The Fair Labor Standards Act (FLSA) sets specific rules about the minimum wage, youth employment, and overtime requirements. As a part of the law, there are rules that determine which type of workers are exempt from overtime. If nonexempt employees don’t receive overtime pay, it can lead to $1,000 penalties for each violation. By learning about the difference between exempt and nonexempt workers, small businesses can avoid FLSA penalties. 

What Is the Difference Between Exempt and Nonexempt Workers? 

When it comes to exempt and nonexempt workers, the biggest difference is in how they are paid. Overtime-exempt workers do not have to be paid overtime because they are paid a salary by their employer. Nonexempt workers are paid overtime if they work more than 40 hours in a week. 

However, being exempt goes beyond just a salary. If a worker isn’t classified as exempt, they can be paid a salary. However, they would also need to be paid overtime for overtime hours if they don’t also pass the duties test. 

As a small business owner, you should create job descriptions for each position and evaluate each description to determine if it’s exempt or not. Periodically, you can conduct internal FLSA audits to ensure your exempt and nonexempt workers are being paid appropriately.

How To Determine if an Employee Is Exempt or Nonexempt

When determining if a worker is exempt or nonexempt, you must perform the duties test and the salary test. If the employee passes both tests, they can be classified as exempt. 

If you’re in doubt about someone’s exempt status, you can reach out to an employment lawyer or HR professional for help. When in doubt, it’s better to pay overtime. You won’t get in trouble for paying someone overtime unnecessarily, but you will be penalized for misclassifying a worker as exempt and not paying any overtime.

The Duties Test 

The duties test is one of the two tests employees must meet in order to be exempt. In order to be exempt, the employee must be performing high-level work. Exempt job duties include executive, professional, administrative, computer, and outside sales positions. Highly compensated employees are also exempt.

It’s important to keep in mind that the FLSA’s duties test isn’t related to the employee’s title. The employee can be given the title of administrative assistant, janitor, or chief executive officer. If these employees aren’t performing job duties that would make them exempt, they aren’t exempt.

Executive 

Executives are considered exempt. Someone may be an executive if they meet all of the following descriptions. 

• They supervise at least two other employees on a regular basis. 
• The employee gives genuine input about hiring, promoting, or firing other workers.
• Managing others is the employee’s primary function.

Often, executive employees maintain sales records, interview workers, delegate tasks, plan budgets, and appraise employee productivity. Each position is different, so it’s important to evaluate each job description on a case-by-case basis.

Professional 

Professional job duties involve professions like dentists, clergy, doctors, accountants, registered nurses, and lawyers. Even creative jobs, like cartoonist or musician, may fall under the professional designation. Typically, being a professional worker requires a higher level of education or skill level.

Administrative 

Determining if someone carries out administrative job duties can be difficult. For example, most secretaries would not be classified as administrative. To fit the regulatory definition, the job must involve the following four qualities.

• It must entail non-manual or office work.
• The work must be related to the company’s management or general business operations.
• A major component of the employee’s duties must involve independent judgment.
• This judgment must be about matters of significance.

This designation is intended for high-level workers who are in charge of running the entire company. Administrative workers are support staff to the production workers. For example, they may be HR employees, payroll workers, and marketing specialists.

Computer Employee

This exemption applies to people who work as computer programmers, computer systems analysts, software engineers, or in similar roles. The individual must perform the following duties as a part of their primary role.

• They spend their time designing, creating, changing, or documenting computer programs.
• The worker uses system analysis techniques during their day-to-day work.
• They document, create, test, design, modify, or analyze prototypes, computer systems, or computer programs in relation to system design requirements.

Outside Sales 

An employee falls under the outside sales exemption if they meet the following requirements.

• The employee normally spends their time working away from the employer’s place of business.
• The worker’s primary job is making sales or getting contracts for services.

Highly Compensated Employee 

Under current FLSA regulations, a highly compensated employee is exempt from overtime rules if they meet the following three requirements.

• They earn $107,432 or more per year.
• The individual primarily performs office work or non-manual work.
• They typically perform one of the duties of an executive, administrative, or professional employee.

The Salary Test 

Besides the duties test, an employee must also fulfill the salary test. This test is made up of the salary basis and salary level components. If the employee doesn’t fulfill both components, they fail the salary test.

Salary Basis 

The test for salary basis is simply whether the employee is paid a salary or not. A salary is an amount that the employee is paid every month regardless of sales or hours worked. If the worker doesn’t get a guaranteed minimum pay each month, they aren’t paid on a salary basis and aren’t considered exempt. 

Salary Level

Before a worker can be considered exempt, they must be paid a certain salary level. Currently, this means that the employee must earn at least $684 a week. This works out to $35,568 per year. 

Dangers of Misclassifying Workers Under the FLSA

When designating employees as exempt or not exempt, accuracy is incredibly important. The FLSA can penalize your company $1,000 for each overtime violation. Violators of child labor laws can be penalized $10,000. A willful violation of any FLSA rules can lead to fines of $10,000 and criminal prosecution. If someone violates the FLSA a second time, they may be imprisoned.

Even if you aren’t caught violating the FLSA, there are still many reasons why you should classify workers correctly. When you treat workers fairly and reward them with overtime for doing extra work, they’re more likely to remain at your company for longer periods of time. Similarly, it’s easier to attract top talent if your company has a reputation for treating its workers well. 

The Importance of Wage and Hour Audits

One of the most effective ways to ensure your company is in compliance is by conducting a wage and hour audit. You need to make sure you are classifying exempt workers correctly. Additionally, you need to make sure your company is calculating overtime pay correctly. During a wage and hour audit, you should perform the following activities.

• Exempt Classifications: Check your employee classifications to make sure they are properly classified as exempt or nonexempt. Use the FLSA’s salary and duties tests to ensure correct classifications.
• Employer Records: When storing records, you should make sure to track pay stubs, time cards, meal breaks, and time off. Additionally, store your job descriptions to demonstrate that exempt employees have been properly classified.
• Wage Calculations: Double-check to see if all employees have been paid minimum wage and overtime correctly.
• Independent Contractors: As the HR saying goes, everyone is happy being an independent contractor until they aren’t. When an independent contractor is injured and can’t pay their bills, they may decide to go after their employer. Because of this, you need to make sure your independent contractors are classified correctly.
• FLSA Training: To avoid FLSA violations, train HR staff and managers on labor laws and overtime rules. 

Important Legislative Changes 

There was a mandatory FLSA salary increase that went into effect in July 2024. However, this FLSA salary increase was overturned by a federal judge in Texas in November 2024. Because it is unlikely the future administration will press for an appeal, FLSA salary requirements will likely remain at their previous limits.

Ensure Your Company’s Compliance With the FLSA

As a part of your company’s HR practices, you should regularly perform FLSA audits. An FLSA violation can lead to significant fines, so the best option is to find FLSA errors early and fix them on your own. 

If you want assistance with FLSA compliance and audits, we can help. Reach out to Asure’s team of small business HR and payroll experts today to learn more.