Exempt vs. Non-Exempt: Employee Classification & the FLSA

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As your small business grows and you hire employees to help you run your company, you will need to become familiar with the Fair Labor Standards Act and the differences in exempt vs. nonexempt status. This information is critical because your business will need to follow federal and state employment laws. Knowing these details will also help you to attract the best employees for your business and keep your payroll budget in check.

What Is the Fair Labor Standards Act?

As part of the U.S. Department of Labor, the Wage and Hour Division oversees the Fair Labor Standards Act. It covers full- and part-time private employment, government employment at state and local levels and federal employees who are a part of a number of different agencies. The FLSA established the rules that employers must follow around specific areas of employment, including:

  • Minimum wage pay rate: Currently, the federal minimum wage hourly rate is $7.25. In some states, there are separate minimum wage laws. In those cases, the employees are entitled to the higher wage.

  • Overtime pay: According to the FLSA overtime rules, there are two basic classifications of employees: exempt and nonexempt. The type of employee you are affects whether you’re eligible for overtime pay. Employees who are eligible for overtime pay need to have worked more than a 40-hour workweek. For every hour they work above that, they are entitled to at least one and a half times their regular rate of pay, and there are no limits to how many hours an employee can work in a given workweek.

  • Child labor standards: The FLSA protects the educational opportunities of minors by ensuring that they are not employed in jobs where the conditions are harmful to their health or well-being. 

  • Record keeping: Employers are required to showcase an official poster that outlines the rules and regulations stipulated by the FLSA in order to inform employees of their rights. Plus, employers are required to keep detailed records for employee time worked and pay.

Understanding Exempt Status

Exempt employees are not entitled to overtime pay, according to the FLSA federal law. This means that if the employee works more than a 40-hour workweek, their employer does not need to pay them any overtime pay. Whether the employer offers overtime to exempt employees is completely up to their own independent judgement. In many cases, businesses that hire exempt employees offer an annual salary with a comprehensive benefits package in place of offering overtime pay.

The FLSA has identified specific categories of exempt workers. Employees who fall into these categories are not eligible for overtime. However, it is not just the job titles of the role that matters. The tasks and job duties that the employee is required to complete also affect their categorization. Categories of exempt workers include:

  • Executive: The primary tasks of this role must be to manage a business or department of a business and oversee at least two employees. They must also have the power to hire or fire an employee.

  • Administrative: This role must complete nonmanual office work in alignment with general business operations.

  • Professional: This role needs to have specific knowledge that is advanced for their field in the areas of science, teaching, computer analytics, engineering or another highly specialized field.

  • Computer: These employees are computer systems analysts, computer programmers, software engineers or hold similar roles.

  • Outside sales: The primary duty of this role must be to make sales away from the main place of business.

  • Highly compensated employees: Any employee who does office work and makes an annual salary of $107,432 or more.

The benefits of hiring an employee with exempt status is that the business’s payroll remains steady throughout. You will always know how much you need to pay employees because it will not be based on the number of hours they have worked. Plus, exempt employees are usually given different expectations than nonexempt workers, and they are evaluated based on their performance results, not hours completed.

Understanding Nonexempt Status

In contrast to exempt status, a nonexempt status employee is eligible for overtime pay per the FLSA. This means that if the employee has worked more than a 40-hour workweek, then he is guaranteed overtime pay for every hour he has worked over 40 hours. Employers need to pay nonexempt employees a minimum overtime rate of one and a half times their regular hourly wage.

In many cases, nonexempt employees are paid the federal minimum wage of $7.25 or the state minimum wage if it is higher. As a result, their overtime rate of pay will be $7.25 x 1.5 = $10.88. From an employer’s perspective, having nonexempt employees can be cost effective if there is not enough consistent work to warrant a full-time salaried employee.

In some cases, an exempt employee may be able to make more money than a nonexempt employee based on the amount of overtime work he is able to take on. However, overtime work is often inconsistent, so nonexempt employees may not receive a regular paycheck like exempt employees.

Determining if Your Employees Are Exempt or Nonexempt

When establishing whether your employees are exempt or nonexempt, it’s critical to follow the rules and regulations of the FLSA. If your employees are being paid an annual salary basis, then they are likely exempt from overtime pay. If you are paying employees by the hour, then they are likely nonexempt from overtime pay.

In addition, employees are not eligible for overtime pay if they earn at least $684 per week or an annual salary level of $35,568. Plus, employees must fall into one of the exempt categories of job titles, and they need to be able to pass specific employment duties tests to showcase their knowledge regarding their job and responsibilities.

Exceptions to the Rules

As with most regulations, there are some exceptions to the rules regarding which employees can be exempt from overtime pay. In addition to executive, administrative, professional, computer and outside-sales employees, some other fields may also be exempt. It’s best to check with the FLSA and with your local state government if you employ:

  • Commission-based employees in retail, manufacturing or service

  • Transportation-industry employees, such as those who work with railroads, taxis and ships

  • Broadcast-industry employees, such as announcers or news editors

  • Domestic service workers

  • Farm workers

State Labor Guidelines to Keep in Mind

Note that in addition to abiding by the federal law of the FLSA, employers also need to follow the labor laws of their state. In some cases, these rules can differ greatly from federal law. For example, in California, if an employer wants to exempt an employee from overtime requirements, then it must pay them at least twice the minimum wage.

Conversely, in New York, there are different thresholds for the annual salaries for executive employees and administrative employees, and they depend on where in the state the employee is located. As a result, the minimum annual salary can range between $10,000 and $15,000 just within the state itself. Always be sure to review your state laws in addition to the rules of the FLSA when hiring employees and contact the FLSA if you have any questions about which rules you must follow.

References

About the Author

Anam Ahmed is a Toronto-based writer and editor with over a decade of experience helping small businesses and entrepreneurs reach new heights. She has experience ghostwriting and editing business books, especially those in the "For Dummies" series, in addition to writing and editing web content for the brand. Anam works as a marketing strategist and copywriter, collaborating with everyone from Fortune 500 companies to start-ups, lifestyle bloggers to professional athletes. As a small business owner herself, she is well-versed in what it takes to run and market a small business. Anam earned an M.A. from the University of Toronto and a B.A.H. from Queen's University. Learn more at www.anamahmed.ca.