Do you know the difference between an exempt and nonexempt employee? It's not just about how you calculate their pay. And if you're not careful, you could end up in hot water by misclassifying nonexempt employees as exempt.
You can thank the Fair Labor Standards Act (or FLSA) for that. The FLSA is the federal law that dictates minimum wage and overtime pay for most employees in the US.
An employee’s exempt or nonexempt status is determined by their job duties, how much they earn, and how they are paid. We'll get into all that in a minute. First, let's look at what it means to be an exempt employee under FLSA regulations.
What is an exempt employee?
An exempt employee is a worker who is exempt from the FLSA minimum wage and overtime requirements. The most common types of FLSA exemptions are what we call “white collar” exemptions and they apply to high-level, salaried executives, managers, and professionals. Other common exemptions include outside sales and computer professionals.
If an employee is exempt, that means that they are paid a predetermined salary for the work they do no matter how many hours per week they work. The exempt employee earns the same salary regardless of whether they work 10 hours or 75 hours in the workweek. They are paid for the value of their services, not for the amount of time they work.
If that’s exempt, then what is a nonexempt employee?
Non-exempt employees are any employees who do not meet the requirements to be considered exempt. Non-exempt employees must be paid at least minimum wage for all hours worked, and they must record their hours worked each workday. Non-exempt employees are also entitled to be paid at premium rates called overtime for hours worked above 40 in a week (states and cities may have additional overtime requirements). Overtime wages are generally one and one half times the employee’s regular rate of pay but some states require double time in some scenarios. Finally, in many states, non-exempt employees must be provided with meal and rest breaks
Most non-exempt employees are paid by the hour. But some are paid a salary, piece rates, commissions, or a combination of payment methods. Just remember, regardless of how a non-exempt employee is paid, they must track all of their time worked, and be paid minimum wage and overtime.
Exempt employees must be paid on a salary basis but what does that mean?
There are two criteria an employee has to meet to be considered exempt under the FLSA. One of those is being paid on a “salary basis.”
But not all salaried workers are exempt. They must also satisfy the job duties test (which we'll cover next).
The salary basis test
An employee is considered a salaried worker if they receive a predetermined salary regardless of the number of hours they work each week. As of this writing, the FLSA salary threshold is $36,568 per year (or $684 per week).
The FLSA rules allow employers to use nondiscretionary bonuses and incentive payments (including commissions) paid annually to satisfy up to 10% of the standard salary threshold. Additionally, if at the end of the year, the employer has not met the salary threshold, the employer can make a final “catch-up” payment within one pay period after the end of the 52-week period to bring an employee’s compensation up to the required level. Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid.
I pay my worker on a salary basis; what else do I need to do to make them exempt?
The other critical requirement for an employee to be exempt under the FLSA is the “job duties test.” Salary alone is not enough to make an employee exempt. They must have “exempt” job duties.
What are exempt job duties?
Exempt job duties under the FLSA generally fall into five main categories, but several other miscellaneous exemptions exist. The five primary exemptions are executive, administrative, professional, computer, and outside sales employees.
Here's a summary of each category:
An executive is exempt if their primary job duty is management - either managing the entire enterprise, or a subdivision or department of it. Just remember, calling someone a manager is not enough. They must actually be managing at least two or more full time employees (or equivalent). An exempt executive has the power to hire, fire, promote, discipline, set compensation, and the like (or their suggestions are given particular weight by the company). A department manager or C-suite executive is generally exempt under the executive exemption.
As an administrative employee, you're exempt if your primary duty is performing office or non-manual work related to the management or general business operations of the company (or its customers). Exempt administrative employees must be vested with authority to make independent decisions of significance with regard to the operation of the business. Administrative employees typically work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities.
Professional employees are exempt when their primary duty includes performing work requiring advanced knowledge in a field of science or learning. And the advanced knowledge must be customarily acquired by a prolonged course of specialized study, generally more than a Bachelor’s degree. Exempt professionals typically work in fields such as law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences and pharmacy. Doctors and lawyers are exempt professionals.
A computer employee is exempt only if employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field. And their primary duty must consist of:
the application of systems analysis techniques and procedures,
the design, development, documentation, analysis, creation, testing, or modification of computer systems and programs based on and related to user or system design specifications,
the design, documentation, testing, creation, or modification of computer programs related to machine operating systems, and
a combination of these duties.
According to the Department of Labor, “The computer employee exemption does not include employees engaged in the manufacture or repair of computer hardware and related equipment. Employees whose work is highly dependent upon, or facilitated by, the use of computers and computer software programs (e.g., engineers, drafters and others skilled in computer-aided design software), but who are not primarily engaged in computer systems analysis and programming or other similarly skilled computer-related occupations identified in the primary duties test described above, are also not exempt under the computer employee exemption.”
Entry level computer programmers are not exempt, but high level software designers and systems architects generally fit this exemption.
Outside sales employees
An outside sales employee is exempt if their primary duty is making sales or obtaining orders or contracts for services away from the employer’s place of business. Outside sales employees are different from inside sales (non-exempt) employees because they spend them majority of their time in the field at the customers’ or prospects’ places of business. By contrast, inside sales employees spend the majority of their time making sales from their employer’s place of business (or their home office), or via telephone, zoom, or the internet. Inside sales employees are non-exempt, whereas outside sales employees are exempt.
How many hours must an exempt employee work each week?
Or better yet, does an exempt employee have to work 40 hours per week? Not at all. There's no regulation for weekly work hours for exempt employees (since the FLSA doesn't govern them).
So you can have an exempt employee work anywhere between 20 and 70 hours a week without altering their salary. The hours they work don't change their exempt status.
What's the purpose of the FLSA?
The body of legislation known as the FLSA is here for two reasons:
to protect a company or organization's employees from being required to work extensive hours and not being fairly compensated for their time, and
as an incentive to hire additional employees rather than having existing workers work overtime.
So FLSA's objective is to either dissuade long work hours for those currently employed and create more job opportunities for those unemployed, or provide higher income for employees.
Avoid misclassifying your workers
Is categorizing your employees as exempt or nonexempt still unclear? Maybe the following examples will help.
Identifying exempt executive employees
When you think of an executive, what comes to mind? Odds are, it's a person in a suit sitting at a desk in a fancy high-level office. But when you look at the criteria, you'll see it closely matches the typical manager:
An employee who manages at least two full-time employees.
So don't misconstrue this. If you have team managers on staff earning over $35,568 annually, then they may be exempt.
It's common for businesses to misclassify workers because the duties test isn't 100% clear (i.e., management of the enterprise). However, when you look closer, it covers routine duties like setting work schedules, interviewing candidates, assigning responsibilities to workers, and handling employee disputes.
The tasks most managers perform daily.
However, if other duties are performed outside of managerial responsibilities, you'll apply the 50% or more rule. This is when you determine whether the worker spends more than half their time performing exempt duties.
If you're worried about misclassifying your employees, then continue reading.
Example of exempt executives
Hector is a marketing manager who leads a team of seven people. His annual salary is $64,000, and the company is quickly expanding. So they asked him to hire several more content creators and managers by the end of the quarter.
Hector's considered an exempt employee because he earns over the minimum salary requirement. And he leads a team of at least two full-time employees. Plus, he's performing other managerial tasks, like recruiting new workers.
Bill, on the other hand, is an assistant manager of a local cafe. He earns $39,000 per year and trains and oversees a group of cooks and servers. But he also handles the register and helps out with cooking and serving dishes more often than not.
Is Bill also exempt? Not quite. Although his salary meets the requirements and he manages employees, he spends more than half his time doing non-managerial tasks.
Identifying exempt administrative employees
Confused about which administrative employees are exempt? You're not alone. It's one of the most misunderstood of the classes. And it's also frequently misapplied.
You'll typically find admin workers in departments like:
Under the FLSA guidelines, administrative employees are exempt if they exercise independent judgment and discretion to make decisions of significance to the business. This means that to be exempt, an administrative employee must be relatively high-level, and not working under close supervision.
Example of exempt administrative workers
Daniella is a public relations manager earning $85,000 annually. She has duties that include connecting with media outlets, crafting press releases, and responding to media inquiries. Her role is to ensure the company's public image remains positive.
Daniella is an exempt employee because the employer gives her control over the company's reputation. This can potentially hurt or help the company's business.
Identifying exempt professional employees
Professional employees are a more specialized area, so it's not as challenging to identify them. You'll find most of these employees in fields like medical, legal, and science.
Exempt professionals are required to have advanced degrees (generally a masters degree or higher) in a field such as:
Now, there's an exception to this rule for creative professionals. If you hire writers, designers, musicians, and other creatives, then they may also be exempt.
Take, for example, a writer. If their role is to rewrite existing content, such as press releases, then this doesn't count. However, if you have a journalist who writes editorials or commentaries, then they can be exempt.
Some of the creatives that may be exempt include:
Example of exempt professional
Jarvis is a reputation lawyer who works in a law firm. His primary role is to help business clients protect their brands from being stolen (plagiarized) or tarnished (defamed). He earns a salary of $275,000 per year.
Jarvis is exempt because he has a law degree (an advanced degree) and he has specialized knowledge and professional training in his craft.
Identifying exempt computer professionals
Here's another highly specialized field, which consists of high-level software engineers and architects. This is the only time you'll find specific job titles listed in the FLSA guidelines.
Some computer professionals may carry a degree, but this isn't a requirement.
It does exclude those working in computer manufacturing and repair roles. Those who use computer programs, like drafting software, also don't qualify. And the same goes for employees who maintain company software or troubleshoot problems such as IT help desk staff, or tech support.
Example of exempt computer professionals
Claudia is a senior software engineer working for a reputable tech company. Her primary duties include designing, coding, and testing HR software platforms to be sold to businesses. She's paid an annual salary of $115,000 per year.
Claudia is considered exempt because she is directly involved in the development and design of the company's technologies. She also has specialized knowledge and responsibilities that may qualify her for exemption.
Identifying exempt outside sales employees
Outside salespeople are the only category that doesn't have a minimum salary requirement. As long as the employee spends at least 50% of their time working off-premises to close sales deals, then they may qualify.
The exemption doesn't include sales workers that work from home or who make sales on the internet or by telephone or Zoom. They are considered inside sales and are non-exempt.
Example of exempt outside salespeople
Lance is a sales rep for a small estate planning service provider. His role is to travel throughout his region, meeting prospects, closing sales, building relationships with clients, and conducting follow-ups at their places of business.
Lance qualifies for exemption because he spends most of his time travelling out of the office meeting with prospective buyers.
Make sure your company complies with the FLSA
Mistakenly misclassifying a non-exempt worker as exempt can be costly. If found guilty, you'll be required to pay the employee for any back-overtime pay owed for several years. The court can also place other penalties against your company, such as doubling the amount you owe in unpaid wages and requiring you to pay the employee’s attorney fees (plus your own). All of this adds up to a very expensive proposition. That, combined with the potential risks to your company’s reputation and the potential hardships on your misclassified workers adds up to one expensive proposition that is simply never worth it.
Don't let this happen to you. Become well-versed in the FLSA regulations for exempt employees. Then ensure you classify your workers correctly.
As always many states and cities have additional or different requirements around exempt status. Always check with your legal counsel, and the regulators in your area regarding your legal obligations. This article is for information purposes only and does not constitute legal advice.
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