Overtime Pay Exemptions

Overtime Pay Exemptions2018-06-13T16:40:07+00:00

Who Gets it. Who Doesn’t.

Federal and state laws–not employers–dictate who is entitled to overtime pay, and various legal tests must be examined to determine whether your employer has properly classified you. Job titles mean nothing; you have to examine the duties to be certain. There are numerous overtime exemptions and, since they can appear complicated, many employers misunderstand them and misclassify their workers, oftentimes denying them years of wages. When that happens, it is usually because a worker failed to qualify as one of the following exempt positions:

  • Executives
  • Administrators
  • Professionals
  • Computer Professionals
  • Outside Salespersons
  • Commissioned Salespersons

The sections below in this FAQ page detail each of these exemptions. You may also wish to review the U.S. Department of Labor’s discussion of these commonly-misunderstood exemptions under federal law, although California law is much more protective of workers. Bear in mind, as you review these tests, that some of their requirements vary between California state law or federal law. Also understand that more than one exemption may apply to a particular job position.

For the sake of illustration, this FAQ page provides the factors as they appear under federal law. Where appropriate, we have also included a reference to the more worker-friendly California law version. Whether California state or federal (or both) tests apply to your job position should be examined by competent legal counsel with eye toward the nature of your work, the industry within which you work, the manner in which you are paid, and (if litigation has already begun) the claims being alleged in the particular lawsuit.

The Executive (a.k.a. “Managerial”) Exemption

Before your employer can deny you overtime pay under the (federal) executive exemption, the employer must demonstrate that you:

  • have the primary duty of managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise, AND
  • “customarily and regularly” direct the work of at least two other full-time employees or the equivalent, AND
  • possess the authority to hire and fire other employees, or have a significant influence in such decisions, AND
  • are compensated on a salary basis (as defined in the current regulations) at a minimum rate of pay (also as defined in the current regulations but, note, the rate may be higher in certain states).

If the employer cannot meet each and every one of these factors (and if no other exemption applies), you are entitled to overtime pay for overtime hours worked. For an employer to prove an exemption applies, it also has to prove it for each pay period you worked. As tough as that requirement is to meet under federal law, the burden under California law is even tougher.

What constitutes “management” work varies from context to context, requiring further examination of the particular company and its practices. Federal regulations provide some guidance through examples, but presume that these duties call for the requisite discretion and independent judgment on the part of the worker (which may be far from reality). Nevertheless, a non-exhaustive list of examples includes interviewing, selecting, and training of employees, setting and adjusting rates of pay and hours of work, directing the work of subordinates, maintaining production or sales records for use in supervision or control, appraising employees’ productivity and efficiency for the purpose of recommending promotions or other changes in status, handling employee complaints and grievances, disciplining employees, planning, determining the techniques to be used, apportioning work among employees, determining the type of materials, supplies, machinery, equipment or tools to be used, or merchandise to be bought, stocked and sold, controlling the flow and distribution of materials or merchandise and supplies, providing for the safety and security of employees or property, planning and controlling budgets, and monitoring or implementing legal compliance measures. Despite their inclusion here, you should also not assume that any of these duties will be considered exempt or managerial in all instances. In many situations, they are not exempt or managerial if performed according to a script provided by the employer.

The California counterpart to this federal test includes a much more liberal set of factors, such as a different interpretation of “primarily duty” (i.e., under federal law, “primary duty” means the foremost job responsibility whereas, under California law, it means the tasks that occupy more than one half of the employee’s work time). If you spend only one half your work time in California performing tasks that don’t qualify as exempt or managerial, then you may be entitled to years of overtime back pay.

The Administrative Exemption

For the federal administrative exemption to apply:

  • the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, AND
  • the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance, AND
  • the employee must be compensated on a minimum salary or fee basis (as defined in the current regulations) at a minimum rate of pay (also as defined in the current regulations but, note, the rate may be higher in certain states).

By this definition, you can see that so-called “production” work (e.g., work for the benefit of the clients of the business, sales work) does not satisfy the first factor, and the exemption would not apply. What constitutes “production” work will, in part, depend on the nature of the business itself. For example, making photocopies for a company’s internal use would be considered “administrative” work, but making copies for the customers of a photocopying service would be considered “production” work. Despite how confusing these distinction might be, it is the employer’s burden to understand them and to prove them, not yours. If the employer doesn’t want to carry that burden, then perhaps it shouldn’t exempt you from overtime pay. The burden for California employers is even higher (including the more liberal definition of “primary duty”). As for all of the exemptions, job titles are irrelevant; the wages and job duties are determinative.

The Professional Exemption

For the federal professional exemption to apply:

  • the employee’s primary duty must be the performance of work: (a) requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or (b) requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor, AND
  • the employee must be compensated on a minimum salary or fee basis (as defined in the current regulations) at a minimum rate of pay (also as defined in the current regulations but, note, the rate may be higher in certain states).

And, yes, as you now know, you employer (not you) must prove all this. Again, California law is more protective of workers than is federal law and applies much different language, but be sure to check with an attorney before determining if an exemption under either standard applies to you.

The Computer Professional Exemption

This exemption is derived from Section 13(a) of the federal Fair Labor Standards Act, the same place where you would find the federal versions of the Executive, Administrative and Professional exemptions (discussed above) and the federal Outside Salesperson exemption (discussed below). This exemption, like each of the exemptions discussed above, also contains a “salary basis” test which, for the computer professional exemption, means compensation on a salary and/or fee basis (as defined in the current regulations ) at a minimum rate of pay, or on an hourly basis at a minimum rate per hour (as defined in the current regulations but, note, the rate may be higher in certain states). Additionally, a computer professional must:

  • work as a computer systems analyst, computer programmer, software engineer, or other similarly-skilled worker in the computer field, AND
  • have, as his/her primary duty, either (1) the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications, (2) the design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications, (3) the design, documentation, testing, creation or modification of computer programs related to machine operating systems, or (4) a combination of the aforementioned duties, the performance of which requires the same level of skills.

What this means is that workers engaged in training customers’ employees in specialized computer software, manipulating and modifying software settings and specifications (e.g., toolbars and set-up) to meet customer needs, installing, debugging, troubleshooting, and converting data and testing customers’ equipment, are generally not exempt (since their duties did not involve determining hardware, software, or systems functional specifications or designing, developing, analyzing, testing, or modifying computer systems or programs). Like all exemptions, job titles do little, if anything, to support the applicability of this exemption. For information about California’s more worker-friendly version of this exemption, read California Labor Code Section 515.5.

The Outside Salesperson Exemption

This exemption permits an employer to deny overtime pay (and minimum wages) only if a particular worker:

  • has the primary duty of (a) making “sales” or (b) obtaining orders or contracts for services or facilities usage, AND
  • is customarily and regularly engaged away from the employer’s place of business in performing such primary duty.

The information above can be found at 29 USC § 213(a)(1) and 29 C.F.R. § 541.500. In order to qualify for this exemption under California law, however, the employee must spend more than 50% of his/her working time performing truly-exempt sales functions away from the employer’s business establishment (or away from the employee’s home, if that is where the employee is normally based). Most of the California Wage Orders contain this or similar language.

The Commissioned Salesperson Exemption

The last of the most commonly-applied of the federal exemptions applies to primarily commission-based salespeople. Section 7(i) of the Fair Labor Standards Act (29 USC § 207[i]) will exempt a particular employee if:

  • the employee is employed in a “retail or service establishment,” AND
  • the employee’s regular rate of pay exceeds one and one-half times the applicable federal minimum wage, AND

Note that the “regular rate of pay” language, referenced in the above federal test, applies on a workweek basis, meaning that averages of compensation for two or more weeks do not satisfy this requirement.

Also note that (while the “retail or service establishment” language is exclusively a creature of federal law) the two California tests for this exemption also require that the employee’s earnings exceed one and one-half times the minimum wage, but that the higher California state minimum wage would apply. Note that only two of California’s Wage Orders (Nos. 4 and 7) provide for this exemption, which means that the majority of industrial fields do not provide an exemption for commissioned salespeople working within them.

Does the “retail or service establishment” requirement for Commissioned Salespersons (under federal law) exclude workers in particular industries?

Yes. An excellent (and, for a while, surprising) example of this applies to financial services industry workers such as registered representatives (aka, stockbrokers), mortgage loan officers, insurance sales representatives and bank employees. Indeed, many of our clients working in these positions have been thrilled to learn that they were entitled to massive amounts of overtime pay. Having said that, an analysis of whether another (e.g., the administrative) exemption may apply to their positions must also be performed before concluding they are entitled to back pay.

Generally speaking, under federal law, a company must be engaged in “retail” operations before it can even attempt to prove one of the exemptions applies to its employees. This is known as a company possessing a “retail concept.” For greater detail about this concept, click here. Conversely, companies that are not engaged in retail transactions (i.e., transactions for the sale of goods or services to the end-user, versus transactions over products and services for eventual re-sale, such as is the case with securities) do not satisfy the federal commissioned salesperson exemption.

A partial list of company types that lack this “retail concept” includes companies/organizations engaged in advertising, banking, bottling, credit, duplicating (including addressing, mailing, mail listings, and letter stuffing establishments), education, employment services, engineering, finance, insurance, mutual, stock and fraternal benefit (including insurance brokers, agents, and claims adjustment offices), income tax return preparation, investment counseling, labor unionization, law, real estate, security (e.g., security guards) telephone service, title and abstracts, transportation, travel (e.g., travel agencies) and trust services.

If you work[ed] in one of these industries (or any one of the myriad other industries identified under federal law), you may well be entitled to significant amounts of overtime pay. Don’t relay on the information found on this FAQ to self-evaluate your case. Contact us, confidentially and free of charge, for an analysis of the wages and penalties to which you may be entitled.

This information is for illustrative and educational purposes only. It should not be construed as legal advice, the establishment of an attorney-client relationship, or as indicative of a particular outcome regarding any legal issue you might have.