Understanding Employee Classification: Exempt or Non-Exempt?

An architectural firm is looking to expand and hires a designer with seven years of experience.  The designer is working on obtaining his architect’s license.  The firm extends an offer at $40 an hour ($83,200 a year at full time) and notes they plan to have the designer supervise one draftsman on their team.  The applicant counters that she would rather have the proper responsibility and title of a salaried employee and proposes a salary of $85,000 a year.  The parties shake hands and have a deal.  But isn’t there someone they forgot to ask about these terms?  The State of California.  The careful practitioner should also consult with the appropriate labor laws and regulations to determine how to classify an employee.

Exempt vs Non-Exempt: The Basics
The law refers to salaried or hourly as “exempt” or “non-exempt.”  The “exemption” is for California’s wage and hour laws.  If an employee is “exempt” than the employer does not need to track hours, overtime, meal periods, etc.  So why not classify everyone as exempt?  Unfortunately, the default under the law is non-exempt.  And perhaps the most important thing to know: it is the employer’s obligation to prove that an exemption applies.  This means when in doubt, there is less risk to classify the employee as non-exempt.

To establish the exemption, an employer must ensure the employee meets three key criteria: enough pay, a qualifying exemption classification (executive/managerial, administrative, or professional), and the duty requirement (to show the employee is primarily involved in exempt work).

Salary Exemption
The salary requirement is the most straightforward: an employer must pay the employee at least two times the state minimum wage for a full-time employee (40 hours a week, 52 weeks a year).  While easy to calculate, take note that it is also a moving target; the state minimum wage is tied to inflation so expect this number to creep up each year on January 1st.

For 2024, the minimum wage is $16 an hour, so the salary exemption minimum is $66,560.

If an employee is too close to the cut-off, the cautious practitioner should consider classifying the employee as non-exempt, so the moving minimum wage does not inadvertently cause the employee to lose the salary exemption down the road.  The also State tends to look closer at the classification of employees near the salary threshold, in case of an enforcement action by the California Labor Commissioner.Classification Exemption
The general exemptions for “executive, administrative, and professional employees” are set forth in Labor Code § 515.  However, architects and other designers are also subject to the Industrial Welfare Commission regulations, specifically Industrial Wage Order Number 4, which spells out additional details on the test for classification.

Executive / Managerial Exemption
An employee under this exemption must primarily manage the business itself – or a department or subdivision of the business.  Their duties should include directing the work of at least two or more full-time employees (or the equivalent if managing any part-time employees) and they should have some managerial authority as well (such as to hire, fire, or play a role in suggesting the hiring, firing, advancement, promotion, etc.) of other employees.

An employee in charge of a permanent unit managing multiple subordinates, like a project manager in charge of a substantial design team, often qualifies for this exemption – but to truly qualify, they need to be involved in some aspect of the management of employees, such as the role in assessing employment performance for future promotions, and not just managing the completion of design tasks.  Additionally, the regulations note the employee must manage a “customarily recognized department or subdivision thereof” and the State notes this is meant to distinguish between a unit with a permanent status and function and one that is just a temporary collection of employees assigned from “time to time to a specific job.”  One way to think of it is a distinction between being a manager and being in management.

Administrative Exemption
This designation is not for administrative staff or assistants in general.  Instead, this exemption applies to employees performing office (or non-manual) work directly related to management policies or general operations with the practice or its customers. The must have the ability to use discretion and independent judgment on important matters.  They also must generally work with independent discretion and judgment, subject only to “general supervision,” and must have some level of specialized or technical lines of work that requires special training, experience, or knowledge to perform their work.

This could include roles in finance, accounting, HR, or marketing.  It can also include an executive administrative assistant that directly assists the head of the firm or another high-level manager, provided they meet the other requirements (such as independence and working with only general supervision).

Employees who are trained on specific administrative procedures and then generally just execute those procedures according to a standardized process generally do not qualify for this exemption.

Professional Exemption
This exemption can be the easiest to establish for architects – if the employee is actually a licensed architect.  An employee licensed by the state in architecture or engineering, as well as several other licensed fields ((or accounting or law), qualifies for this exemption.

There is also a more difficult standard for the (unlicensed) employee – that of a “learned or artistic” professional.  These two standards are set forth in the Industrial Wage Order 4 as
Work requiring knowledge of an advanced type in a field or science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education and from an apprenticeship, and from training in the performance of routine mental, manual, or physical processes, or work that is an essential part of or necessarily incident to any of the above work; orWork that is original and creative in character in a recognized field of artistic endeavor (as opposed to work which can be produced by a person endowed with general manual or intellectual ability and training), and the result of which depends primarily on the invention, imagination, or talent of the employee or work that is an essential part of or necessarily incident to any of the above work

This work must be “predominantly intellectual and varied in character (as opposed to routine mental, manual, mechanical, or physical work)” and the work product must not be “standardized.”

Do unlicensed designers fall within this exception?  It would be much easier for employers if the law clearly said “yes” but unfortunately, as with many other things in the law, the answer is “it depends.”  Having a degree in architecture or a design field helps – especially a graduate level degree – to show that the employee is “learned” and had a prolonged course of specialized intellectual instruction.  The Wage Order also references some federal employment standards, and those federal standards state an employee meets the initial threshold of this exemption if the employee is in “possession of the appropriate academic degree.”  But the federal standards also note that ultimately, the requirements of the job itself will determine if the employee meets the exemption – so they must also have all the other factors as well, not just a degree.

Duty Requirement
In addition to the salary and classification tests, exempt employees must regularly exercise discretion and independent judgment and must “primarily” engage in these types of duties.  This means they are empowered to assess circumstances and select a variety of courses of action, rather than following a more rigid set of procedures, or looking to a supervisor for approval of practically all decisions.  This is not to say employees must be free to run wild with no oversight – the work of the employees must only “primarily” meet these duty tests – meaning they spend more than 50% of their time on the exempt duties.  A design team or practice group leader can regularly report to a principal and discuss major design features with them – a type of “supervision – and still qualify for the exemption.

Employees sometimes wear several hats and perform an assortment of duties; the employees must also primarily (more than 50% of the time) perform the duties that meet one of the classification tests.  Generally, most exempt employees clearly meet the duty test.  If it is not clear if an employee actually can meet the duty test, a careful employer may consider restructuring their duties or keeping them as a non-exempt employee until they can “spread their wings” and start exercising greater independence in their work.

Family Exemption
There is one final path to exemption – the Wage Order 4 notes it does not apply to anyone “who is the parent, spouse, child, or legally adopted child of the employer.”  This is not to say that no state or federal wage and hour laws apply to families, but the standards are substantially relaxed.

How to Proceed?
It is important to assess the expected duties and qualifications of an employee before they begin work to determine if they meet the wage and hour exemption.  The careful practitioner should consider writing job descriptions and job qualifications in a way that emphasize the relevant classification and the need for independent discretion and judgment in the work.  Employee reviews of exempt positions should also note the expectations that the employee meets these classifications.  If challenged, the employer should be able to defend the decision to classify the employee as exempt, both through material in the personnel file and based on the actual performance of the work itself.

The classification of employees often requires a detailed examination of the factual circumstances of the position.  What of the new employee in our hypothetical, for example?  She meets the salary exemption but is not a licensed architect or a qualifying executive.  Does she meet the “learned professional” classification?  Does she meet the duty test?  It depends.

You may contact the author to discuss further:

Ryan J. Kohler

Nothing contained in this article should be considered legal advice. Anyone who reads this article should consult with an attorney before acting on anything contained in this or any other article on legal matters, as facts and circumstances will vary from case to case.