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Your Guide to Exempt vs Non-Exempt Employees Under FLSA

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The Fair Labor Standards Act (FLSA) is a federal policy that sets standards for wages and employment. It covers topics including federal minimum wage, overtime, and recordkeeping requirements. Among other provisions, the law classifies employees as “exempt” or “non-exempt”, and establishes rules for minimum wage and overtime payment for non-exempt workers.

For small and medium-sized business owners, complying with the provisions of FLSA is important to avoid legal risks. This guide provides an overview of exempt vs non-exempt employees to help you categorize your employees properly and maintain compliance with federal policies.

Overview of FLSA Provisions

The FLSA sets out standards for private sector employers and workers in the following areas:

  • Minimum wage - This section sets a floor for employees’ hourly wages. Note that some states may have their own minimum wage requirements that are set outside of FLSA, in which case the higher minimum wage generally applies in that state.
  • Overtime pay - Most business owners are aware of the requirement to “time and a half” wages when more than 40 hours are worked in a week. Importantly this applies only to non-exempt employees, which we will discuss in greater detail below. The FLSA establishes rules for which employees are considered non-exempt and the scenarios under which overtime pay is due.
  • Payroll and recordkeeping - Compliance with FLSA requires following standards for payroll recordkeeping as well as visibly posting FLSA policies so employees have the opportunity to understand their legal rights.
  • Youth employment - FLSA also sets guidelines for the employment of minors under the age of 16 to protect youth from unfair, unsafe, or inappropriate employment.

This article focuses on the topic of overtime pay. The key determinant of eligibility for overtime hinges on FLSA exempt vs non-exempt definitions. As an employer, it is your responsibility to make sure you correctly classify your staff and maintain compliance under FLSA.

The classification of employees as exempt vs. non-exempt depends primarily on:

  • How much you pay the employee
  • Whether the employee is paid hourly or receives a fixed salary
  • The type of work the employee performs

In general, exempt employees are paid a fixed amount for their work, averaged out over a year, and aren’t entitled to overtime pay. Non-exempt staff, on the other hand, are entitled to at least time-and-a-half for any service over 40 hours a week, or over 8 hours a day in some states. Below, we provide more detail about three “tests” that determine which employees are exempt vs. non-exempt.

FLSA Exempt vs. Non-Exempt Tests

To determine the classification of your employees, the FLSA provides three basic exemption tests. Any worker who doesn't meet the criteria in all three of these tests is considered non-exempt.

Salary type exemption test - The employee earns a set amount regularly no matter how many hours they work. Their pay doesn’t change because of the amount or quality of their output.

Salary amount exemption test - The worker is paid more than $684 a week or $35,568 a year. According to the US Department of Labor (DOL), “up to 10 percent” of this annual salary amount may include “nondiscretionary bonuses and incentive payments.”

Duties exemption test - This test sets specific requirements for employees that work in administration, computers, outside sales, or in executive or professional functions. The duties test for exempt employees only looks at the employee's main responsibilities, not at their job title. The requirements to “pass” this test are defined as follows, based on types of duties:

  • Administrative employees must do office or non-manual work and have the authority to make decisions.
  • Computer employees must work as computer programmers, systems analysts, software engineers, or do other equally skilled work. They may earn either a salaried amount or be paid hourly for their work as long as it’s at least $27.63 an hour.
  • Outside sales employees must do most of their work away from your business, selling products or services to clients or customers.
  • Executive employees must manage a department or division and have the power to recruit, dismiss, promote, and demote at least two or more workers they supervise.
  • Professional employees may be either learned” or “creative” professionals. Learned professionals must do work that requires specialist skills or knowledge. This must be in an area of science or learning, and they must have an advanced degree in that subject. Creative professionals ’duties must “involve invention, imagination, originality, or talent in a recognized artistic or creative field,” as defined by the DOL.

Who is Eligible for Overtime Pay?

Any employee that does not pass all three FLSA exempt tests is non-exempt. A non-exempt employee is owed overtime rates for any hours they work over 40 per week. Note that a  week does not necessarily have to run from Monday to Sunday; it is defined as a consecutive 168-hour period starting on any day at any time. Employees who qualify for overtime must get at least one and a half times their usual pay during the applicable overtime periods.

Some states including Alaska, California, Colorado and Nevada also have overtime rules for when employees work longer than 8 or 12 hours in a single day.

As suggested by the job responsibilities included in the duties test detailed above, note that manual laborers and other employees who do physical work are always entitled to overtime pay and never considered exempt. 

For example, consider a manual worker who earns $42,000 a year and is paid the same salary each month. Although this employee meets the criteria of two of the tests, they do not pass the duties test on account of the nature of their work. Therefore, the employee would be considered a non-exempt salaried employee. 

Who is Excluded from Overtime Pay?

Exempt employees—whose salary type, pay level, and duties pass all the FLSA tests—don’t qualify for overtime pay. You may still pay exempt workers for overtime if you wish, but this isn’t a legal requirement according to FLSA.

In addition to the three standard tests for FLSA exemption, the DOL also carves out an additional exemption specifically for highly compensated workers, defined as workers who are paid more than $107,432 a year. Workers who meet this threshold are exempt from overtime requirements even if they don’t meet the standard tests, as long as they “regularly perform at least one of the duties” associated with the third exemption test. Note, therefore, that the exemption for highly compensated workers would still not apply to employees doing manual labor.

Depending on the type of business you own, it’s important to know that some farmworkers, drivers, and seasonal workers are also excluded from overtime benefits. Furthermore, federal and state laws can give conflicting instructions. In the event of conflicting requirements, DOL guidance advises that the more stringent requirements that are the “most protective to employees” are the ones that must be followed.

Penalties for Misclassifying Employees

Even if you do so accidentally, misclassifying exempt or non-exempt employees can have severe and expensive consequences for your business.

Within the DOL, there is a Wage and Hour Division with the power to criminally prosecute employers who have willfully broken the rules on overtime and minimum wage. This may lead to fines, penalties, or even prison time, and employees can sue employers for back pay.

Final Thoughts

As an employer, it’s critical that you get the exempt or non-exempt classification of your employees exactly right and give them all the benefits to which they’re entitled, including minimum wage and pay for overtime. Start with the FLSA exempt test, then make sure you’re following any other relevant state and federal laws.

Employment practices liability insurance offered by Counterpart can help to cover certain liabilities related to employee payroll issues like wage and hour allegations. Your broker can help you better understand your risks and identify coverage options that protect your business.

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