Might AI Usage Remove Employees’ Exempt Status, Trigger More OT Costs?

Workplace utilization of artificial intelligence (AI) has doubled in the last two years, reducing the time workers spend on routine tasks and shifting the responsibilities of a wide range of roles. 

HR professionals (particularly those in the U.S.) should pay attention, lest these changes push some company employees out of exempt status, and trigger overtime costs and the risk of litigation from misclassified employees.

“It’s not hard to imagine how AI — with its amazing abilities to assess, analyze, inform, choose and create — could influence how employees do the work that qualifies them to be classified as exempt from overtime,” said Brett Bartlett, a partner at Seyfarth Shaw LLP and the co-chair of the law firm’s national wage-and-hour litigation practice group. “For both exempt and nonexempt employee populations, the use of AI will influence how work is done and the time necessary to do it.”

The risk is that white-collar employees defer to AI to make recommendations rather than exercising that discretion and independent judgment themselves, as is required in the U.S. by the Fair Labor Standards Act (FLSA) to warrant exempt status.

Most legal experts agree, however, that employees’ AI usage is not, in and of itself, enough to justify reclassification.

Access bonus Workspan Daily Plus+ articles on this subject:

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Exempted Status Is Based on the Nature of the Work

In the U.S., federal and state wage orders and labor code provisions define exemptions by reference to the nature of the work an employee performs — the exercise of discretion, independent judgment, management authority and specialized knowledge — not by reference to the tools used to perform that work, stated Danielle Ochs, a San Francisco-based shareholder at law firm Ogletree Deakins.

“Whether an exempt employee uses a calculator, a spreadsheet or a generative AI model to assist in their analysis does not change the character of the duties themselves,” she said. “In fact, the emerging rules regulating automated decision-making systems emphasize and encourage human-in-the-loop decision-making and create compliance exceptions where an employer can show such human review.”

Ochs explained that AI optimally functions as an assistive tool rather than a replacement for the independent judgment and discretion that define exempt work. The exempt employee still must review, evaluate, contextualize and approve AI-generated output, which itself constitutes the exercise of discretion and independent judgment.

Further, under the FLSA, exemption is determined by the employee’s “primary duty,” and under California law, the employee must spend “more than 50 percent” of working time on exempt duties, Ochs said.

“These tests examine how the employee spends their time, not how efficiently they accomplish tasks,” she said. “If an exempt employee uses AI to draft a first version of a report but still spends the majority of their time managing people, exercising business judgment and making decisions of consequence, the classification analysis is unchanged.”

Most Impacted Roles

According to Barlett, employers these days tend to pay competitive base salaries to exempt employees because of the important duties that they perform, and not because of any desire to skirt overtime pay obligations or for an ignorance of the law.

“It’s easy to jump to the conclusion that employees’ use of AI might tear away from some of them the justification for classifying them as exempt, but it’s very important to consider that most exempt employees who use AI are operating at a fairly sophisticated level and are able (or are learning) to use AI to supplement their roles — i.e., to do their work more effectively,” he said. “They are not abandoning the duties that justified their competitive salaries.”

The jobs most likely to face potential challenges are roles where AI is absorbing a larger share of the analytical or drafting work that historically consumed the bulk of the employee’s time, agreed Ochs.

The key question is whether that employee is now spending less than half their time exercising discretion, independent judgment, management authority and/or specialized knowledge.

Bartlett said that some roles to watch closely include:

• Managers classified as exempt executives using AI to inform hiring decisions by weeding through hundreds of applications to identify the “best” candidates for employment.
• Account or finance executives classified as exempt administrative employees using AI to assess volumes of financial data to develop recommendations to upper management or financial forecasts.
• Engineers or architects classified as exempt learned professional employees using AI to develop schemata and plans on an expedited basis.
• Non-“doctor of medicine” healthcare professionals classified as exempt learned professional employees using AI to analyze voluminous medical records to inform diagnoses or other assessments.
• Journalists classified as exempt creative professionals using AI to prepare first drafts of articles or scripts for eventual publication.
• Designers and artists classified as creative professionals using AI for first-draft designs and ideations.

Bartlett added that none of these are definitive examples of misclassified roles or of facts that — without more functional impact — would justify reclassification from exempt to nonexempt status.

“Each example, viewed superficially, might suggest that an important function of the role has been supplanted by the use of AI,” he said. “In my experience, though, when you look more closely at how employees in the roles are using AI, you see that they are using it to supplement how they’re doing their work. [In such cases,] the AI is not supplanting that work.”

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Employee Compensation
• Organizational Performance
• People Analytics