Exempt vs. Non-exempt Employees: Which One Are You?

Oh, for the good old days when it was just a question of whether you had a salary or an hourly wage! If you were salaried, you got a yearly income figure and no overtime. If you were hourly, you got an hourly income figure and overtime. This basic set-up has been around since the inception of the Department of Labor’s Fair Labor Standards Act (FLSA) in the 1930s, but over the years things have become a little complicated, especially when it comes to small business.

Exempt or Non-Exempt, That is the Question
It’s no longer a question of whether an employee is salaried or hourly, but rather whether or not the employee is exempt from the FLSA or not. Typically, those that are exempt are paid salaries and those that are not exempt are paid by the hour. If it was an issue of titles, then this would be easy, but it isn’t. The courts have gone by what the employee does, rather than by what they are called, to determine whether or not an employee is exempt.

Exempt Employees
By law (Section 13(a)(1) of the Fair Labor Standards Act as defined by Regulations, 29 CFR Part 541), the following employees must be exempt:

 
Executives
To qualify for the executive employee exemption, all of the following tests must be met:
  • The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week;
  • The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
  • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
  • The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
 
 
Administration
To qualify for the administrative employee exemption, all of the following tests must be met:
  • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
  • 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; and
  • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
 
 
Professionals

To qualify for the learned professional employee exemption, all of the following tests must be met:

  • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
  • The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
  • The advanced knowledge must be in a field of science or learning; and
  • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
 

To qualify for the creative professional employee exemption, all of the following tests must be met:

  • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
  • The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
 
 
Computer Employee Exemption

To qualify for the computer employee exemption, the following tests must be met:

  • The employee must be compensated either on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour;
  • The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below;
  • The employee’s primary duty must consist of:

1) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;

2) The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;

3) The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or

4) A combination of the aforementioned duties, the performance of which requires the same level of skills.

 
 
Outside Sales Exemption

To qualify for the outside sales employee exemption, all of the following tests must be met:

  • The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
  • The employee must be customarily and regularly engaged away from the employer’s place or places of business.
 
 
Highly Compensated Employees

Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

Remember, in order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department of Labor’s regulations. If those duties fall short of those requirements, then the employee is considered non-exempt.

 
 
Non-exempt Employees

Covered, nonexempt workers are entitled to a minimum wage of not less than $5.85 per hour effective July 24, 2007; $6.55 per hour effective July 24, 2008; and $7.25 per hour effective July 24, 2009. Special provisions apply to workers in American Samoa and the Commonwealth of the Northern Mariana Islands. Nonexempt workers must be paid overtime pay at a rate of not less than one and one-half times their regular rates of pay after 40 hours of work in a workweek. On the other hand, these employees are paid only for the time they actually work.

Of course, such employees must be employed by a company that falls under the FLSA. That means the organization must have a unified operation, common control and a common business purpose. This organization must also meet any one of the following criteria:

  • Annual gross volume of sales made or business done is not less than $500,000 (exclusive of excise taxes at the retail level that are separately stated); or
  • The organization is engaged in the operation of a hospital, an institution primarily engaged in the care of the sick, the aged, or the mentally ill who reside on the premises; a school for mentally or physically disabled or gifted children; a preschool, an elementary or secondary school, or an institution of higher education (whether operated for profit or not for profit); or
  • The work being done is an activity of a public agency.
  • The organization engages in interstate commerce, the production of goods for interstate commerce, or in any closely related occupation directly essential to such production.

This last one is where things can get a little sticky because the definition of interstate commerce in the law is very broad. Activities that employees may engage in that would push a business into the realm of interstate commerce include work in communications or transportation; regular use of the mails, telephones, or telegraph for interstate communication, keeping records of interstate transactions; handling, shipping or receiving goods moving in interstate commerce; regularly crossing State lines in the course of employment; working for independent employers who contract to do clerical, custodial, maintenance, or other work for firms engaged in interstate commerce or are in the production of goods for interstate commerce.

 
Blue Collar Workers
The exemptions do not apply to manual laborers or other workers who perform work involving repetitive operations with their hands, physical skill and energy. FLSA-covered, non-management employees include those in:
  • Production
  • Maintenance
  • Construction
  • Carpentry
  • Electricians
  • Mechanics
  • Plumbers
  • Iron workers
  • Craftsmen
  • Operating engineers
  • Longshoremen
  • And others with similar kinds of work.
 
First Responders
The exemptions also do not apply to first responders regardless of rank or pay level or the type of work they are engaged in at any given time. These are listed by the Department as:
  • Police officers
  • Detectives
  • Deputy sheriffs
  • State troopers
  • Highway patrol officers
  • Investigators
  • Inspectors
  • Correctional officers
  • Parole or probation officers
  • Park rangers
  • Fire fighters
  • Paramedics
  • Emergency medical technicians
  • Ambulance personnel
  • Rescue workers
  • Hazardous materials workers and similar employees

 

These employees are entitled to minimum wage and overtime premium pay under the FLSA, and are not exempt under the Part 541 regulations no matter how highly paid they might be.

 
When Exempt and Non-exempt Merge

There are certain circumstances where an employee who is considered non-exempt can take on an exemption in regards overtime pay. These fall into two categories: Exempt from overtime pay and partially exempt from overtime pay.

 
Exempt from Overtime Pay
 
The following non-exempt employees are exempted from the overtime rules of the FLSA:
  • 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; and
  • Farm workers.
 
 
Partially Exempt from Overtime Pay
These non-exempt employees receive overtime only if certain circumstances or other special industry- or company-specific rules apply.
  • Employees engaged in certain operations on agricultural commodities and to employees of certain bulk petroleum distributors.
  • Hospitals and residential care establishments may adopt, by agreement with their employees, a 14-day work period instead of the usual 7-day workweek if the employees are paid at least time and one-half their regular rates for hours worked over 8 in a day or 80 in a 14-day work period, whichever is the greater number of overtime hours.
  • Employees who lack a high school diploma, or who have not attained the educational level of the 8th grade, can be required to spend up to 10 hours in a workweek engaged in remedial reading or training in other basic skills without receiving time and one-half overtime pay for these hours. However, the employees must receive their normal wages for hours spent in such training and the training must not be job specific.
  • Fire and police departments may establish a work period ranging from 7 to 28 days in which overtime need only be paid after a specified number of hours in each work period.
 
 
The Bottom Line
For most businesses, the rules are fairly basic: Those employees that meet the exemption criteria get a salary, those that do not are hourly. If you are at a loss to describe what a given employee does, consider what they spend the majority of their time (80%) doing. If it falls into the exempt side, then treat them as exempt employees. If not, consider them hourly. There are different rules regarding how you keep track of the time for these different classes of employee so make sure that you are up to the current standards. Consult your lawyer, your payroll company if you have one or the U.S. Department of Labor at www.dol.gov .