Chapter 14:
"White Collar" Exemptions

Updated as of May 2008

TIPS ON THE EMPLOYERS GROUP EXEMPTION GUIDE LIST

Exemption Categories

The most widely available "white collar" overtime exemptions are for the executive, administrative, professional employees or outside salespersons. For California employers the principal sources of overtime exemptions are the federal Fair Labor Standards Act (FLSA) and its regulations, and the California's Industrial Welfare Commission Orders (Wage Orders). Where conflicts exist between the two laws, the higher standard (more difficult to be exempt) applies.

Duties, Responsibilities, and Salary Test

White-collar exemptions are determined by using duties, responsibilities, and salary (remuneration) tests. Job titles mean nothing. Salaried status alone is similarly insufficient for exempt status.

Exemption Not a Choice

Exemption is not a choice of the employee or employer. Even if both parties agree to an exemption classification, overtime will still be owed if the duties, responsibilities and salary tests are not met.

Salary/Remuneration (Compensation) Requirement

In California white-collar exempt employees must earn a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment. - since January 1, 2008 it's $640 per week. Full-time is defined in Labor Code § 515(c) as forty (40) hours per week. Where California and federal minimums differ, the higher standard (rate) applies.

Federal and California Tests

Generally, under federal law, if an employee is highly compensated (paid $100,000 or more per year) and customarily and regularly performs any one or more of the exempt duties of an exempt classification, he/she will be FLSA exempt. An employee may be exempt if paid at least $455 per week and his/her primary duties are the performance of the exempt duties of the classification. Basic FLSA exempt classifications are: Administrative, Executive, Professional, Outside Salesperson, and the hourly paid Computer Professionals. The DOL’s Employment Standards Administration, Wage and Hour Division, maintains a website regarding FLSA exemptions.

California Wage Orders generally require an exempt employee to be primarily engaged in duties which meet the test of the exemption. "Primarily engaged in" means that more than one-half (1/2) of the employee's work time must be spent engaged in exempt work. For example, the activities constituting "administrative" exempt work and non-exempt work are construed in the same manner as those appearing in the Code of Federal Regulations. See 29 C.F.R. §§ 541.201-205, 541.207-208, 541.210, 541.215 . Additionally included is all work that is directly and closely related to exempt work, and work which is properly viewed as a means for carrying out exempt functions. The work actually performed by the employee during the course of the workweek must, first and foremost, be examined and the amount of time the employee spends on such work, together with the employer's realistic expectations and the realistic requirements of the job shall be considered in determining whether the employee satisfies this requirement.

Exempt Duties More Than 50% of the Time

When judging exempt duties and responsibilities, California requires that the work be "primarily" exempt. That is, the work duties must be of an exempt nature more than 50% of the employee's time. This "more than 50%" rule is actually more restrictive than the new federal regulations requirement, where an employee’s “primary duty” can represent less than 50% of his/her regular work.

EXEMPTIONS

Executive Exemption

This is the exemption classification for supervisors and managers. The executive exemption requires that the individual be primarily engaged in duties, which meet the test of the exemption. Duties may involve the management of the business or of a customarily recognized department or subdivision. Management duties include hiring, firing, direction, payment, evaluation and discipline. The individual must regularly and customarily direct the work of two or more employees.

Administrative Exemption

This exemption classification is, perhaps, the most misapplied. The administrative exemption requires that the employee's primary duties be office or non-manual and be directly related to management policies of general business operations of the employer. That is, the individual must be involved in "matters of significance." Regular use of discretion and independent judgment is also required. "Discretion" and "independent" judgment imply independent choice, free of immediate supervision or direction. California guidelines state that employers often confuse discretion and independent judgment with skills or knowledge. Independent judgment and discretion imply evaluation and comparison of possible options and making a decision not merely applying knowledge in following prescribed procedures or determining whether specified standards have been met.

Professional Exemption

In order to meet this exemption a person must be licensed or certified by the State of California and be primarily engaged in the practice of: law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting; or in an occupation commonly recognized as a learned or an artistic profession. A "learned or artistic profession" is one in which an employee is primarily engaged in work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study or work that is original and creative in character in a recognized field of artistic endeavor. And, the work is predominantly intellectual and varied. The employee must customarily and regularly exercise discretion and independent judgment in the performance of his/her duties.

Pharmacists and registered nurses are not considered exempt professional employees unless they individually meet the criteria established for exemption as executive or administrative employees.

Outside Salesperson Exemption

Outside salespersons are exempt in California if the employee is at least 18 and spends more than one-half of his or her time away from the employer's location selling tangible or intangible items. Federal law requires an outside salesman to have as his/her primary duty: making sales, and obtaining orders. The salesperson must be customarily and regularly engaged “away” from the employer’s place or places of business.

Advance Practice Nurses Exemption

Starting in 2000 certified nurse midwives, certified nurse anesthetists and certified nurse practitioners who are "primarily engaged in performing duties for which certification is required" became exempt from overtime requirements (see California Labor Code § 515(f)(2)(B)). Advanced practice nurses who are practicing nursing in a position not requiring their certification are not exempt for such non-certified work.

Computer Professionals Exemption

Hourly paid computer professionals in the software field who are "primarily engaged" in exempt work as specified in § 515.5(a) of the Labor Code, are highly skilled, and are paid not less than $36.00 per hour for all hours worked are exempt from premium overtime pay rates.. The Division of Labor Statistics and Research is empowered to adjust this rate annually in October to be effective January 1 of the following year. The amount of increase is equal to "the percentage increase in the California Consumer Price Index for Urban Wage Earners and Clerical Workers." Work performed over 8 hours per day or over 40 hours in a workweek is compensated at the regular hourly rate. Section § 515.5(a)(4) of the California Labor Code permits an employer to pay an annualized full-time salary equivalent of the hourly rate. However, employers must still pay $36.00 for each hour worked in a workweek. It is essential that employers keep track of all hours worked for hourly paid computer professionals in order to assure the proper payment of wages. SB 929 became effective on January 1, 2008. It lowered the hourly rate of pay for a computer professional from $49.77 to $36.00, or the annualized full-time salary equivalent of that rate, provided that all other requirements of the law are met. AB 10, effective September 30, 2008, states that a computer professional may be exempt:: "...if the employee is paid on a salaried basis, the employee earns an annual salary of not less than seventy-five thousand dollars ($75,000) for full-time employment, which is paid at least once a month and in a monthly amount of not less than six thousand two hundred fifty dollars ($6,250)."

Effective January 1, 2009, the computer software employee's minimum hourly rate of pay exemption increases from $36.00 to $37.94, the minimum monthly salary exemption increases from $6,250 to $6,587.50, and the minimum annual salary exemption increases from $75,000 to $79,050. The increases reflect a 5.4% increase in the California Consumer Price Index for Urban Wage Earners and Clerical Workers. ( California Department of Industrial Relations Memoranda, October 28, 2008.)

* The Division of Labor Statistics and Research shall adjust both the hourly pay rate and the salary level of computer professionals on October 1 of each year to be effective on January 1 of the following year by an amount equal
to the percentage increase in the California Consumer Price Index for Urban Wage Earners and Clerical Workers.

CALIFORNIA WAGE ORDERS

There are 17 Industrial Welfare Commission Orders (California Wage Orders). Thirteen are industrial covering certain industries. Three orders cover certain occupations. One order covers miscellaneous employees not previously covered by prior IWC Orders. Occupational Wage Orders cover certain types of employees not working for an employer covered by one of the twelve industrial orders. Industrial orders take precedence over occupational orders in determining Wage Order coverage. For example, professionals working for a manufacturer are covered under the industrial order -- "Manufacturing Industry" 1, not the occupational order - "Professional, Technical, Clerical, Mechanical and Similar Occupations" 4. Some occupations and industries are not covered under the California Wage Orders.

Note: See Chapter 2 in this manual titled, "What California Wage Order Are We Under."

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