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Because it is highly litigated, understanding the distinction between exempt and nonexempt employees is critical. Generally, exempt employees are your key personnel who possess management and decision-making responsibilities. Because of the complexity of this area of law and the potential for fines and awards of back overtime pay when an employee is misclassified, this website contains an extensive discussion of the subject. It also contains sample worksheets to assist you in determining an employee’s status.
An exempt employee is normally an executive, administrative or professional employee. Other exempt employee types include some salespeople and computer professionals. All other employees generally fall under the nonexempt category. All nonexempt employees are covered by the state and federal wage and hour laws. To avoid paying overtime premiums, an employee must be exempt from the overtime requirements of both state and federal law.
You are not required by law to fill out and/or save exemption worksheets to determine if an employee should be classified as exempt or nonexempt. However, the worksheets offer an excellent way to define an employee’s job duties and compare them to the criteria that must be met for an employee to be classified properly as exempt or nonexempt. Misclassification of a nonexempt employee as exempt could result in huge awards of back overtime payments, plus fines and legal expenses.
Use the exemption worksheets to help determine if the position you are filling should be classified as exempt or nonexempt. When determining if an employee’s duties meet the requirements for an exemption, remember that an employee who does not perform exempt duties on a regular basis cannot be classified as exempt for a temporary assignment unless they meet the following criteria:
You usually complete the worksheet based on the position’s job description. However, consider asking the employees who fill the position to help you complete the worksheets. These employees can help determine the exact duties performed on a regular basis. They also know the amount of time they actually spend on various tasks, as this may differ greatly from time allocated for those tasks in a written job description. Keep completed exempt analysis worksheets in employees’ personnel files or with other worksheets in a common file. You can use them for reference when hiring for similar positions.
Making the determination at the time of recruitment is critical if you will be running credit reports in the hiring process. California law generally prohibits the use of a consumer credit report for employment purposes, but there is an exception if the position is an exempt manager.1 If you want to obtain and use a credit report for a managerial position, you must make sure that the position properly meets the exemption test at the time of recruitment. For more information, see Obtaining Applicant and Employee Credit Report.
You can also use the worksheets periodically to reconsider the status of existing positions if the job content changes or the amount of time spent on exempt versus nonexempt duties changes.
In order for California employees to be exempt, they must generally meet strict job duties tests particular to each exemption.
Job titles alone do not designate an employee as exempt or nonexempt. An employee with an impressive job title may not qualify as an exempt employee if their actual duties do not meet the exemption requirements. An employee who performs routine bookkeeping tasks does not become an exempt employee when given the title “controller” rather than “bookkeeper.” Giving an employee the title of “store manager” does not make them exempt if they open or close the store alone, serve customers, maintain merchandise displays and perform the work of a retail clerk. Calling an employee a “computer systems analyst” or “software engineer” does not make that employee exempt unless the employee meets all the exemption tests. For more information on the exemption tests for computer professionals, see Computer Professional Exemption.
Properly classified exempt employees generally must meet a specific minimum salary test. The following information describes some of the more important issues you should consider regarding an exempt employee’s salary.
Under California law, the most common exemptions require employees to earn a minimum monthly salary of no less than two times the state minimum wage for full-time employment, and the salary must be a pre-determined sum.2 This minimum amount may not be prorated for part-time work.3 There are different rules for some employees, such as hourly physicians, computer professionals and salespersons.
However, merely placing an employee on a salary does not exempt that employee from wage and hour laws. A nonexempt employee placed on a “salary” earns overtime just as hourly wage earners do.
To calculate this amount, multiply the applicable state minimum wage by two, then multiply by the number of hours a full-time employee works in one year. Divide the result by 12 months.
Example:
In California, special minimums for exempt status apply to certain physicians who are paid hourly and to computer professionals. For more information, see “Exemption for Physicians Paid on an Hourly Basis” in Professional Exemption and Computer Professional Exemption.
Different rules also apply to outside and inside salespersons. For more information on these rules, see Outside Salesperson Exemption and Commissioned Inside Sales Employee Exemption.
The applicable statewide minimum wage increased for fast food workers and health care workers, respectively. The higher rates in these industries change the exempt salary threshold for covered employees.
To read more, see the discussion of fast food and health care industries in Wage and Hour Requirements for Specific Industries.
Salary is limited to cash wages. It cannot include payments “in kind,” such as the value of meals and lodging.
For California employers, the minimum salary test of two times the state minimum wage is currently higher than the federal salary basis test, which means California employers must follow the state’s exempt salary requirements and stricter duties test.
Under the federal Fair Labor Standards Act (FLSA) and the U.S. Department of Labor’s (DOL) regulations, the federal threshold for white-collar exempt salary is $684 per week (equivalent to $35,568 per year) and the annual compensation threshold for employees who are exempt as a “highly compensated employee” is $107,432. These thresholds were set by the DOL in 2019.
Still, the federal salary basis regulations6 warrant some attention because multi-state employers may have employees subject to the federal rules, and at times, federal regulations are relied on by California agencies. The Division of Labor Standards Enforcement (DLSE) indicated that although differences do exist between the state and federal exemption standards, the federal regulations can serve as a guide where there is no conflict.7
The federal regulations include a safe harbor provision that provides some protection from liability under federal law. A state court could consider the provision if you are sued under state law. Under the safe harbor provision, an employer can avoid total loss of an exemption as a result of making improper deductions from salary if:
In order to meet the minimum salary test, the exempt employee must receive a pre-determined amount constituting all or part of their compensation for each pay period. The amount cannot be reduced because of variations in the number of hours worked or quality of the work performed. Again, this is the general rule for the executive, administrative and professional exemptions.
In Negri v. Koning & Associates, a California court of appeal ruled that an insurance adjuster who was paid hourly and did not receive a pre-determined amount per pay period was not paid on a salary basis and therefore was not exempt.10 A guaranteed minimum must be in place. A compensation scheme based solely on the number of hours worked without a guaranteed minimum is not a “salary” and does not qualify an employee as exempt. In this case, the court ruled that the employee was nonexempt and could proceed with his overtime claim.
Aside from the exceptions provided in this section, the employee must receive their full salary for any week in which the employee performs any work without regard to the number of days or hours worked. As a general rule, you need not pay an exempt employee for any workweek in which they perform no work.
Despite the general rule requiring payment of a set salary, an employer may pay an exempt employee additional compensation on an hourly basis for hours in excess of the standard 40-hour workweek. If the standard workweek in a particular industry is less than 40 hours, the Labor Commissioner allows an hourly rate for all hours beyond the industry standard. In addition, any hourly rate paid to otherwise exempt employees for work in excess of eight hours in any one day will not affect the exempt employee’s status.11
If an employee who is on a temporary assignment does not perform exempt duties on a regular basis, they are not exempt unless they work the exempt job and meets the duties and salary tests for at least one calendar month.
Most exemptions explained in this chapter require the employee to be “primarily engaged” in exempt duties. To determine if the employee primarily engages in exempt work, the Labor Commissioner examines all the work that the employee performs during the workweek. The Labor Commissioner considers the amount of time the employee spends on exempt work, as well as your realistic expectations and the realistic requirements of the job. In general, the employee must spend more than 50 percent of their time performing exempt duties.12
Exercise caution if you have managers that supervise employees and, at the same time, perform routine nonexempt tasks, such as stocking shelves or managing the phone lines.
A California court ruled that a manager who performed various nonexempt duties (bagging groceries, cashiering, stocking) while simultaneously supervising staff was not primarily engaged in the performance of exempt work and was entitled to overtime.13
Linda Heyen, an assistant manager at a Safeway, sued the store for unpaid overtime, claiming that Safeway should have classified her as a nonexempt employee because she regularly spent more than 50 percent of her work hours performing nonexempt tasks, such as cashiering, bagging groceries and stocking shelves.
Safeway argued that while these managers help with bagging or stocking shelves, they still actively function in their exempt managerial duties of supervising others, observing how the store is run, considering how to make the store run more efficiently, resolving employee and operational problems, and instructing employees.
The court disagreed with Safeway and upheld an award of overtime to Heyen.
According to the court, when a supervisor is multi-tasking and engaging in the concurrent performance of both exempt and nonexempt duties, the employer should examine the supervisor’s primary reason or purpose for undertaking the task in order to determine if the task is exempt or nonexempt — there are no “hybrid activities.” The employer must determine if more than 50 percent of the time is spent on exempt tasks.
The court provided this guidance, quoting federal regulations: “If a task is performed because it is ‘helpful in supervising the employees or contribute[s] to the smooth functioning of the department for which [the supervisors] are responsible’ ... the work is exempt; if not, it is nonexempt.”
Examples from the decision:
In a recent court case, also involving an assistant manager at Safeway, a jury returned a verdict that the assistant manager was properly classified as exempt, which was upheld by an appellate court.14 Though this case was decided in favor of Safeway, the court reiterated that employers shouldn’t assume that a menial task is exempt simply because it assists an exempt employee in carrying out “managerial” job duties. Nonexempt duties should be considered exempt when they are “directly and closely related” to exempt duties. Categorization of the time depends on the manager’s purpose: If the underlying purpose is managerial (supervisory training or demonstration purposes), the task may be exempt.
For more information, see “Working Managers” in Executive Exemption.
Most exemptions explained in this chapter require the employee to “customarily and regularly exercise discretion and independent judgment.”15 Discretion and independent judgment involve comparing and evaluating possible courses of conduct and acting or making a decision after considering various possibilities. An employee with discretion and independent judgment must either:
To “customarily and regularly” exercise discretion and independent judgment is to use discretion and independent judgment frequently in the course of day-to-day activities. The phrase “customarily and regularly” signifies a frequency that is more than occasional but may be less than constant.
These types of activities do not involve exercising discretion and independent judgment:
Inspectors and graders, for example, may have some leeway regarding the application of knowledge to a particular situation, but only within closely prescribed limits.
Almost every employee must make decisions requiring discretion. The discretion and independent judgment exemption requires that the decisions must involve matters of consequence of real and substantial significance to the policies or general operations of your business or customers. The tasks can be related directly to only a particular business segment but must substantially affect the whole business.
Exercising discretion and independent judgment on matters of consequence is different than making decisions that can lead to serious loss through the choice of wrong techniques, improper application of skills, neglect or failure to follow instructions.
Employees in training for an exempt position are not exempt employees because they do not exercise discretion and independent judgment during the training process.
1. Lab. Code sec. 1024.5
2. Lab. Code sec. 515(a)
3. DLSE Enforcement Policies and Interpretations Manual sec. 51.6.3
4. Lab. Code sec. 1475(d)(2)(D)
5. Lab. Code secs. 1182.14(g), 1182.15(g)
6. 29 CFR sec. 541.602
7. DLSE Enforcement Policies and Interpretations Manual secs. 51.6.5, 51.6.6
8. 29 CFR sec. 541.603(d)
9. DLSE Enforcement Policies and Interpretations Manual, sec. 51.6.1
10. Negri v. Koning & Associates, 216 Cal. App. 4th 392 (2013)
11. DLSE Opinion Letter 1997.09.03
12. DLSE Enforcement Policies and Interpretations Manual sec. 51.2
13. Heyen v. Safeway, Inc., 216 Cal. App. 4th 795 (2013)
14. Safeway Wage and Hour Cases, 43 Cal.App.5th 665 (2019)
15. DLSE Enforcement Policies and Interpretations Manual sec. 51.5; 29 CFR 541.207