Exempt: Everything You Need to Know
An employee can be deemed exempt or nonexempt under the Fair Labor Standards Act. 7 min read
2. What Is Exempt?
3. What Are the Job Duties of an Exempt Employee?
4. Exempt vs. Non-Exempt Employees
5. Guidelines for Exemption From Overtime Pay Requirements
6. Changes to Overtime Pay Guidelines
7. Tax Liability Differences
8. Overtime Implications
9. Workers' Rights and Benefits Implications
10. Unemployment Implications
11. So, Which Is Better?
12. Exclusions From FLSA Coverage
13. Salary Level Test
14. Salary Basis Test
15. The Duties Test
16. Exempt Executive Job Duties
17. Exempt Professional Job Duties
18. Exempt Administrative Job Duties
What Is Exempt?
Exempt refers to an employee’s status for wage purposes. An employee can be deemed exempt or non-exempt under the Fair Labor Standards Act. While a non-exempt employee enjoys numerous legal protections under the FLSA, an exempt employee has practically no legal protections. The main implication of an employee being exempt is that said employee is not entitled to be paid for overtime hours. Some types of job positions are deemed exempt under the FLSA. Outside sales staff and airline employees are two examples of job positions that are automatically exempt under the FLSA.
Under the FLSA, employers are not required to pay exempt employees overtime wages for working more than 40 hours in a wage week. On the other hand, non-exempt employees must receive overtime pay for all overtime work performed.
In some cases, employers accidentally or purposely treat their non-exempt employees as if they were exempt. Sometimes, employers don't record overtime hours properly, or they don't compensate these hours properly. If a non-exempt employee believes that he has not been properly compensated, he has the right to file an FLSA overtime claim with the U.S. Department of Labor.
What Are the Job Duties of an Exempt Employee?
Most of the time, the job duties of exempt employees involve "high-level" tasks that have a major impact on the company's operations. Under the FLSA, job titles and job descriptions are not considered when classifying an employee as exempt or non-exempt. This is because a job title does not always match up with the job duties. The FLSA prefers to pay attention to job duties rather than the job title or description to classify an employee as exempt or nonexempt.
There are three categories that exempt employees often fall under when it comes to the FLSA:
If an employee does all the following on a regular basis, chances are he is considered an exempt executive employee:
- The employee is responsible for supervising two or more employees in the organization.
- Management is one of the employee's key duties. The employee is also able to have genuine input in relation to the job status of the company's other employees.
Bosses and those in charge are usually the employees who are considered exempt executive employees.
Professional employees usually have intellectual jobs that involve the use of judgement and discretion. In general, professional employees need to have a specialized education to gain professional jobs. Usually, creative professionals like journalists, actors, musicians, and writers also are exempt due to professional exemption.
When it comes to classifying an employee as administratively exempt, you should remember that such employees are not responsible for creating or offering products and services that the company sells to make a profit. Also, clerical work is not performed by administrative employees.
Exempt vs. Non-Exempt Employees
Employers do not have to pay overtime wages to exempt employees as far as the Fair Labor Standards Act is considered. However, simply because exempt employees are not protected by the FLSA does not mean they are completely unprotected. Usually, there are other federal and state laws in place to protect them. For example, there are laws for hourly rates and wages in most states. The federal minimum wage is $7.25. Most of the time, requirements associated with state laws are more stringent and numerous than requirements associated with the FLSA.
Employers pay minimum wage or more to non-exempt employees for up to 40 hours of work each week. After an employee performs 40 hours of work in a week, the employee must receive 1.5 times the basic hourly wage for each additional hour worked for the week. Exempt employees, on the other hand, do not receive more pay for their overtime work. In general, exempt employees receive a yearly salary rather than an hourly wage. Exempt employees also have jobs that are administrative, executive, and professional in nature.
Guidelines for Exemption From Overtime Pay Requirements
STEM employees, executive employees, salespeople, professional employees, and administrative employees are usually exempt. To be exempt, employees must fulfill these criteria.
- Receive a salary instead of hourly pay.
- Earn $23,660 in a year or $455 in a week at least.
- Receive a salary for all weeks that they work.
To be classified as an exempt employee, one needs to pass the FLSA's employments tests for job duties, job responsibilities, and salary. Exceptions are researchers as well as those who have a governmental or educational grant to work.
Changes to Overtime Pay Guidelines
For eligibility to be exempt from receiving overtime pay for overtime work, salary will be increased from $455 to $913 each week or $47,476 a year. The salary for eligibility is being increased to account for inflation. The U.S. Labor Department will review and update the salary threshold every three years with the next review in January 2020.
Recently a federal judge from Texas decided to block overtime rules temporarily from going into effect. If it weren't for this action by the federal judge, these new overtime rules would have gone into effect in December 2016.
Tax Liability Differences
The tax bracket of an employee is determined by income level. Besides this, there is no difference in taxing exempt and non-exempt employees on the state or federal levels. All pay is considered earned income for exempt and non-exempt employees. Therefore, all income of both non-exempt and exempt employees is subjected to taxation.
In most cases, employers want their exempt employees to spend as much time as needed to complete their assigned tasks. The amount of time it takes for the employee to complete the assigned task is not relevant. If it takes an employee 60 hours to complete the assigned tasks, the employer will expect them to work those 60 hours. Employees are usually more motivated to work productively because they do not get any extra pay for working more than 40 hours a week. Employers pay exempt employees to complete the job rather than on an hourly basis.
In contrast, non-exempt employees are required to receive overtime pay for overtime work from their employers. Therefore, it behooves employers to restrict the hours of those employees. Many employers don't allow their non-exempt employees to work more than 40 hours in a work week. That way, they don't have to pay the employee 1.5 times the hourly rate for the overtime work.
Workers' Rights and Benefits Implications
Usually, non-exempt employees receive a significant number of protections in comparison to exempt employees under the FLSA. In fact, the FLSA grants exempt employees no rights for protection. However, it is important to keep in mind that there are other federal and state laws intended to protect their interests and rights of exempt employees. Federal and minimum wage laws are just one example.
States have different unemployment benefits. Usually, both exempt and non-exempt employees enjoy the same unemployment benefits.
So, Which Is Better?
Many employees prefer working in non-exempt positions. Their reasoning is that they prefer being paid for every hour that they work. Some employees prefer working in exempt positions due to the greater amount of freedom that these positions provide. Companies usually don't restrict how exempt employees use their free time. On the other hand, employers will monitor how much time non-exempt employees spent at the water cooler. Some exempt employees may be able to get their job duties done in 30 hours rather than 40 hours. However, these exempt employees will be paid the same amount as if they had worked 40 hours in the work week.
Exclusions From FLSA Coverage
According to the FLSA, some jobs are automatically exempt when it comes to overtime rules. If a job is already moderated by another state or federal labor law, then this job position is automatically exempted from the FLSA overtime rules. This explains why exempt employees may still enjoy rights and privileges despite not being covered by the FLSA overtime rules.
Salary Level Test
If an employee earns less than $455 in a week or $23,006 in a year, this employee is automatically considered non-exempt. The nature of the job duties of such employee does not need to be considered. On the other hand, the vast majority of employees who earn more than $100,000 annually are classified as exempt. Of course, there are a few exceptions to this rule.
Salary Basis Test
The salary basis test is used to help classify employees as either non-exempt or exempt. In general, an employee receives a salary if they are guaranteed to be paid a minimum amount so long as they work during a work week. An employer calculates the weekly pay for a salaried employee by dividing the annual pay by the number of work weeks in a year. Another sign that an employee is salaried is if the pay of the employee remains the same whether they work more for less hours than usual in a week.
The Duties Test
If an employee passes a salary level test and salary basis test the employee still needs to have job duties that are exempt to be considered an exempt employee. The FLSA does not recommend using job titles or job descriptions to classify an employee's job duties as exempt or non-exempt. The reason for this is that an employee's job duties do not always align with the employee's job title. A teacher might be called a janitor but that does not change the fact that they are a teacher. Administrative, executive, and professional job duties are considered exempt under the FLSA overtime rules.
Exempt Executive Job Duties
A job duty is executively exempt if it involves supervising two or more employees on a regular basis. The two-employee requirement is equivalent to two full-time employees or the equivalent in part-time employees. For an employee's job duties to be considered exempt, supervision must be a major part of the job duties. Another major aspect of the job duty should be management. Finally, the employee must be able to have a genuine impact on employees' job status within the company.
Exempt Professional Job Duties
Job duties traditionally associated with the learned professions are usually exempt when it comes to FLSA overtime rules. Professionally exempt job duties are usually intellectual nature. These job duties require the employee to exercise judgment and discretion. These employees commonly have specialized education. Many creative professionals are also considered exempt employees. It is usually the easiest to classify employees as professionally exempt.
Exempt Administrative Job Duties
It is usually most difficult to classify employees as administratively exempt. The reason for this is that administrative jobs tend to be very imprecise in nature. The FLSA defines administrative job duties as non-manual. These job duties are usually performed in office settings. Discretion and judgment are also required for administratively exempt job duties.
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