Are Your Employees Exempt or Non-Exempt?
The FLSA (Fair Labor Standards Act) requires three things to make an employee exempt. Most agency employees are, by Department of Labor definition, non-exempt, regardless of how agency owners or employees would like to view themselves or each other. And, if you think that no one notices, here are a few sobering statistics….
Author: Al Diamond The FLSA (Fair Labor Standards Act) requires three things to make an employee exempt. Most agency employees are, by Department of Labor definition, non-exempt, regardless of how agency owners or employees would like to view themselves or each other. And, if you think that no one notices, here are a few sobering statistics…. The FLSA (Fair Labor Standards Act) requires three things to make an employee exempt, compensation above a weekly minimum ($455/wk or $23,660/yr), the employee must be salaried, as opposed to hourly, and must perform “certain” exempt duties. While there are no standard reasons for making employees exempt or non-exempt, many agency owners over-simplify the decision based only on whether the employee would or should receive overtime pay. And some employees would like to be considered exempt, over-simplifying the reason for being salaried as avoiding potential loss of income if they are not able to work the full work week. Others, who work longer hours, want to be hourly to be eligible for overtime pay for time worked over 40 hours. But, in fact, most agency employees are, by DOL (Department of Labor) definition, non-exempt, regardless of how agency owners or employees would like to view themselves or each other. And, if you think that no one notices, here are a few statistics:
There are five classes of possible exempt employees: Executives – must earn no less that $455/wk or $23,660/yr, must manage the agency or a division or department as a primary part of their job, must have the authority to hire, fire, evaluate and set compensation for employees (giving evaluations is not, in itself, sufficient) and must manage at least two employees. Professionals – May be one of three types, Creative (artists, musicians, etc.- that does not apply to agencies, Computer (primarily system analysts or programmers, so repair and maintenance employees don’t count as exempt), and Learned (intellectual and advanced knowledge in a field of science or learning specifically that requires consistent exercise of independent discretion and judgment). This area has been attempted for use by agencies to exempt service employees. If the employee must follow guidelines (like system requirements or underwriting requirements) they will be treated like the claims adjusters who were judged to be non-exempt since they must follow their companies’ claims guidelines in their adjustment efforts. Moreover, jobs in which most employees gain their skill and knowledge by experience does NOT qualify for exemption. Most agency staff would be considered technicians (also not permitted to be exempted). Computer – must earn either $445/wk salary or $27.63/hourly AND must have primary duties systems analysis, computer systems programming or design – well out of range of most computer employees in agencies. Outside Sales – This is a good opportunity for exemption of sales employees, but, be warned, IT APPLIES ONLY TO OUTSIDE SALESPEOPLE (primary responsibility selling and working with clients and prospects primarily outside of the office)! The issue with producers is the general use of 1099 independent contractor agreements (trying to avoid payroll tax loads and T&E expectations) for people who the IRS will categorize as agency employees. If you provide desk space, benefits, working hour assignments, prospects, clients and expectations of production (goals, monitoring, management, etc) and maintain ownership of the accounts generated for 1099 producers and if they only work for your agency, the chances are that, in an audit, these people will be considered agency employees and you will face fines and penalties. Producers have no minimum compensation levels and they can be paid in any way (including pure commission) and still be considered agency employees by the government oversight bodies. RECENT QUESTIONS TO AGENCY CONSULTING GROUP, INC. REGARDING PRODUCERS AND EXEMPT EMPLOYEES:
Just because a person is on commission doesn’t mean that they are (or are not) qualified as employees. Just because a person is a producer doesn’t automatically make them an exempt employee (they must be “outside” salespeople to become exempt).
Most small to medium sized agencies do not have professional HR managers who understand FLSA rules. More than 70% of small businesses in the U.S. would fail an FLSA Audit. Your best bet to avoid this situation is to perform an annual self-audit, or have Agency Consulting Group, Inc. audit your FLSA Exemption Status specifically indicating the exemption status and the rationale for each employee. A business may correct any deficiency through the Safe Harbor provision of the Act that permits employers to correct improper deduction mistakes without losing an employee’s FLSA exempt status. This indicates your good-faith efforts to ward off double damages to those misclassified exempt employees. Call Al Diamond if you have questions regarding exemption status and 1099 qualifiers at (800) 779-2430.
E-mail: info@agencyconsulting.com Website: www.agencyconsulting.com Copyright 2009 by Agency Consulting Group, Inc. Used with permission. |
“I have had a producer on commission only as a 1099 independent contractor for years. He is devoted to selling insurance for us and is a sub-producer on our agency management system. He works his own schedule, can either work from his office at our agency or from home, can work or not based on his initiative and either earns commission or not based on his sales activity. He can work as few or as many hours as he wants and it doesn’t directly affect his compensation. He pays his own T&E and schedules his business expenses on his own tax return. We give him a fair commission on his sales.”
The good news is that you can certainly pay him straight commission and he is by definition exempt from overtime issues since his role is in outside sales. The bad news is that, by IRS definition, he is an employee, meeting most (if not all) of the qualifiers of an employee. 
