Exempt employee is a term that refers to a category of employees set out in the Fair Labor Standards Act. They do not receive overtime pay, nor do they qualify for the minimum wage.
Breaking Down Exempt Employee
Exempt employee classifies employees who are exempt from overtime pay and the minimum wage. Exempt employees are paid not for hours worked but rather for the work that they performed. For an employee to be considered exempt, they must use discretion and independent judgment, at least 50 percent of the time and must earn more than $455 per week.
Requirements differ from individual state to individual state, but an example of one of the requirements used to classify an exempt employee is that the employee is in an executive position, must supervise at least two employees and make the decision to either hire or fire said, employees. Another common reason an employee may full under the exempt category is if they are an administrative employee who exercises independent judgment more than 50 percent of their working time.
Also read: What are gross wages?
Exempt Employees, Non-Exempt Employees, and the Fair Labor Standards Act
The exempt employee category is a result of the Fair Labor Standards Act, a U.S. law passed in 1938. The watershed labor law protects workers against unfair pay practices and work regulations. The law has been greatly changed over the last 80 years, but is still one of the most important labor laws in the history of the United States, and sets regulations for a wide array of employee- and employer-related issues.
The Fair Labor Standards Act specifies at which times workers are to be paid and which times they are not expected to be paid, or non-paid hours. An exempt employee does not receive overtime, or time and a half their regular rate, when working excess hours. The act marks overtime as any hours that exceed 40 hours in the seven-day workweek. If employers have $500,000 or over per year in gross sales, they must adhere to the Fair Labor Standards Act. The act applies only to employees employed by an employer, not to independent contractors or volunteers.
Exempt is one of two categories of employees specified by the Fair Labor Standards Act; the other category of employee is a non-exempt employee. Non-exempt employees are entitled to overtime pay or time and a half if they work over 40 hours in a workweek, whereas exempt employees are not. The majority of employees covered by the act fall under the non-exempt employee category.
There are two basic types of employees in the workplace – “exempt employees” and “non-exempt employees.” What’s the difference between these types of workers and the jobs they hold? The most significant difference is pay for overtime work. The term “exempt” means exempt from being paid overtime.
There are regulations that govern whether an employee could be exempt from receiving overtime pay.
Certain types of employees, often classified as exempt employees, are not entitled to overtime pay as guaranteed by the Fair Labor Standards Act (FLSA). To add to that, most states have their own wage and hourly-rate laws that have even more requirements in addition to the FLSA.
The FLSA requires that employers pay at least minimum wage for up to 40 hours in a workweek and overtime pay for any additional time unless the employee falls into an exception category.
In addition to the Federal Act, many states have their own set of wage requirements and laws, and employers must abide by both federal and state law to stay compliant.
If an employee is considered exempt (vs. non-exempt), their employer is not required to pay them overtime pay. It is at the employer’s discretion whether or not to pay for hours worked overtime. Some employers might create an employee benefits package with extra perks in lieu of overtime pay.
In general, to be considered an “exempt” employee, you must be paid by salary (not hourly) and must perform executive, administrative, or professional duties.
To complicate matters further for employers, there are additional federal, state, and FLSA laws related to other classifications of workers, such as interns, independent contractors, temporary employees, volunteers, workers-in-training, and foreign workers that employers are required to abide by.
A non-exempt employee is entitled to overtime pay through the Fair Labor Standards Act. Also, some states have expanded overtime pay guidelines. Check with your state department of labor website for rules in your location.
Employers are required to pay time and a half the employee’s regular rate of pay when they work more than 40 hours in a given pay week.
Most non-exempt employees must be paid at least the federal minimum wage ($7.25 in 2020) for regular time and at least time and a half for any hours worked over the standard 40.
Types of Exempt Employees
The Fair Labor Standards Act recognizes the following main categories of exempt workers:
- Outside Sales
These categories are purposefully broad to encompass many types of jobs.
It is the tasks performed on the job, not the job title alone, that determine exempt vs. non-exempt employment status.
The FLSA guarantees non-exempt employees one and one-half times their normal pay rate for overtime worked during a given work period.
Guidelines for Exemption from Overtime Pay Requirements
Effective January 1, 2020, administrative, executive and professional employees, salespeople, and STEM (Science, Technology, Engineering, and Math) employees can be classified as exempt and, therefore, can be ineligible for overtime pay if they meet the following criteria:
- Employees are paid a salary as opposed to being paid on an hourly basis.
- Employees earn at least $684 per week or $35,568 annually (up from $455 per week or $23,660 annually).
- Employees are paid a salary for any week they work.
Also, to qualify for exemption from overtime, employees must also meet certain employment tests regarding their job duties and responsibilities.
The following general conditions must be met to designate an employee as exempt:
- For the executive exemption, employees must have a primary duty of managing the enterprise or a department or subdivision of the enterprise; must customarily and regularly direct the work of at least two employees; and must have the authority to hire or fire, or their suggestions and recommendations as to the hiring, firing, or changing the status of other employees must be given particular weight.
- For the administrative exemption, employees must have a primary duty of performing office or non-manual work directly related to the management or general business operations of the employer or the employer's customers, and their primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.
- For a professional exemption, employees must have a primary duty of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by prolonged, specialized, intellectual instruction and study, or must specialize in a few other similarly, highly specialized fields, such as teaching, computer analytics, and engineering.
- Highly compensated employees may be exempt if they perform office or non-manual work and earn an annual salary of $107,432 or higher. To qualify, they must perform at least one of the duties of an exempt executive, administrative, or professional employee.
- For the computer exemption, employees must be employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field with job responsibilities that meet the criteria for exemption.
- To qualify for the outside sales exemption, employees must have a primary duty of making sales or obtaining orders or contracts. The work must be conducted away from an employer's place or places of business.
Other Recent Changes in Overtime Rules
The following changes are in effect as of January 1, 2020:
- The annual compensation requirement for “highly compensated employees” is increased from $100,000 per year to $107,432 per year.
- Employers can use non-discretionary 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.
Exceptions to Overtime Requirements
In addition to the main categories of exempt employees (administrative, executive, professional, computer, and outside sales) there are other employees who may be exempt from overtime pay requirements:
- Certain commissioned employees of retail or service establishments; auto, truck, trailer, farm implement, boat, or aircraft sales-workers; or parts-clerks and mechanics servicing autos, trucks, or farm implements, who are employed by non-manufacturing establishments primarily engaged in selling these items to ultimate purchasers
- Employees of railroads and air carriers, taxi drivers, certain employees of motor carriers, seamen on American vessels, and local delivery employees paid on approved trip rate plans
- Announcers, news editors, and chief engineers of certain non-metropolitan broadcasting stations
- Domestic service workers living in the employer’s residence
- Employees of motion picture theaters
State Guidelines for Classification of Exempt Workers and Overtime Pay
Not all states have the same guidelines for exempt employees. For example, to classify an individual as exempt from overtime requirements in California, must pay the worker at least twice the prevailing minimum wage. All other employees would automatically be eligible for overtime regardless of job responsibilities.
Workers earning over the salary threshold would still need to meet the other criteria for exempt status to be placed in that category.
Also, non-exempt employees must be paid overtime wages equivalent to at least 1.5 times the California minimum wage of $13 per hour (for employers with over 26 employees), or $19.50 per hour.
In New York, the state's minimum salary threshold for executive and administrative employees has been increased in phases, and the actual rate depends on geographic location and employer size. For example, the threshold for administrative employees, effective 12/31/19, is $58,500 (annualized) for employees who work in New York City. In Nassau, Suffolk, and Westchester counties, the threshold is $50,700, and in the remainder of the state it's $46,020