What is an Exempt Employee? Definition, Criteria, and Implications

What is an exempt employee?

An exempt employee is not entitled to overtime pay under the Fair Labor Standards Act (FLSA). This means they are exempt from the FLSA's minimum wage and overtime requirements. There are two main criteria for exemption:

• Salary Basis: Exempt employees must be paid on a salary basis, receiving a predetermined amount each pay period regardless of hours worked.
• Duties Test: They must also perform specific job duties defined by the Department of Labor (DOL) in one of the following exempt categories:
• Executive: Manage others and have significant business decision-making authority.
  
• Administrative: Perform office or non-manual work using discretion and independent judgment.
  
• Professional: Utilize specialized knowledge and intellectual skills requiring advanced education.
  
• Computer: Hold specialized computer-related positions with advanced knowledge and duties.
  
• Outside Sales: Primarily engaged in making sales away from the employer's establishment.

• Salary Threshold: Additionally, most exempt employees must earn a minimum weekly salary of $684 (as of 2023), with some exceptions for highly compensated employees.

What is a non-exempt employee?

• Non-exempt employees are entitled to overtime pay for any hours worked over 40 in a workweek. They are typically paid on an hourly basis and must be tracked for their exact hours worked.
  
  
• They generally perform more routine or manual tasks with less independent judgment compared to exempt employees.
  
  
• Minimum wage regulations apply to non-exempt employees.

Here's a table summarizing the key differences:

Remember:

• Classification is not determined by job title alone. Always evaluate the employee's specific duties and salary.
• Consult the DOL regulations and legal counsel for complex situations or specific questions.
• Misclassifying employees can lead to costly penalties and lawsuits.

To qualify for exempt status, what criteria must be met?

Most employees qualify for exempt status based on three factors: (1) their compensation, (2) how much they earn, and (3) the nature of their employment. Additionally, each state may have different requirements. However, exempt employees and non-exempt employees are typically distinguished by the following general guidelines:

• Salaries are based on work or tasks performed, not on hours worked.
• An individual must earn at least $455/week ($23,660/year).
• More than 50% of their working time must be spent performing executive, administrative, or professional duties.

An employee with a salary is not necessarily exempt from taxes. Exempt employees must be paid a salary and perform their job duties as exempt employees (also known as their duties test).

A step-by-step guide to classifying employees as exempt

You should follow these steps to ensure your company complies with labor law and compensates employees fairly: 

Determine if they are salaried or hourly

First, it is important to determine whether an employee receives an hourly wage or a salary. Most nonexempt employees typically work in industries that require a 40-hour workweek, such as those in the service and maintenance industries. While exempt employees do not usually receive a salary for their work, they may need to work unusually long or inconsistent hours weekly. This is because of their duties. Salaried employees who are exempt from overtime work may be subject to an employment agreement that obligates them to work certain hours.

Identify their job title and authority level.

The job titles don't determine exempt status, but employees with specific roles and responsibilities may qualify if they meet these conditions:

• Executive exemption: An executive employee must have managerial responsibilities within a company, department, or division. In addition, the manager must supervise at least two other full-time employees, or the equivalent, and be responsible for hiring, firing, and changing other employees' statuses.
  
  
• Administrative exemption: Employees should be responsible for at least office management or non-manual work directly related to the company's management or general business operations. They must also use discretion and judgment in matters that concern the company.
  
  
• Professional exemption: A primary employee duty must require advanced knowledge or skills and a vital intellectual component. Advanced knowledge is acquired through a prolonged course of specialized instruction in a science or learning field. Usually, this is the case in engineering, education, and the lab sciences.
  
  
• Outside sales exemption: An employee's primary responsibility must be to obtain orders from clients or contracts. Additionally, they must spend a lot of time away from their workplace.
  
  
• Computer employee exemption: Employees may receive salaries or fees of at least $684 per week or $27.63 an hour. They are usually employed as computer systems analysts, software engineers, or similar roles. Their primary duties should include implementing computer systems and programs, applying systems analysis techniques, and developing software.
  
  
• Highly compensated employees: Those earning more than $107,432 per year and performing office work or non-manual labor are exempt if they meet the criteria of the executive, administrative or professional exemption.
  
  

Consider other possible exemptions.

Other employees can be exempt from overtime and minimum wage requirements based on the responsibilities of their jobs. The earnings of employees working in retail or service businesses are typically derived through commissions rather than being paid hourly. Some mass transit employees, like taxi drivers, local delivery drivers, railroad employees, and airline pilots, receive trip-specific pay. Generally, employees paid outside the usual hourly or salary structure may not be required to work overtime or be paid minimum wage.

Confirm state requirements

State employment laws and regulations differ from those of the federal government. You should review your state's specific requirements to determine whether your employees qualify for an exemption.

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What are the advantages and disadvantages of hiring exempt employees?

Exempt employees offer businesses several advantages and disadvantages, and you should weigh those carefully before hiring them.

Benefits of hiring exempt employees

An exempt employee's biggest advantage is that they are guaranteed a steady income.

Aside from earning more than hourly employees, exempt employees tend to have access to extra benefits, including retirement accounts and retirement plans; bonuses; health insurance plans sponsored by companies; and vacation and sick leave paid by employers.

You won't be charged overtime. Employees who are exempt from pay overtime won't be paid overtime no matter how many hours they work each week.

The salaries of exempt employees do not vary according to their work hours. Conversely, nonexempt employees typically earn 1.5 times their usual pay if they work more than 40 hours each week.

You can assume they’re more experienced. It has become increasingly apparent that knowledge is a critical business asset, and exempt employees generally have a greater depth of knowledge than nonexempt employees.

For highly skilled workers, exempt employees may be the best option.

It is possible to give them more responsibility. Exempt employees will allow your company to meet crunch time deadlines ahead of business mergers, conferences, and seasonal deadlines.

These employees must work long hours without receiving higher pay, as they are the backbone of your company.

Disadvantages of hiring exempt employees

You may have to pay them more. Your non-exempt employees will likely cost you more than your exempt employees, even though you won't pay them overtime.

This is because exempt employees typically have more experience and are tasked with more responsibility, resulting in a higher pay rate.

This salary may be higher than the regular and overtime hours of non-exempt employees combined.

Unworked hours are not deducted from your pay. Let's assume your exempt employees work a 40-hour week when calculating their salaries.

Exempt employees cannot be deducted from their pay for work hours they don't perform, even if they regularly work fewer than 40 hours per week.

In other words, you might occasionally pay exempt employees for unworked hours.

Alternative compensation for exempt employees who work overtime

There are several ways you can show appreciation to an employee for completing overtime work without receiving a paycheck if they are salaried but not a significant amount of money. 

Suppose your sales team stays for an extra three hours on Friday because of events beyond their control.

You could buy them dinner or let them come in at 10 am on Monday instead of 8 am.  

The same goes for your entire staff working overtime to launch a marketing campaign successfully, perhaps by hosting a company party or providing bonuses at the end of the year.

In addition to compensating for the lack of pay, these rewards show your employees you value them.

If you regularly require salaried employees to work overtime, a benefits package could compensate them more fairly than raising their salary.

There are often benefits such as paid vacation, health care, and life insurance included in these packages.

Useful Read: Time Off in Lieu (TOIL): Balancing Employee Rewards and Work-Life Harmony

What is the duty test for exempt employees?

An exemption from the duties test is required for exempt employees by the DOL. For instance, a person who qualifies for the executive exemption must manage or hire others. The title of a job does not guarantee exempt status on its own.

Can certain hours be imposed on exempt employees?

The employer can designate the work schedule for exempt employees in whatever way they deem appropriate, so long as it complies with state or local regulations regarding mealtimes and breaks.

Is it necessary for exempt employees to work 40 hours a week?

Exempt employees don't need to work a 40-hour workweek, but many companies have company policies that require them to do so. Employers can discipline, including terminating employees who fail to meet the requirements, but they usually cannot withhold pay. The employee might no longer qualify for the exemption in such a case.