Table of contents
- What is an exempt employee?
- To qualify for exempt status, what criteria must be met?
- A step-by-step guide to classifying employees as exempt
- What are the advantages and disadvantages of hiring exempt employees?
- What are the best ways to compensate exempt employees who work overtime without paying overtime?
What is an exempt employee?
Exempt employees are those employees who are exempt from employment standards under the Fair Labor Standards Act (FLSA). Exempt employees do not receive overtime pay or the minimum wage. When an employee is exempt, it is primarily because they do not receive overtime pay. Employers who are exempt from overtime are in contrast to those who are not.
Exempt vs. nonexempt employees
What does an exempt employee mean? The difference between an exempt employee and a non-exempt employee is based on the rights provided by the Fair Labor Standards Act (FLSA). The FLSA provides minimum wage and overtime pay, and other rights for non-exempt employees. Nonexempt employees are entitled to overtime pay and receive at least the federal minimum wage ($7.25 per hour) for regular hours and time and a half for overtime.
However, employees exempt from the FLSA aren't entitled to benefits, such as overtime pay and a minimum wage guarantee. In addition to their rights under federal labor laws and state regulations, exempt and non-exempt employees may also be entitled to other benefits.
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 nonmanual 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 nonmanual 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.
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 time 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.
What are the best ways to compensate exempt employees who work overtime without paying 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.
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.
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