As an employer, you've probably heard about exempt and non-exempt employees at least once. That's because all employees fall into one of these two categories.
The Fair Labor Standards Act (FLSA) mandates that employers classify every job — current and new — as being exempt or non-exempt from overtime pay and/or minimum wage.
Our guide breaks down exempt and non-exempt employees.
The U.S. Department of Labor (DOL) recently issued its long-awaited final overtime rule which, when it goes into effect on January 1, will set the minimum salary threshold at $684 per week, annualizing to $35,568 per year — up from $23,660 per year.
How Exempt and Non-Exempt Employees Differ
This article specifically covers federal standards for employee classification under the FLSA. Both federal and state standards govern how to classify members of your workforce.
Check your state’s specific laws to make sure you’re staying compliant — they are often detailed on the websites maintained by state wage enforcement agencies.
Below, you can check out a short video on exempt vs non-exempt status under the FLSA.
Note: The new overtime rule will increase the salary threshold from $23,660 per year to $35,568 per year.
What is an Exempt Employee?
An exempt employee is an employee who is exempt from overtime pay and/or minimum wage.
The most common FLSA exemptions are referred to as “white collar” exemptions. What’s a white collar exemption? The term commonly refers to exemptions for executive, administrative, professional, outside sales, and computer professional employees.
In general, an employee must meet all the standards of three different tests to qualify as exempt from minimum wage and overtime pay.
Those three tests include:
Job Duties. For each exemption category, there’s an associated job duties test set forth in the FLSA regulations. The job duties tests have many detailed components that are specific to each white collar exemption. Most exemptions, though, require that the employee regularly exercise discretion and independent judgment in performing her job duties. Some states have different duties requirements than those under the FLSA.
Salary Basis. Next, there’s the salary basis test. In general, an exempt employee must be paid a fixed salary for certain exemptions. That means their salary won’t reduce due to the quality or quantity of work they perform. Be sure to check applicable state law as the salary basis requirements may vary.
Salary Level. With limited exceptions, an exempt employee must be paid a salary that meets the minimum threshold under the FLSA. Several states have salary thresholds that are higher than the FLSA, so check the laws in the states where you have employees to make sure you’re getting this right.
Under the new overtime rules, an employee must make at least $684 a week ($35,568 a year) to meet the salary threshold requirement under the FLSA. An exempt employee generally must be paid the same amount for any week in which the employee performs any work, regardless of the number of days or hours worked.
What is a Non-Exempt Employee?
Non-exempt employees must receive at least the minimum wage for all hours worked and overtime pay. Generally, employees are considered non-exempt unless an exemption applies.
Although non-exempt employees typically receive hourly pay, employers can pay them on a salary basis and pay applicable overtime.
Under federal law, when a non-exempt employee works more than 40 hours in a workweek, overtime must be paid at 1.5 times the employee’s regular rate of pay. For example, if an employee worked 60 hours, they would receive their regular rate of pay for 40 hours, plus an additional 20 hours at the overtime rate. Some states have more stringent overtime requirements than the FLSA (e.g., daily overtime premiums).
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.