Every employee is designated under the law as having a "non-exempt" or an "exempt" status. This status governs whether an employee is entitled to overtime pay.

As a general rule, private employers are required to pay California employees premium overtime wage rates for time worked beyond eight hours in any workday as well as for time worked beyond 40 hours in any workweek. Employees who are entitled to overtime pay are classified as non-exempt employees. It is presumed under the law that all employees are non-exempt unless shown to fit into one of the established exempt categories.

Exceptions to the general rule exist for very specific categories of employees who are engaged in bona-fide executive, administrative, or professional capacities. These "white collar" employees are exempt from the overtime laws. Other exemptions exist for outside salespeople, a restricted group of computer professionals, and various other industry-specific positions. All exempt categories are intended to be narrowly drawn.

The federal standards for exempt status are set forth in the Fair Labor Standards Act, and the state standards are set forth in the Wage Orders issued by the California Industrial Welfare Commission. Though the federal and state standards for exempt status are not identical, they are similar. Most employers must comply with both federal and state standards.

Who Qualifies For Exempt Status

In order to qualify for any of the three white collar exemptions, a California employee must meet the "salary test" by receiving a set salary of not less than $500 per week and must meet the "duties test" by spending more than 50 percent of the actual time worked engaging in the type of work activities described for each exemption below. (The minimum salary required will increase to $540 per week as of January 1, 2002.) A necessary element of the duties test for each of the white collar exemptions is the requirement that the employee customarily and regularly exercise discretion and independent judgment affecting matters of a real and substantial significance to the policies or general operation of the employer's business and having a substantial effect on the general direction of the business as a whole. The following additional criteria must be met for the respective exemptions to apply.

For the executive exemption to apply, the employee must:

1. Manage either the entire business or a customarily recognized department or subdivision of the business; and
2. Customarily and regularly direct the work of at least two other employees; and
3. Have the authority to hire or fire other employees or to make suggestions and recommendations concerning the hiring or firing of other employees that are given substantial weight.

For the administrative exemption to apply, the employee must:

1. Perform office or non-manual work directly related to management policies or general business operations of the employer or its customers; and
2. Either:
   Regularly and directly assist a proprietor or employee subject to the executive or administrative exemption; or
   Perform under only general supervision work along specialized or technical lines requiring special training, experience or knowledge; or
   Execute under only general supervision special assignments and tasks.

For the professional exemption to apply, the employee must:

1. Be licensed or certified by the State and engaged in the practice of law, medicine, dentistry, optometry, architecture, engineering, teaching or accounting; or
2. Be engaged in an occupation commonly recognized as a learned profession (one in which the work requires advanced knowledge in a filed of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study); or
3. Be engaged in an occupation commonly recognized as an artistic profession (one in which the work is original and creative in character in a recognized field of artistic endeavor and which requires invention, imagination or talent).

Why Proper Classification Matters

The most obvious reason that proper classification is important is that non-exempt employees must be paid for overtime hours worked while exempt employees need not be paid anything beyond their established salary no matter how many hours they work. Misclassification of a non-exempt employee as an exempt employee can result in orders against the employer for up to four years' back pay, penalties, interest, and payment of attorneys' fees and costs.

An exempt employee is theoretically paid for the job function performed, not for the hours of labor required to perform such function. Thus, while not entitled to extra pay for hours worked beyond an otherwise normal workday or workweek, an exempt employee generally is not subject to having his or her salary reduced due to variations in the quality or quantity of the work performed. No deductions from an exempt employee's pay can be made for partial day absences, and there are restrictions on an employer's ability to deduct pay for full-day absences. Deductions are not allowed for absences caused by jury duty, attendance as a witness, or temporary military leave (though an employer may offset any amounts received by the employee as jury or witness fees or military pay). Exempt status can be destroyed and lost if improper deductions from salary are made. A lost exemption can have the same consequences as misclassification.

Like many regulatory schemes, exceptions and nuances pervade the regulations on exempt status. Employers who have any uncertainty about proper classification of employees should consult an experienced employment law attorney to determine the appropriate course of action.

We are happy to discuss exempt status and related issues with you and to respond to any questions you may have. Please feel free to contact Lynn Bersch of our San Francisco office at (415) 659-5925 or Judy Keyes of our Oakland office at (510) 466-6878 or any of Crosby's other employment law attorneys.