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Common FLSA Exemption Test Pitfalls By Jonas Johnson, Ph.D. Senior Researcher (800) 627-3697 - [email protected] - www.erieri.com Copyright© 2012 ERI Economic Research Institute - 8575 164th Avenue NE, Redmond, WA 98052

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Page 1: Common FLSA Exemption Test Pitfalls - ERI Economic ... · PDF fileCommon FLSA Exemption Test Pitfalls By Jonas Johnson, Ph.D. ... 8575 164th Avenue NE, Redmond, WA 98052 . ... In conversations

Common FLSA Exemption Test PitfallsBy Jonas Johnson, Ph.D.Senior Researcher

(800) 627-3697 - [email protected] - www.erieri.comCopyright© 2012 ERI Economic Research Institute - 8575 164th Avenue NE, Redmond, WA 98052

Page 2: Common FLSA Exemption Test Pitfalls - ERI Economic ... · PDF fileCommon FLSA Exemption Test Pitfalls By Jonas Johnson, Ph.D. ... 8575 164th Avenue NE, Redmond, WA 98052 . ... In conversations

Copyright© 2012 ERI Economic Research Institute 1

The Fair Labor Standards Act (FLSA) is designed to ensure that employees are compensated fairly for the amount of work that they provide to an organization. One portion of the act covers whether an employer is required to pay an employee for the amount of overtime worked. To determine if an employee is exempt from overtime pay, the employee’s job must conform to the specifications set out in one of five standards. These standards are: the executive exemption, administrative exemption, computer exemption, professional exemption, and the outside sales exemption. Organizations work to comply with the requirements of the Act, but there are several common mistakes that regularly occur when determining a position’s exemption status.

The current paper deals with three of the most commonly used exemptions and the pitfalls that organizations will frequently fall into using these exemptions. These are elements of positions which appear to comply with the exemption during an initial analysis, but, upon examination by the federal government, have been determined to not be in compliance.

Administration Exemption

The administration exemption is designed to address employees who administer significant functions within an organization. However, due to somewhat ambiguous wording in the law, this is one of the exemption tests where mistakes are commonly made. This is because, despite the inexact wording, the DOL has carefully defined what makes a job exempt under this test. One example of an occupation which may be exempt (depending on circumstances) under this exemption is a tax accountant. This position generally has a primary duty which is directly related to the management or general operations of the business. Of particular interest is the clarification that administrative employees should have the latitude to exercise discretion and independent judgment. This is a requirement of the administrative exemption. In conversations with HR departments, it has become clear that some organizations are classifying jobs such as administrative assistant as exempt. This is likely due to the assump-tion that because administrative is in the title of the job, it must meet the criteria of the administrative exemption. Unfortunately, this is not the case. Administrative assistants and other lower level administrative jobs may not be expected to be exempt under the FLSA. For this exemption especially, it is critical to consider the exemption test based on the job description as opposed to the title.

Consider the job description, not simply the

job title.

All screenshots from the FLSA module in ERI's Occupational Assessor® & Survey (OA)

Page 3: Common FLSA Exemption Test Pitfalls - ERI Economic ... · PDF fileCommon FLSA Exemption Test Pitfalls By Jonas Johnson, Ph.D. ... 8575 164th Avenue NE, Redmond, WA 98052 . ... In conversations

2Copyright© 2012 ERI Economic Research Institute

Computer Exemption

When determining whether an employee is exempt under the computer exemption, one stumbling block for organizations may be the assumption that, just because an employee is engaged with computer systems, that individual will pass the computer exemption test. The computer test is designed to encompass high level systems analysts and programmers. Organizations run into trouble when they classify relatively low level IT workers, such as employees working at a help desk, as exempt. The key for this exemption test is to determine whether or not the employee’s primary duty consists of analyzing systems or developing software. If the employee does not do either of these two activities, extreme caution is advised in using this exemption.

Computer Programmer

Computer Data Entry Operator

How often does the primary duty consist of computer programming, design, and/or systems

analysis?

Page 4: Common FLSA Exemption Test Pitfalls - ERI Economic ... · PDF fileCommon FLSA Exemption Test Pitfalls By Jonas Johnson, Ph.D. ... 8575 164th Avenue NE, Redmond, WA 98052 . ... In conversations

3Copyright© 2012 ERI Economic Research Institute

Professional Test

One of the largest pitfalls with the professional test is a failure to understand how educational requirements im-pact the exemption. One of the critical questions from the professional test covers whether advanced knowledge is required, whether the work is predominantly intellectual in character, and whether the position requires the consistent exercise of discretion and judgment in a field of science or learning. It is critical to understand how the educational requirements of an occupation impact this exemption. A misconception with this test is the assump-tion that a general Bachelor’s Degree is sufficient to pass this exemption. This is not the case. For a job to pass the professional test, there should be a requirement for a specialized degree. Furthermore, the organization needs to adhere to that requirement. For example, if an organization employs mechanical engineers and has a requirement that the engineers have a Master’s Degree in mechanical engineering, and then hires a mechanically adept indi-vidual with an unrelated Bachelor’s Degree for that position, the job would no longer meet the requirements for the professional test. The reason being, by hiring an individual without training in a field of science or learning, the organization has demonstrated that the occupation does not require the advanced knowledge required to pass the test. There are exceptions of occupations with Bachelor’s Degrees that will pass the test, but these are specialized degrees which are required for acceptance to an occupation. An example of this degree is a Bachelor of Science in Nursing. Because the nurse occupation may require a Bachelor of Science, this particular degree can be considered training in a field of science or learning if the occupation only requires individuals with that degree.

Aeronautical Engineer

Does the position require advanced knowledge in a

field of science or learning?

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4Copyright© 2012 ERI Economic Research Institute

Creativity

One subset of the professional test which warrants further exploration is the creativity test. The creativity test refers to employees whose primary duty requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. The key to this exemption is the phrase “recognized field of artistic or creative endeavor.” Examples of these employees would be sculptors or novelists. While some occupations may exhibit some level of creativity, the fact that they exhibit creativity does not mean they would pass the creativity exemption test. For example, a high level accountant may be expected to be creative to minimize an organization’s tax liability, but, because this occupation is not in a recognized creative or artistic field, the occupation would not pass the test.

Conclusion

When determining whether a position may be classified as exempt, it is critical to consider the primary and sec-ondary duties carried out by the individuals within the job. When a regulator or judge decides whether a position is exempt, that individual will pay more attention to the description of the job and the actual duties carried out by the individual as opposed to the title. Furthermore, in some situations, incorrectly allowing one individual into a position which is classified as exempt may cause problems with other employees’ exemption status in that job, as can be seen with the educational requirements in the professional test. There are many nuances to the FLSA, and there are many potential pitfalls as well. This paper covers some of the more common mistakes that organizations make in FLSA classification, but naturally, is not exhaustive of the issues organizations face when considering exemption status.

For further information regarding the Fair Labor Standards Act, please see the Department of Labor’s website: http://www.dol.gov/whd/flsa/.

For more information on the FLSA module used in this report, visit ERI's Occupational Assessor® & Survey (OA) via http://www.erieri.com/OccupationalAssessor.