WHAT IS AN EXEMPT EMPLOYEE? Requirements & How They Work

What is an Exempt Employee

When an employee is exempt, they don’t have to get paid extra for working past their shift. Exempt employees differ from nonexempt employees. Basically, under the FLSA, you must meet both parts of the salary exemption test in order to not have to pay overtime. Some administrative, professional, and executive workers are not required to work overtime under the FLSA. These workers are called “exempt” employees. To be “exempt,” employees must meet three tests: salary level, salary basis, and duties tests. Here is everything you need to know about exempt vs nonexempt employees

What is an Exempt Employee?

There are two types of employees in any workplace: exempt and nonexempt. Employees who are exempt from the minimum wage and overtime pay requirements are known as “exempt employees.” This is because exempt workers usually have jobs in management or the arts and sciences, and they are paid a salary instead of an hourly wage. Exempt employees are frequently compensated with year-end bonuses for the type of work they do and any overtime work. Different states have different rules, but the FLSA says that a job is exempt if it falls into one of the following categories: Professional, Administrative, Executive, Computer-related, or outside sales

These classifications are pretty broad—as they should be, as they cover many jobs in many different industries. The FLSA states that employees in the above categories are exempt if they are salaried and earn at least $684 per week or $35,568 annually as of Jan. 1, 2022. Considering that 26 U.S. states are planning to raise the minimum wage in 2022, this figure will likely shift in some areas.

Other employees may be exempt from receiving overtime pay in addition to the main types of exempt employees. These include farm workers, movie theater employees, nonmetropolitan broadcast station employees, taxi drivers, railroad employees, motor carrier employees, and American vessel employees.

What Is an Exempt vs Nonexempt Employee?

The main difference between exempt vs non-exempt employees is that non-exempt workers are protected by the Fair Labor Standards Act, which sets minimum wage and overtime requirements. And, while the FLSA has evolved since its inception in 1938, one thing has remained constant: employers must correctly classify their employees or risk costly compliance violations. While non-exempt employees must be compensated for working additional hours, exempt employees are paid a salary regardless of how many hours they work.

Wage-related regulations create additional distinctions. Non-exempt workers must be paid at least the federal minimum wage, while exempt workers must be paid at least $684 per week or $35,568 per year. It shows that the minimum wage for non-exempt workers is lower than for exempt workers. $684 per week for a 40-hour workweek equates to about $17.10 per hour (before taxes), significantly more than the federal minimum wage of $7.25 per hour.

Exempt Employee Rules

Exempt and non-exempt employees, as well as the Fair Labor Standards Act enacted in 1938, established the exempt employee category. Under landmark labor law, workers are protected from unfair pay practices and work regulations. The law has evolved significantly over the last 80 years, but it remains one of the most important labor laws in American history, establishing regulations for a wide range of employee and employer-related issues. 

Salary of an Exempt Employee

The FLSA specifies when workers are to be paid and when they are not to be paid. Exempt employees, for example, do not receive overtime or time and a half when working extra hours. Time and a half is 1.5 times the employee’s hourly rate—the bare minimum an employer must pay for overtime. 

The FLSA requires most U.S. employees to be paid at least the federal minimum wage for all hours worked and time-and-a-half for all hours worked over 40 in a workweek. Section 13(a)(1) of the FLSA, on the other hand, says that people who work as executive, administrative, professional, or outside sales employees are exempt from both the minimum wage and overtime pay. Certain computer employees are also exempt under Sections 13(a)(1) and 13(a)(17). These exemptions are frequently referred to as “white-collar” or “EAP” exemptions. In general, employees must meet certain job-related requirements and be paid at least $684* per week to qualify for the exemption. Exempt status is not determined by job title. For an employee to get an exemption, his or her job duties and salary must meet the rules and regulations of the department.

Part 541 exempts employees from minimum wage and overtime pay requirements. Some state laws have more stringent exemption requirements than federal law. The FLSA does not preempt any such stricter state standards. If a state adopts a higher standard than the FLSA, the higher standard applies.

What Does It Mean if a Position Is Exempt?

An “exempt position” is one held by an employee who doesn’t have to follow the rules in Seattle Municipal Code Chapter 4.04 or the Personnel Rules made in response to it when it comes to hiring, discipline, firing, or appealing decisions about their jobs to the Civil Service Commission. Such positions may be exempted from compliance with these provisions based on an ordinance, city charter, or state law.

How to Determine Whether an Employee Should Be Exempt

The FLSA employs several tests to determine whether a worker is exempt or not from the FLSA. There are a few exceptions, but most exempt employees must pass all three of the following tests:

  • They must be paid a minimum of $35,568 per year, or $684 per week.
  • They must be paid a salary rather than an hourly wage.
  • They must carry out exempt job duties. 
  • Employers can pay up to 10% of an employee’s standard salary in nondiscretionary bonuses and incentives, including commissions.

Procedures for Classifying Employees as Exempt

Follow these steps to ensure you’re in compliance with labor rules and paying your employees fairly:

#1. Determine Whether They Are Salaried or Hourly

The first step is to determine whether an employee is paid hourly or on a salary. Hourly or nonexempt workers usually work in service and maintenance, where a 40-hour workweek is sufficient. Exempt employees, on the other hand, are frequently paid on a salary basis because their duties may include more complex tasks that necessitate working inconsistent or longer hours on a weekly basis. Exempt salaried employees may also be subject to an employment agreement requiring them to work the number of hours necessary to fulfill their responsibilities.

#2. Determine Their Job Title and Authority Level.

Although job titles are not used to determine exempt status, employees with specific roles and responsibilities may meet the following employment-type requirements for exemptions:

  • Exemption for executive employees: An executive employee must be in charge of a managerial position in a business, department, or subdivision. They must also be in charge of at least two other full-time employees, or the equivalent, and have the authority to hire, fire, or otherwise change another employee’s status.
  • Administrative exemption: The employee’s primary responsibility must be the performance of office or nonmanual work directly related to the management or general business operations of the company. Their primary responsibilities must also include exercising discretion and judgment in important company matters.
  • Professional exemption: An employee’s primary duties must involve advanced knowledge or skills and be defined as intellectual work. This advanced knowledge must be in science or learning and acquired through specialized instruction. This is common in fields such as engineering, teaching, and laboratory sciences.
Read Also: CAPITAL GAINS EXEMPTION FOR SENIORS: How It Works 2022 
  • Exemption for outside sales: An employee’s primary role must be making sales or obtaining client orders or contracts. They must also be away from the company’s headquarters regularly.
  • Exemption for computer employees: The employee must be paid at least $684 per week or $27.63 per hour in salary or fees. They must work as computer systems analysts, software engineers, or in a similar capacity. Their primary job responsibilities must include using systems analysis techniques and procedures, implementing computer systems or programs, and creating computer programs.
  • Employees who are well compensated: Exempt are those who perform office or nonmanual work and are paid at least $107,432 per year if their duties meet at least one of the executive, administrative, or professional exemption tests.

#3. Think About Other Possible Exemptions

Job responsibilities may exempt other employees from overtime and the minimum wage. In retail or service businesses, employees may be paid on a commission basis instead of by the hour. Trip-specific rates may be paid to taxi drivers, local delivery drivers, railroad and airline employees, and others who work in mass transit. Non-hourly or salary-based employees may be exempt from overtime or minimum wage requirements.

#4. Verify State Requirements

Aside from federal employment rules and regulations, each state has its own requirements. To find out if your employees are exempt, you should look at the requirements for exemption in your state.

Is It Better to Be Exempt or Nonexempt?

Exempt employees are paid more because they must complete tasks regardless of the hours needed. Exempt employees are frequently expected to stay late or come in early if doing the job requires it.

Is Being an Exempt Employee a Good Thing?

Exempt employees often have a more flexible work environment than non-exempt employees because they are paid for the jobs they do rather than the time it takes them to do them. Employers are frequently more concerned with the completion of these workers’ jobs than with the time it takes them to do those jobs, so employers may be less concerned if workers take longer lunch breaks, arrive late, or work in areas other than the office. On the other hand, they are not compensated for any additional hours worked to complete their tasks.

Why Are Some Employees Exempt?

Exempt workers aren’t eligible for minimum wage, overtime, or other protections. Most of the time, these people work in executive, supervisory, administrative, and other professional positions, and they usually get paid. Exempt positions are not required to follow FLSA standards, but it is expected that they will complete their job duties for the agreed-upon amount of pay, regardless of how long it takes.

What Job Title Are Exempt?

Exempt: A job status that is exempt from the FLSA’s requirements. Presidents, vice presidents, deans, managers, administrators, and professional employees are examples of exempt positions. These positions are salaried and do not receive overtime pay. 

Nonexempt: A job classification protected by the Fair Labor Standards Act (FLSA) that requires employees to be paid at least the minimum hourly wage and overtime pay for hours worked in excess of 40 per week. Employees in maintenance, clerical, service, technical, and paraprofessional positions are examples of non-exempt positions.

Conclusion

Both exempt and non-exempt positions can earn high salaries, regardless of job duties. Even though exempt employees may have more freedom, they often work more than 40 hours per week without getting paid more. Non-exempt employees must follow stricter regulations, such as clocking in and out, but they also know that any work done outside of their regular hours results in a larger paycheck.

References

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