Wage and Hour Laws: Identifying Exempt Employees and Independent Contractors

  • By Jacqueline Kelleher

Exempt employees

The Fair Labor Standards Act and New York Labor Law require employees be paid overtime for working over 40 hours in a week. However, certain employees are exempt from minimum wage and overtime requirements, if the positions meet the tests set out in the FLSA and New York Wage Orders. New York standards for establishing an exemption are higher, and should be followed in New York. Such employees must pass three tests: salary level, salary basis and duties test.

To meet the salary level and salary basis tests, exempt employees must be paid on a salary basis, and receive a minimum salary not less than $536.10 per week for administrative and executive positions, and $455.00 per week for professionals. Outside sales personnel may be exempt, but have no minimum salary requirement. The employee must receive his or her full salary for any week in which he or she performs any work, although if the employer provides paid time off, such as sick leave or vacation leave, that time may be charged when an employee works less than the regular work week.

If the employee meets the salary level and salary basis tests, the employer must then determine whether the duties performed by the employee meet an exemption. Under New York law, an administrative employee is an individual: whose primary duty consists of office or non-manual field work directly related to management or general operations of the employer; who customarily exercises discretion and independent judgment; who regularly and directly assists an employee in an executive or administrative capacity, or who performs work along specialized or technical lines, requiring special training, experience or knowledge.

The exercise of discretion and independent judgment is often confused with the use of skill in applying techniques, procedures or specific standards, or with making decisions on matters of little consequence. An employee who merely applies knowledge in following prescribed procedures, determining which procedure to follow, or determining whether specified standards are met does not exercise discretion and independent judgment. Bookkeepers, secretaries and clerks of various kinds who hold run-of-the-mill positions in an ordinary business generally do not qualify. However, positions such as executive assistant to the president, executive secretaries, high-level administrative assistants, assistant managers or buyers in retail or service establishments, mortgage loan officers and human resource managers may meet the administrative test.

An employee meets the executive exemption if the individual’s primary duty consists of management of the enterprise, or a customarily recognized sub-division or department; who customarily and regularly directs the work of two or more employees; who has the authority to hire or fire other employees, or whose suggestions as to hiring, firing, advancement, promotion or other change of status will be given particular weight; who customarily and regularly exercises discretionary powers, and who meets the salary tests. Examples of tasks performed by an employee who would meet the executive exemption include selecting and training employees; maintaining other employees’ production or sales records; handling other employees’ complaints, grievances and discipline; planning or determining techniques to be used and apportioning the work among employees; controlling the flow and distribution of materials or merchandise; planning and controlling the budget and monitoring or implementing legal compliance measures.

In New York, an exempt professional is an employee whose primary duty consists of the performance of work requiring knowledge of an advanced type in a field of science or learning acquired by a prolonged course of specialized intellectual instruction, or whose primary duty is the performance of work that is original and creative. Additionally, the work either must consist of the exercise of discretion and judgment in its performance, or must be predominantly intellectual and varied in character. Interestingly, the professional exemption in New York only requires that the minimum federal salary requirement of $455.00 per week be met in order to maintain the exemption.

Finally, New York recognizes an outside sales exemption. In order to qualify for this, the employee must customarily and predominantly be engaged away from the premises of the employer, not at any fixed site or location for the purposes of making sales, selling and delivering articles or goods, or obtaining orders and contracts for the service or for the use of facilities. In New York, such employees will be exempt from the minimum wage and overtime requirements, provided that the employer has prepared a written document signed by the employer and the employee containing information on how the employee’s pay is to be calculated and when payments are going to be made.

Independent Contractors

Another thorny issue for classification of workers is correctly identifying independent contractors. The classification of such workers determines important issues such as pension eligibility, workers compensation coverage, wage and hour law coverage, and many other matters. The determination of whether an employer/employee relationship exists will rest upon evidence that the employer exercises control over the results produced, or the means used to achieve the results. This is a very current issue, as the Obama administration has announced a multi-million dollar program to enforce proper classification of employees. In the event an employer misclassifies an employee as an independent contractor, the employer can face liability for unpaid taxes, unemployment insurance, workers compensation insurance, and potential civil and criminal penalties as well.

Under New York law, the critical inquiry is the degree of control exercised by the employer or contractor over the results produced, and the means used to achieve the results. Relevant factors include whether the contractor worked at his own convenience; was free to engage in other employment; received fringe benefits; was on the employer’s payroll and was on a fixed schedule. An independent contractor is generally characterized by an “arm’s length” relationship between the worker and the employer.

The IRS has developed a common-law test to evaluate the degree of control exercised over the worker. Facts which are considered fall into three categories: behavioral controls, financial control, and the type of relationship of the parties. Behavioral control evaluates whether the business is directing and controlling how the worker performs the job functions, including instructions and training. To evaluate financial control, the extent to which the worker has unreimbursed business expenses, the extent of the worker’s investment, whether the worker can realize a profit or loss, whether the worker makes his services available to the relevant market and how the worker is paid are all evaluated. Finally, the type of relationship is evaluated on factors including whether a written contract exists, whether the business provides the worker with employee benefits, the permanency of the relationship and whether the services performed are central to the regular business of the company.

The workplace is ever-changing, and it is important to periodically review employee classifications and independent contractors. Next month we will look at how to evaluate current practices to ensure compliance.

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