The exempt employee conundrum
December 18, 2021
Many foreign companies that hire their U.S. subsidiary’s first employee are perplexed by the contradictions inherent in the system of employment laws in New York. One the one hand, the system is very employer-oriented (no state mandated PTO, at-will employment, federal holidays that employers are entitled to ignore) while on the other hand there are enough anxiety-inducing pitfalls to make employers feel that the regulatory deck is stacked against them. One such issue is misclassification - where an employer mistakenly (or occasionally intentionally) treats an employee as exempt from federal overtime pay rules (which require payment at a rate of 1.5x for any hours worked over forty in a week), when in fact the employee is entitled to overtime pay. At a minimum, this misclassification can result in the employer being required to pay all misclassified employees for the over time to which they were entitled going back three years. In addition, courts can then assess the same sum again in liquidated damages, which doubles the amount the employer is required to pay. Finally, where the misclassification was intentional, there are additional penalties of $1,000 per violation and even potential prison time for the offending employer.
The classes of employees who are exempt are “professional'‘ (in the learned professions sense), “administrative” (in the operations management sense) and “executive” (in the high-level decision making sense), with the “exercise of independent judgment on matters of significance” being a key factor. There are additional exemptions for some computer-related professions (e.g. software engineers), for commission-based sales people and for certain creative professionals. Furthermore most employees earning over $107,432 are exempt provided at least one of their duties falls within the "professional”, “administrative” or “executive” exemptions.
When assisting a company that is just getting started in the U.S., we advise them to run an individual analysis for each new recruit to determine whether the employee is exempt or not, and then whenever the employee’s role changes. This helps employers get into the habit of vigilance and avoids a scenario that we often see where an employer’s initial employees are exempt, while subsequent employees may not be, however the employer, having dealt initially with only exempt employees, has failed to run an assessment on future hires. For example, a SaaS vendor new to the U.S. hires two initial employees - both of whom have business development and marketing roles. Both employees exercise significant independent judgment and so are legitimately exempt from overtime. The company’s next few hires include a junior account executive who isn’t exempt, but is treated as exempt because the employer has gotten into the habit of treating all employees as exempt, as they all earn a salary and all work in an office.
Many roles are exempt from overtime rules, but unless an assessment is carried out each time, an employer has can inadvertently find itself on the wrong side of the law.
