Exempt vs Non-exempt Employees

The two main categories of employees under the Fair Labor Standards Act, or FLSA, are exempt employees and non-exempt employees. The most notable difference between an exempt employee and a non-exempt employee is how they are treated for overtime pay. Exempt employees are not paid for overtime. Determining the exempt vs non-exempt status of an employee is an important analysis required of any employer in the US.

Exempt-vs-non-exempt-comparison

The FLSA

Exempt employees are exempt from the FLSA. The FLSA is a federal statute that protects workers across the US, including by guaranteeing workers overtime pay. If employees are non-exempt, then they are eligible for protection under the FLSA and must be paid overtime. 

The FLSA defines federal standards for minimum wages, overtime pay, recordkeeping and youth employment. If states provide higher standards, then an employee is covered by the state standard. The FLSA covers employees in the private sector and in federal, state and local governments. Unless an employee is exempt, an employer must pay overtime. 

Non-exempt employees

The FLSA mandates employers to pay non-exempt employees minimum wages for up to 40 hours in a work week and overtime wages for additional time worked. In 2019, the federal minimum wage is $7.25, and overtime pay is at least 1.5 times an employee’s wage. 

Exempt employees

To be exempt from the FLSA, employees must fall within specific categories. There are specific rules for salespeople and STEM (science, technology, engineering and math) employees, and three broad categories as follows:

  • Executive,
  • Administrative, and
  • Professional.

Employees fit within those categories if they meet certain minimum compensation and job duties standards, which are often called the "Salary Test" and the "Duties Test". Those standards are used to analyze whether an employee can be considered ‘white collar’ enough for an exemption from the FLSA. 

In order to qualify as exempt, employees must receive a salary, not an hourly wage, and must be paid a salary for any week they work. 

Salary Test

In respect of minimum compensation, new rules under the FLSA apply from January 1st, 2020 and are as follows: 

Employees must be paid $684 per week (equivalent to $35,568 per year for a full-year worker).

Annual compensation for “highly compensated employees” is required to be at least $107,432 per year.

Employers may use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices. 

The rules applicable before January 1st, 2020 required employees to be paid $455 per week and (in order to be considered a “highly compensated employee”) receive annual compensation of at least $100,000 a year.

Duties Test

The Duties Test requires an employer to consider the facts and circumstances of an employee’s role to determine if they are ‘white collar’ enough for exemption from the FLSA. According to the Department of Labor's guidance, an employee must fit within one of the following three job descriptions to be qualified as exempt:

  • Executive exemption. The employee’s primary duty must be managing the enterprise or a customarily recognized department or subdivision of the enterprise. The employee must customarily and regularly direct the work of two or more full-time employees and have the authority to hire or fire other employees (or the employee’s suggestions and recommendations as to the hiring, firing or changing the status of other employees must be given particular weight).
  • Administrative exemption. The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers. The employee’s primary duty must also include the exercise of discretion and independent judgment with respect to matters of significance.
  • Professional exemption. The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which (i) is predominantly intellectual in character (ii) includes work requiring the consistent exercise of discretion and judgment, (iii) must be in a field of science or learning and (iv) must be customarily acquired by a prolonged course of specialized intellectual instruction.

State and other law

There are additional federal, state and FLSA laws, rules and regulations related to other classifications of workers, such as interns, researchers, those working under an educational or government grant, independent contractors, temporary employees, volunteers, workers in training, and foreign workers. Employers are required to consider all laws, rules and regulations applicable to their employees.   

This article is not to be considered legal advice and is not a substitute for advice from qualified legal counsel. Material aspects of the discussions in this article may change at any time and without further notice. This article does not address state laws, and the circumstances in your state may differ materially from the discussion here. The weekly wage in the graphic for this article is the weekly wage as of January 1st, 2020.

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