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 position — 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.
In 2019, the U.S. Department of Labor (DOL) issued its long-awaited final overtime rule, which updated the earnings thresholds necessary to exempt certain employees from minimum wage and overtime requirements and set the minimum salary threshold at $684 per week, annualizing to $35,568 per year for a full-year worker — up from the previous standard salary level of $23,660 per year.
An exempt employee is an employee who is exempt from overtime pay and/or the minimum wage.
Some of the 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 certain tests to qualify as exempt from minimum wage and overtime pay:
For certain exemptions an employee must be paid a fixed salary. 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.
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. Many of the exemptions require that the employee have management authority or regularly exercise discretion and independent judgment in performing her job duties.
Some states have different duties requirements than those under the FLSA, so make sure to check the specific requirements for any location where you have employees.
Salary or Fee Basis
With limited exceptions, an exempt employee’s compensation must meet 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 FLSA rules, an employee must make at least $684 a week ($35,568 a year) to meet the salary threshold requirement. Generally speaking, an exempt employee 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.
Non-exempt employees must receive at least the minimum wage for all hours worked and are entitled to 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 during a workweek, 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).
Classifying Exempt vs. Non-Exempt Employees
Note: The most recent FLSA rule increases the salary threshold from $23,660 per year to $35,568 per year.
2021 Minimum Salary for Exempt Employees
Some states use their own salary and duties tests for classifying whether an employee is exempt and non-exempt from overtime.
California, like many states, has its own minimum wage requirements that employers must meet. Under California’s wage and hour law, both salaried and hourly employees can be classified as exempt or non-exempt.
The 2021 minimum annual salary threshold to qualify asfor an exempt employee is $58,240 per year for employers with 26 or more employees.
For employers with 25 or fewer employees, that salary minimum is $54,080 per year.
Here’s a look at both minimum wage and salary thresholds for California:
25 or fewer employees
New minimum hourly wage: $13.00
New minimum exempt weekly salary requirement: $1,040 ($54,080 per year)
26 or more employees
New minimum hourly wage: $14.00
New minimum exempt weekly salary requirement: $1,120 ($58,240 per year)
California localities also have their own minimum wage and salary requirements. Check out the full list of California local minimum wage requirements here.
Similar to California, New York has its own set of minimum wage requirements on both the state and local level.
Although there are exceptions where higher rates are required, generally speaking, fFor New York State, the minimum hourly wage is $12.50 and the salary requirement is $48,750 per year.
Check out the local wage requirement updates for Nassau, Suffolk, and Westchester counties, as well as New York City here.
For all other states, see our full list of minimum wage requirements.
Penalties for Misclassifying Employees
The ramifications of misclassifying employees are significant. The Department of Labor can impose civil penalties. Additionally, a misclassified employee could potentially be entitled to up to two years of back pay for any unpaid wages (three years if a willful violation is found), as well as liquidated damages equal to the amount owed and payment of the employee’s attorneys’ fees. Finally, in cases of wilful violations, an employer could also face criminal penalties, including fines and imprisonment.
It pays to properly classify your workers, as complex as it can be! If you struggle with staying ahead of minimum wage requirements and calculating overtime, Justworks has tools and resources to help you stay compliant. Check out everything included in our Compliance Support here.
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.