Exempt Employees vs. Nonexempt Employees

The Fair Labor Standards Act (FLSA) is an important federal law that regulates most of the workplaces in the United States. The FLSA sets minimum wage and overtime pay standards, among other things. It requires that most employers pay workers at least the federal minimum wage for all hours worked and overtime pay of at least 1.5 the regular rate of pay for all hours worked over 40 hours in a workweek.

However, the FLSA provides exemptions from minimum wage and overtime pay requirements for certain categories of employees. An exemption means the FLSA excludes you from its pay requirements. As a result, your employer does not have to pay overtime when you work more than a 40-hour workweek or the federal minimum wage. Exempt employees are often white-collar workers. They work in upper-level positions in their organization.

FLSA exemptions include:

• Executive positions
• Administrative positions
• Professional positions
• Outside sales employees
• Computer employees
• Highly compensated employees

However, the type of work you perform isn't the only test for determining whether you are an FLSA-exempt employee. Your employer must also apply other standards. For example, they must take into account how the employee is paid (the salary basis test), how much money the employee earns (the salary threshold), and certain job duties (job duties test).

The U.S. Department of Labor establishes objective standards for exemptions. Employers sometimes classify employees as exempt to avoid paying them for their overtime hours. Business owners often think that determining employee exemption status is at their discretion. This is not true. Job titles and an employer's employee classification do not determine FLSA-exempt status.

Salary Basis

Salaried employees are, as a rule, exempt. Being paid on a salary basis means you receive a predetermined amount of compensation each pay period. An exempt employee receives their full salary for any week they perform work, regardless of the number of days or hours worked. This is different from employees paid an hourly rate who are usually compensated according to the number of hours worked.

Salary Threshold

To qualify as an exempt employee, you must receive a certain amount of compensation and be paid on a salary basis. The current salary threshold is $684 a week. This requirement entails receiving at least $684 a week or $35,568 a year.

The salary level is under debate. The U.S. Department of Labor in August 2023 announced a proposal to raise the salary threshold from $684 to $1,059 a week. Under that overtime rule, the yearly amount to qualify would move from $35,568 a year to a little more than $55,000 a year.

Job Duties

Once the salary basis and salary threshold are met, the employee's job duties are considered. As a rule of thumb, exempt employees perform relatively high-level duties concerning the company's overall operations, regardless of job title. The duties test is different for each exemption.

Executive Exemption

The executive exemption requires the following job duties:

• Supervise two or more other employees
• Hold a managerial position
• Have genuine input into other employees' job status. Examples include hiring, firing, and assignments.

As a rule of thumb, an employee working exempt executive duties is in charge or considered the boss.

Administrative Exemption

This exemption is for employees whose main duties involve supporting a business. Administrative employees do not directly produce what the company sells; however, they tend to occupy higher seniority than workers in basic clerical roles.

Exempt administrative job duties include:

• Office or nonmanual work that is directly related to general business operations or management
• Exercises independent judgment and discretion about significant matters

Examples include human resources, public relations, payroll, and accounting staff.

Professional Exemption

There are two types of professional exemptions — learned professional and creative professional.

The learned professional exemption requires that:

• The employee's primary duty must be performing work requiring advanced knowledge.
• The advanced knowledge must be in a field of science or learning.
• The advanced knowledge comes from long-term specialized intellectual instruction.

Exempt professional employees include lawyers, physicians, architects, and registered nurses. This exemption does not include skilled trades, mechanical arts, or work that does not require a college or postgraduate degree.

The creative professional exemption requires that:

• The employee's primary work responsibility involves doing work that requires "imagination, originality, or talent in a recognized field of artistic or creative endeavor."

This exemption generally includes creative professionals such as writers, journalists, actors, and musicians.

Outside Sales Exemption

To qualify for the outside sales employee exemption, you must meet all of the following tests:

• The employee's primary duty is obtaining orders or contracts for services or the use of facilities for which the client or customer will pay a consideration.
• The employee performs the work outside of the employer's place of business.

Computer-Related Exemption

The employee must be a skilled worker in the computer field, such as a computer programmer, computer systems analyst, software engineer, etc.

The employee's primary duties must consist of:

• Systems analysis
• The design, development, testing, or modification of computer systems or programs
• The creation, testing, or modification of computer programs related to machine operating systems

Highly Compensated Employee Exemption

Highly compensated employees are exempt from FLSA-required overtime pay. They must make a minimum salary of $107,432 a year and perform office or nonmanual work. They must also regularly perform at least one of the duties of an exempt executive, administrative, or professional employee.

Nonexempt Employees

Generally, blue-collar workers, hourly wage workers, and manual laborers are nonexempt employees and entitled to federal minimum wage and overtime pay under the FLSA.

Exclusions

The FLSA covers most U.S. workers and classifies them as either exempt or nonexempt employees in terms of pay and overtime regulations. However, the FLSA specifically excludes certain jobs. For instance, it excludes many agricultural workers, while laws other than the FLSA govern truck drivers and some other professions.

State Laws

You must also consider state laws. The FLSA provides minimum standards. Some states have different criteria than those in the FLSA for determining exempt and nonexempt workers. State requirements for claiming exemptions may be stricter. For example, a worker may be exempt under federal law but nonexempt under state law. If you are subject to FLSA and state overtime exemption rules, the standard most favorable to the employee prevails.

Misclassification

Misclassifying employees can cost employers a lot of money. Nonexempt employees mistakenly treated as exempt and denied overtime pay may file FLSA overtime claims with the U.S. Department of Labor. Even more concerning, a misclassification class-action lawsuit could result.

Class-action wage-and-hour lawsuits are common and can be costly for employers. Parent companies of HomeGoods, Marshalls, and T.J. Maxx resolved class-action claims by assistant store managers, who alleged they were wrongly categorized as exempt employees and denied overtime compensation. This settlement amounted to $31.5 million. Similarly, Burlington Coat Factory agreed to pay nearly $20 million to settle two separate lawsuits from assistant store managers who said they were incorrectly classified, leading to the denial of overtime pay for hours worked beyond 40 in a given workweek.

Have Specific Questions About Exempt vs. Nonexempt Employees? Contact a Lawyer

The differences between exempt and nonexempt employees cause a lot of confusion. If a company employs you as an exempt employee, they may have miscategorized you, and you may deserve overtime pay. Your first step should be to resolve the issue directly with your employer, as it could be an honest mistake. However, if you believe your rights have been violated, you should consider speaking with a skilled employment law attorney in your area.