Business Tips

Exempt VS. Non-Exempt Employees

Understanding Exempt versus Non-Exempt Employees

In business, you hear the terms “exempt” and “non-exempt” often with reference to employees. But if most or all of your hires have routinely fallen squarely into one bucket or the other, then you may not have had reason to learn the difference or the exact meaning of those two terms. 

You may have known that this all has something to do with overtime pay—but you’ve probably wondered what certain employees are exempt from, and who is exempt? As a business owner, controller or payroll administrator, it’s important to know the meaning of exempt versus non-exempt employees, and what the distinction means to you. 

What is an exempt employee?

The U.S. government’s Fair Labor Standard Act (FLSA) requires that most U.S. employees receive at least the federal minimum wage, and at least the state minimum wage if there is one. It also stipulates that those who work beyond 40 hours in a workweek must receive overtime pay, or “time and a half” their usual hourly wage rate. These rules are set out in FLSA Section 13(a)(1) rules.

You may be able to guess now that an “exempt employee” is an employee who does not fall under the overtime pay protections of the rules set out in section 13(a)(1). This means their employer isn’t required to pay minimum wage or overtime, i.e. time and a half, for hours over 40.

FLSA defines “exempt employees” in Section 13(a)(1) as those workers “employed as bona fide executive, administrative, professional and outside sales employees”. There are also “certain computer employees” who are exempted from overtime and minimum wage coverage in FLSA.

What is a non-exempt employee?

If you’re not exempt from a rule, then you’re not outside its reach. A “non-exempt employee” is an employee who is covered by the FLSA Section 13(a)(1) rules dictating minimum wage and overtime pay. Non-exempt employees include most hourly workers, and they constitute a large portion of the workforce than exempt employees. 

Basic overtime exemption guidelines

While the minimum wage portion of the FLSA rules is significant, in this article we’ll be focusing on the overtime pay requirement.

Again, certain groups of employees who meet particular job duty criteria mentioned above as well as specific salary thresholds are exempt from the FLSA’s overtime pay requirement. 

The Department of Labor describes that, effective in 2020, the following are the salary guidelines for which employees in the job categories mentioned will qualify for an exemption:

  • Employees are paid on a salary basis as opposed to an hourly basis.
  • Employees earn at least $684 per week or $35,568 annually (up from $455 per week or $23,660 annually). 
  • Employees are paid a salary for any week they work.

Note: Pay bonuses or incentive payments (including commissions) that are paid by employers at least annually may account for up to 10 percent of the salary threshold. 

Types of exempt employees

Those who meet job criteria and pass salary basis test

To qualify for exemption, employees who apparently fit into one of the categories mentioned in Section 13(a)(1)—executive, administrative, professional, outside sales or computer employee, as well as highly-compensated employees—must meet certain criteria concerning their job duties, along with passing what’s known as a salary basis test.

Executive exemption

Executive employees who meet the following job duties and salary criteria qualify for the executive exemption:

  • Employee’s primary duty is managing the company or a subdivision, i.e. department, of the company 
  • Directs the work of at least two other full-time employees
  • Has the authority to hire and fire employees, or their opinion is given special weight in hiring and firing
  • Salary test: Must be paid on a salary basis at a rate not less than $684 per week

Administrative exemption

Administrative employees who meet the following job duties and salary criteria qualify for the administrative exemption: 

  • Employee’s primary duty is performing office or non-manual work related to the management or general business operations of the company or the company’s customers
  • Their primary duty includes the exercise of discretion or independent judgment in significant matters—in other words, they make some decisions and aren’t just carrying out others’ orders
  • Salary test: Must be paid on a salary basis at a rate not less than $684 per week

Professional exemption

Professional employees who meet the following job duties and salary criteria qualify for the  professional exemption: 

  • Employee’s primary duty must involve the performance of tasks that require advanced knowledge, defined as work that is primarily intellectual in nature and that entails judgment and discretion 
  • The advanced knowledge must be in a field of science or learning, and the knowledge must be acquired by a prolonged course of specialized intellectual study 
  • Must be paid on a salary basis at a rate not less than $684 per week

Computer employee exemption

Computer employees who meet the following job duties and salary criteria qualify for the  computer employee exemption: 

  • Must be employed as a computer systems analyst, computer programmer, software engineer or another similarly skilled position in the computer field, with job responsibilities that meet the criteria for exemption
  • Salary test: Must be paid either on a salary or fee basis at a rate not less than $684* per week or $27.63 an hour

Outside sales exemption

Outside sales employees who meet the following job duties qualify for the outside sales exemption (there is no salary test for this category of employee): 

  • Must have a primary duty of making sales or taking orders for contracts of goods, services or the use of facilities which will be paid for by client or customer
  • Must be primarily conducting business away from the employer’s office or offices

Highly-compensated employee exemption

Highly compensated employees who meet the following job duties and salary criteria qualify for the highly compensated employee exemption: 

  • Must perform office or non-manual work and at least one of the duties laid out for the executive, administrative or professional exemption
  • Salary test: Must be paid total annual compensation of $107,432 or more (which must include at least $684* per week paid on a salary or fee basis) 

Overtime hours: loved by employees who want the extra pay, loathed by bosses who don’t want the extra labor cost. 

What were the 2020 changes to overtime rules?

To recap, the following changes enacted to the FLSA’s overtime rules are now in effect as of January 1, 2020:

  • The salary threshold was raised from $424 to $684 per week
  • The annual compensation requirement for “highly compensated employees” was increased from $100,000 per year to $107,432 per year.
  • Employers can now use non-discretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices.3

Exceptions to Overtime Requirements

There are a handful of occupations that the FLSA specifically lists as not covered by its overtime rules. Those jobs exempted from its overtime protection include but aren’t limited to:

  • Movie theater employees
  • Local radio and television station employees
  • Agricultural workers
  • Domestic service workers
  • Taxicab drivers 
  • Amusement park workers

Another set of workers are covered by distinct labor laws, and are therefore not covered by FLSA rules. These may include:  

  • Rail or air carrier employees covered by the Railway Labor Act exemption
  • Truck drivers governed by the Motor Carriers Act  

How ExakTime can help

Sorting out which employees are protected by the FLSA’s overtime rules which are not is essential, as employers are legally required to pay for overtime hours at one-and-a-half times their normal pay rate. Not paying overtime is punishable by fines and may result in lawsuits.

ExakTime can help you not only determine whether an employee is owed overtime, while also ensuring that you pay non-exempt employees properly for their overtime due, with accurate to-the-minute labor tracking and secure, cloud-based records that are easily synced to payroll. 

With ExakTime, you can rest assured that you are remaining in compliance with the FLSA overtime rules at all times and have clear records to prove it. Contact us to learn more.