Classifying an employee as nonexempt vs. exempt can be a confusing task. It’s not enough to rely on the job title or job description. Discerning whether a particular position is truly exempt from overtime under California and federal law requires you to know the state wage and hour rules, and how to apply those rules to each position so you can correctly determine whether overtime compensation may be owed. One of the first tests for classifying exempt workers is the salary basis test.

Nonexempt vs. exempt: The salary-basis test

Is a salaried employee always exempt from overtime pay by default? The answer is no. When determining the nonexempt vs. exempt status for an employee, all exempt employees must be paid a salary, but being paid a salary is not alone sufficient to meet the exemption requirements. Firstly, the salary itself must meet the minimum salary requirements. Secondly, the employee must meet all other requirements of whichever exemption applies to their situation.

In a recent BLR webinar, Mark J. Jacobs and Ryan D. Wheeler outlined exactly how much the salary must be in California to meet the minimum threshold. The employee must be paid on salary basis an amount that is at least twice minimum wage based on a 40-hour week. That’s $16 per hour, multiplied by 2,080 hours, which translates to: $640 per week or $2,773.34 per month or $33,280 per year. Jacobs and Wheeler explained that "if you have a salaried employee, and they don’t make that much money, by law they cannot be an exempt employee."

When can you deduct from salary without losing exemption?

To pass the salary basis test (and pass the first hurdle to qualify for one of the exempt statuses), the employee’s weekly salary must be paid without reductions for variations in the quantity or quality of work performed. The employee must be paid for any week in which any time was worked. Even if the employee is coming in late and leaving early, wages cannot be deducted without jeopardizing the exemption.

This often leads to frustration for employers when they perceive an employee may be abusing their salaried position; however, deducting wages would result in losing the exempt status. "If you have someone who is abusing their position as a salaried employee, you need to reclassify them as an hourly employee and make them keep track of their time. The salary designation should be reserved for people who you’re not worried about having to track their time." Jacobs and Wheeler advised.

The presumption under both California and federal law is that if any work was performed in that work week, then the salary must be paid for that week. There are only limited exceptions to this rule, such as docking in full-day increments for one or more days of absence caused by:

• The first and last week of employment. If an employee starts on a Wednesday, for example, they are only due to be paid for the days worked that first week – 3 days in this example.
• Personal leave. If no work is done for a full day taken as a personal day, then the full day can be deducted from pay. Leaving work for a couple hours of personal time does not result in any deduction, however.
• Illness or accidents not covered by the employer’s bona fide paid leave program. This may happen when the employee has time lost for sickness or accidents and employee has no accrued benefits (or has exhausted all benefits) under that program.
• Disciplinary deductions caused by major safety violations.

However, be careful with any deductions, even allowed deductions. Consider whether this person should truly be a salaried employee.

The above information is excerpted from the BLR webinar titled "Exempt v. Non-Exempt in California: How to Evaluate Classifications to Determine If Employees are Entitled to Overtime." To register for a future webinar, visit http://catalog.blr.com/audio.

Attorney Mark J. Jacobs is a partner in the Irvine, California, office of Fisher & Phillips LLP. He focuses his practice on defending employment-related lawsuits and administrative complaints on a variety of issues, including harassment, retaliation, and discrimination.

Ryan Wheeler is an associate in the Irvine office. His practice includes counseling and defending employers in all areas of labor and employment law.