As an employer, one of your many responsibilities may include classifying employees.
Although it sounds like a simple task, classifying employees is actually a complex matter that has far-reaching implications for your company as well as your employees. That’s why it’s important to inform yourself and seek out professional counsel to correctly classify employees.
There are many different types of classification, but in this post we will focus on classifying exempt and non-exempt employees. As a quick overview, exempt employees are not subject to minimum wage and overtime requirements as laid out in the Fair Labor Standards Act (FLSA).
Psst...we’ve written an entire post explaining the difference between exempt vs non-exempt employees here.
How to Determine an Employee's Exempt Status
Under federal law, an employee’s status as exempt is determined with reference to three basic tests under the FLSA’s minimum wage and overtime requirements:
- Salary basis test
- Salary level test
- Job duties test
There may be additional or different exemption requirements under state law. That means that even if an employee satisfies the federal requirements to be classified as exempt, if that employee does not also satisfy applicable state requirements, the employee should not be classified as exempt. See how the federal tests apply to a few common employee situations.
As mentioned, all employees are considered non-exempt unless their salary and job duties satisfy the applicable exempt requirements under state and federal law. Under federal law, non-exempt employees are subject to the FLSA’s minimum wage and overtime requirements. Exempt employees, however, are not subject to these minimum wage and overtime regulations.
Classifying employees correctly will help you avoid penalties and other potential consequences.
What Are the 3 Tests Under Federal Law for Determining Exempt Status?
An employee may be classified as exempt if the salary basis test, salary level test, and job duties test following test are satisfied.
The salary basis test is straightforward. In general, an exempt employee should be paid a fixed salary, or fee for certain exemptions. That means an exempt employee’s salary won’t reduce due to the quality or quantity of work she performs.
The current salary level for the exemptions that require a salary basis is $23,660 annually. However, the salary level test may potentially be changed — that is, the required salary level for exempt status could be raised from $23,660 annually to $47,476 annually, depending on the developments in the pending court case. (You can read more about that development here.)
The job duties test is arguably the most complex of the three. There are several exemption categories. The most common exemptions are the ‘white collar’ exemptions: executive, administrative, professional, outside sales, and computer professional employees. For each exemption category, there is an associated duties test set forth in the FLSA regulations. To be properly classified as exempt, an employee’s job duties must satisfy all of the relevant job duties requirements.
To help clarify the requirements for the ‘white collar’ exemptions, we created this infographic below. It includes examples of how the job duties requirements for the executive, administrative, and professional employee exemptions may apply to an employee.
What Are Some Examples of Exempt or Non-Exempt Employees?
If you’re still looking for more resources to explain the change, we’ve also made downloadable slides and other articles explaining exempt classifications. And it’s always a good idea to consult legal counsel for guidance on the application of these exemptions under federal and state law to your situation.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.