Exempt or Nonexempt: You Need to Know

As anyone who has spent any time in the workforce can tell you, there are exempt employees and nonexempt employees. The big difference between them is the fact that the first does not qualify for overtime while the second does. Most people are familiar with the so-called “white collar” exemptions for executive, administrative and professional employees. These folks are usually salaried, which people associate with exempt employees. However, according to the Fair Labor Standards Act, just having a salary is not enough. 

Workweeks and Overtime

To begin with, an employee's workweek is defined as a fixed and regularly recurring period of 168 hours -- seven consecutive 24-hour periods. That means your employee’s workweek may begin at 1:00am on Thursday morning and will continue for the following seven 24-hour periods. It does not need to coincide with the calendar week, but may begin on any day and at any hour of the day and different workweeks may be established for different employees or groups of employees. Also, the averaging of hours over two or more weeks is not permitted. Overtime is calculated for each workweek and overtime pay earned in a particular workweek must be paid on the regular pay day for the pay period in which the wages were earned. 

Once you understand the basis of employee overtime pay, you can then look at the exemptions. Yes, the white collar exemptions are important, but so are the exemptions for creative professionals, computer employees, outside salespeople and highly compensated employees. The exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy. Nor do they apply to non-management employees in production, maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers no matter how highly paid they might be. 

Keep in mind that all of the following tests must be met for that particular exemption to be valid. Miss one and you are liable for overtime. 

Executive Exemption

For an employee to qualify for the executive exemption, all of the following conditions 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. 

Administrative Exemption

For an employee to qualify for the administrative exemption, all of the following conditions 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. 

Learned Professional and Creative Professional Exemptions

For an employee to qualify for the learned professional exemption, all of the following conditions 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, the position must meet all of the following conditions:

  • 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 Exemption

For an employee to qualify for the computer exemption, the following conditions 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:
    • The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
    • 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;
    • The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
    • A combination of the aforementioned duties, the performance of which requires the same level of skills.

Outside Sales Exemption

Your outside sales people can qualify for the outside sales exemption, as long as the following conditions are 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. 

The FLSA offers a minimum standard. It may not be waived or reduced, but it may be exceeded. Other federal, state or local laws can establish higher minimum wages and overtime rates or reduce the number of hours in a workweek. When the state laws differ from the federal FLSA, you are obligated to comply with the standard that is most protective to your employees. By that same token, as an employer you can make changes as long as you meet or exceed the mandates of the law. Also, entering into a collective bargaining agreement will not eliminate your obligations under the FLSA and nothing in the law will relieve you from your contractual obligations under that collective bargaining agreement. 

These are the basics. For additional information, visit http://www.wagehour.dol.gov or call the Department of Labor’s toll-free information and helpline, available 8:00am to 5:00 pm in your time zone, 1-866-4USWAGE (1-866-487-9243).