructs them on the expectations of employees subject to the executive exemption.
  5. Be Mindful Of Loss Of Direct Reports.  Instruct your Human Resources department to keep track of direct reports to ensure that employees classified as exempt executives supervise at least two full-time equivalent employees.
  6. Require Self-Evaluations Regarding The Exemption Test.  If your company uses self-evaluations as part of a performance review process, solicit self-evaluation in categories related to the exemption test.  For example, ask employees to:
    • Describe how they have exercised discretion and independent judgment in managing their departments;
    • Describe how they have exercised discretion and independent judgment in supervising subordinates; and
    • Describe how they have helped the department through employee growth and retention.
  7. Require Periodic Signed Acknowledgements.  Have your employees sign periodic acknowledgments that they spent more than 50% of their time on exempt tasks during the applicable time period.

Edited by Sophia Kwan