Don’t get this wrong. It’s one of the most common payroll mistakes. And it’s costly. Determining whether an employee is exempt or non-exempt is a crucial aspect of compliance with labor laws. The classification of employees as exempt or non-exempt has significant implications for minimum wage requirements, overtime eligibility, and other employment rights.
Let’s examine the criteria that differentiates exempt versus non-exempt employees, as well as the consequences of misclassification. By understanding these distinctions and adhering to the regulations set forth by the Fair Labor Standards Act (FLSA) and state laws, employers can avoid legal repercussions and protect the rights of their employees.
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What Is an Exempt Employee?
To qualify as an Exempt Employee, certain qualifications must be met. We’ll go into those requirements in a moment. Exempt employees are paid a salary that is typically distributed in equal amounts at the end of every pay period. Exempt employees don’t qualify for minimum wage.
The Fair Labor Standards Act (FLSA) minimum wage and overtime rules don’t apply to Exempt Employees. So, whether your exempt employee works 70 hours a week or 32 hours a week, their compensation doesn’t change based on their number of hours.
As we’ll discuss later, there are certain tests that you’ll need to use to make sure your employees qualify for an exemption.
Criteria for Exempt Employees
Currently, the employee must be paid $684 a week or $35,568 per year. In addition, job duties must primarily involve executive, professional, or administrative work. Here are 7 of the more common qualifications outlined by The U.S. Department of Labor (DOL).
1 – Executive Exemption
To qualify for the executive employee exemption, all of the following tests must be met:
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The employee must be compensated on a salary basis at a rate not less than $684 per week.
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The employee’s primary duty must be managing the enterprise or managing a customarily recognized department or subdivision of the enterprise;
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The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
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The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.
2 – Administrative Exemptions
To qualify for the administrative employee exemption, all of the following tests must be met:
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The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week;
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The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
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The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
3 – Learned Professional Exemption
To qualify for the learned professional employee exemption, all of the following tests must be met:
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The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week.
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The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work that is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
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The advanced knowledge must be in a field of science or learning; and
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The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
4 – Creative Professional Exemption
To qualify for the creative professional employee exemption, all of the following tests must be met:
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The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week;
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The employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
5 – Computer Employee Exemption
To qualify for the computer employee exemption, the following tests must be met:
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The employee must be compensated either on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour.
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The employee must be employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field performing the duties described below;
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The employee’s primary duty must consist of:
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The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications;
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The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
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The design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or
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A combination of the aforementioned duties, the performance of which requires the same level of skills.
6 – Outside Sales Exemption
To qualify for the outside sales employee exemption, all of the following tests must be met:
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The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
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The employee must be customarily and regularly engaged away from the employer’s place or places of business.
7 – Highly Compensated Employees
Highly compensated employees performing office or non-manual work and paid total annual compensation of $107,432 or more (which must include at least $684 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.
Note how the DOL specifically makes it clear that these highly compensated employees must be performing office work, not manual labor.
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What is a Non-Exempt Employee?
Non-exempt employees are entitled to minimum wage. They are also entitled to overtime pay when working more than 40 hours per week. Overtime pay must be at least 1.5 times their regular rate of pay. Non-exempt employees are those who do not fit into the exempt classifications above, or they fit into these categories listed by the DOL:
Blue-Collar Workers
The exemptions provided by FLSA Section 13(a)(1) apply only to “white-collar” employees who meet the salary and duties tests set forth in the Part 541 regulations. The exemptions do not apply to manual laborers or other “blue-collar” workers who perform work involving repetitive operations with their hands, physical skills, and energy.
FLSA-covered, non-management employees in production, maintenance, construction, and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers, and laborers are entitled to minimum wage and overtime premium pay under the FLSA and are not exempt under the Part 541 regulations no matter how highly paid they might be.
Police, Fire Fighters, Paramedics & Other First Responders
Exemptions do not apply to:
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Police officers
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Detectives
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Deputy sheriffs
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State troopers
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Highway patrol officers
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Investigators
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Inspectors
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Correctional officers
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Parole or probation officers
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Park rangers
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Firefighters
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Paramedics
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Emergency medical technicians
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Ambulance personnel
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Rescue workers
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Hazardous materials workers
These exemptions also apply to similar employees, regardless of rank or pay level, who perform work such as:
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Preventing, controlling, or extinguishing fires of any type
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Rescuing fire, crime, or accident victims
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Preventing or detecting crimes
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Conducting investigations or inspections for violations of the law
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Performing surveillance
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Pursuing, restraining, and apprehending suspects
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Detaining or supervising suspected and convicted criminals, including those on probation or parole
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Interviewing witnesses
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Interrogating and fingerprinting suspects
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Preparing investigative reports
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Other similar work
How to Classify Exempt Vs. Non-Exempt Employees
Use the rules laid out by DOL above. However, in addition to the FLSA tests, certain states have additional regulations for classifying workers as exempt or non-exempt. These rules may differ from the FLSA in terms of salary thresholds and the duties that qualify an employee for exemption.
Federal requirements do not necessarily supersede state requirements. In fact, if your employee meets the federal requirements for an exemption but not the state’s, the state’s minimum wage and overtime protections apply. If you have questions about how to properly classify employees, reach out to an Asure payroll expert.
Penalties for Misclassifying Employees
If you misclassify non-exempt workers as exempt, you can be held liable for paying back overtime, lost wages, fines, and damages. Your business may also suffer from bad publicity when the story makes the news. It’s important to remember that an employee’s title doesn’t determine their exempt or non-exempt status. See the conditions above in this article or refer to the DOL website.
A common way businesses are caught breaking the law is when an employee files a complaint with the Department of Labor. This is as simple for employees as filling out a form online or calling 866-487-9243. The DOL has a special task force called The Wage and Hour Division (WHD). The WHD’s mission is to “safeguard the workplace rights afforded by the federal labor laws.”
In fiscal year 2022, the WHD answered more than 913,000 calls from employees asking if their rights were violated. The WHD provides assistance in over 200 languages. In addition, the WHD conducted over 4,000 outreach events educating over a quarter-million workers about HR laws. The WHD recovered over $100,000,000 from businesses that mistakenly or maliciously failed to properly pay their workers. This included $32.9 million from construction businesses and $27.1 million from food service companies.
Conclusion
Proper classification of employees as exempt or non-exempt is critical to complying with federal and state laws. Improper classification is one of the most common mistakes businesses make with their payroll. Exempt employees are not subject to minimum wage and overtime rules, while non-exempt employees are entitled to these protections. There are serious consequences when misclassifying employees, even if it’s accidental.
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