Are Your Employees Exempt or Non-Exempt?

Knowing whether your employees are exempt or non-exempt determines whether they must be paid overtime. The Blueprint guides you through the tests for employee exemption.

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When you start working entry-level jobs at a restaurant, in construction, or, God forbid, doing telemarketing, there are a few federal laws that become ingrained almost by osmosis. These include that you get overtime for any hours worked over 40 in a week, and you have to be paid the minimum wage.

Then there’s the one about the higher up that you’re promoted, the less you have to work. As soon as you actually got promoted, though, any illusion of working less soon went out the window.

What if I told you there are employees who are exempt from overtime and federal minimum wage laws? Read on to learn more.

Overview: What is an exempt employee?

The Fair Labor Standards Act (FLSA) designates exempt and non-exempt employees. Exempt employees do not have to be paid the minimum wage (they generally are paid far more), and, more important, they do not qualify for overtime pay.

Exempt employees are not paid for the time they work but for the tasks they complete. As long as they complete those tasks, they make the same amount whether it takes 20 hours in a week or 80.

You will make the decision about which of your employees are exempt and which aren’t when you negotiate their employment. You then enter each of them into your payroll software, and you can find which are being paid overtime each pay period in the payroll register.

Types of exempt employees

Employees must pass the following three tests to be considered exempt from FLSA overtime rules.

1. Salary test

Salary exempt is the easiest test to perform. The employee passes if they earn more than $455 per week or $23,600 per year.

2. Salary basis test

The second test is salary basis. Is the employee paid by the hour or paid an annual amount that is divided up by pay periods? Exempt employees have a guaranteed minimum amount that they earn any week that they work. The pay is not reduced for quantity or quality of work

3. Duties test

Exempt employees must perform one of the following duties:

  • Executive: Must have the following job duties:
    • Regularly supervises two or more employees
    • Has management as the primary duty of the position
    • Has genuine input on the job status of other employees (e.g., hiring and firing)
  • Learned professions: Anyone who was hired because they have advanced knowledge of a specific subject typically learned at a university (e.g., doctors, teachers, engineers, architects, clergy, lawyers, registered nurses, pharmacists).
  • Executive administration: The FLSA says that the executive administration exemption is designed for, “Relatively high-level employees whose main job is to keep the business running.” Exempt administrative job duties are (taken from the FLSA website):
    • Office or non-manual work
    • Directly related to management or general business operations of the employer or the employer’s customers
    • A primary component of which involves the exercise of independent judgment and discretion about matters of significance

The duties test should be easy to apply in practice. You know who your executives are, who was hired for a “learned profession,” and which administrators are keeping the business together. If it’s unclear for any employee, visit the FLSA coverage page for more information.

What is a non-exempt employee?

Non-exempt employees must be paid overtime, either based on their gross wages or as blended overtime. FLSA non-exempt employees must also be paid a minimum wage. Here's a list of the minimum wage rates by state.

Generally you can determine who is non-exempt based on whether they are salary or hourly, but refer to the rules above for the total calculation.

Exceptions to overtime requirements

There are aren’t too many ways around the government overtime rules, but here are a few.

1. Fun with work weeks

More and more businesses are turning to the so-called 9/80 pay period. It allows employees to work 80 hours over nine days and get every other Friday off. Employees work nine hours per day Monday through Thursday and eight hours every other Friday.

The issue, at least for this article, is that employees end up working 44 hours one week and 36 the next. Typically, the FLSA would require you to pay overtime for the four hours in week one.

The way businesses get around this is to set their work week to end four hours into the workday on Friday. That way, the second four hours that day are applied to the next week. The FLSA allows businesses to set the work week however they want as long as it is clearly communicated to employees.

2. 8/80

Some types of medical employees (e.g., nurses and EMTs) can choose to be paid overtime either when they eclipse 80 hours in a two-week period or when they go over eight hours in a day.

3. Movie theaters and agriculture workers

It makes sense for some agricultural workers to not be paid overtime — farms generally work on low margins, and the work can be 16 hours per day in one season and then nothing for months. Visit this link to see exactly which farm jobs are not paid overtime.

Movie theaters are a little weirder. Back in the 1960s, they were hurting and lobbied the government to be exempt from minimum wage and overtime laws. They succeeded, although, starting in the 1970s, they had to pay minimum wage.

Exempt vs. non-exempt frequently asked questions

Are there tax differences?

There is no change in taxable wages for the employee or payroll taxes for the employer between exempt and non-exempt employees.

Can exempt employees be paid overtime?

Salaried employees do not qualify for overtime under the FLSA. That doesn’t stop you from paying them what really is overtime in the form of bonuses or other compensation increases. It is just not called overtime.

How do furloughs work for exempt and non-exempt employees?

Earlier this year, I spent a week researching how to implement a furlough. The business where I work was considering laying everyone off if our job sites were shut down because of COVID-19.

In a furlough, employees are effectively laid off but will be called back when business picks up again. You can also furlough employees for one week per month as some major newspaper companies have done.

There is one key thing to keep in mind if you ever need to consider a furlough: Exempt employees must be paid their full salary in any work week during which they work a single minute.

This includes checking email, filling a work truck with gas, or being on conference calls. Non-exempt employees are only paid for the hours they work.

You’ll hire more exempt employees over time

The government has a seemingly unending set of rules and regulations for the payroll process. It’s important to learn as much as you can and keep these rules in mind. When hiring, firing, and setting salaries, there’s no substitute for having at least summary knowledge.

When hiring new employees, make the exempt or non-exempt decision early in the process. Employees who will be considered non-exempt should be paid by the hour to make it easier to calculate overtime.

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