Startups are known to live by the mantra “Move fast and break things.” However, that should not apply to employee classification. Correctly distinguishing between exempt and nonexempt employees is essential to avoid potential legal issues and sustain a productive and compliant work environment. This article explains the difference between exempt and nonexempt employees and why it matters.
To understand the difference between an exempt and a nonexempt employee, and why the distinctions matter, review the Fair Labor Standards Act (FLSA) and its biggest implication delineating between exempt versus nonexempt employees.
Huge caveat: this article only discusses the federal law, but most states and some municipalities have higher or different standards. Consult your Human Resources professional or employment counsel as you’re seeking to classify your employees.
FLSA
The FLSA is a federal law that defines the difference between exempt and nonexempt employees. Enacted in 1938, it is enforced by the Wage and Hour Division of the U.S. Department of Labor. The FLSA sets minimum wage, overtime pay, recordkeeping and youth employment standards that affect employees in both the private and public sectors.
Correctly classifying employees as exempt or nonexempt is often overlooked but is a crucial part of employment compliance. Employers must classify their employees as exempt or nonexempt based on specific criteria, such as job duties, salary level and payment method.
Exempt Versus Nonexempt Employees
Exempt employees are salaried workers who are not eligible for overtime pay. Nonexempt employees are typically paid hourly (although under the FLSA, they can also be paid hourly, salary, piece rate, commission, etc., as long as their weekly compensation equals at least minimum wage for all hours worked) and must receive overtime pay for any hours worked beyond 40 in a week.
Exempt employees typically hold executive, administrative or professional positions. They meet criteria such as being paid a salary of at least $684 per week, performing managerial duties of other employees or exercising independent judgment, and having their salary remain constant even if they work less than 40 hours in a week.
Nonexempt employees, on the other hand, are usually entry-level or hourly workers who do not meet the criteria for exemption. They must be paid at least the federal minimum wage and one-and-a-half times their regular rate of pay for any hours worked over 40 in a workweek.
How to Determine Employee Status
Determining an employee’s exempt or nonexempt status can be complex. Employers must analyze the employee’s job duties, salary level and payment method to determine their exemption status under the FLSA.
To begin the analysis, employers should first identify the primary duties of the employee’s job. This involves examining the tasks they perform on a regular basis and determining whether those tasks meet the requirements for exemption under the FLSA.
Next, employers should review the employee’s salary level to determine if they meet the minimum salary requirement set by the FLSA for exempt employees. If they do not meet this requirement, they are considered nonexempt and eligible for overtime pay.
In addition to job duties and salary level, employers must also consider how they compensate their employees. Exempt employees are typically paid on a salary basis, while nonexempt employees are often, but not always, paid hourly. Employers must ensure that their payment method complies with federal labor laws to avoid potential legal consequences.
Employers must carefully analyze each employee’s job duties, salary level and payment method when determining their exemption status. This can help ensure compliance with federal labor laws and prevent costly legal disputes down the line.
Job Duties Test
The job duties test examines the primary duties of the employee’s job to determine if they meet the requirements for exemption. The FLSA has three categories of exempt employees: executive, administrative and professional. Each category has its own set of criteria that the employee must meet.
- Executive Exemption
To qualify for the executive employee exemption, all of the following tests must be met:
- The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $684 per week;
- The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
- The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
- 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.
- Administrative Exemption
To qualify for the administrative employee exemption, all of the following tests must be met:
- 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;
- 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
- The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
- Professional Exemption
There are two types of exempt professional employees: learned professionals and creative professionals. Here are the criteria:
Learned Professional Exemption
To qualify for the learned professional employee exemption, the following tests must be met:
- 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;
- The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work that is predominantly intellectual in character and requires the consistent exercise of discretion and judgment;
- The advanced knowledge must be in a field of science or learning; and
- The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
Creative Professional Exemption
To qualify for the creative professional employee exemption, the following tests must be met:
- 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;
- 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.
Please note that job titles do not determine exempt status and neither does being paid on a salary basis. For an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department of Labor’s (DOL) regulations.
These exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy. Police, fire fighters, paramedics and other first responders are also specifically mentioned by the DOL as likely being nonexempt and thus entitled to overtime pay.
Also, please be aware that these figures and criteria may change and it’s always good to check the most recent regulations from the DOL.
Legal Consequences of Misclassifying Employees
Misclassifying employees can result in serious legal consequences for employers. Employers who violate the FLSA.
If an employer misclassified employees as exempt when they are actually nonexempt, these employees may be entitled to back pay for unpaid overtime. This means that the employer must pay the employee for any overtime hours worked at a rate of one-and-a-half times their regular rate of pay.
In addition to back pay, employers who misclassify employees may also be subject to liquidated damages. Liquidated damages are a monetary penalty equal to the amount of back pay owed to the employee. This means that if employers owe their employees $10,000 in back pay, they may also owe $10,000 in liquidated damages.
Conclusion
In summary, the classification of employees into exempt and nonexempt categories is based on specific criteria, such as job duties, salary level and payment method. Employers must carefully analyze each employee’s job duties, salary level and payment method when determining their exemption status under the FLSA. Misclassifying employees can result in serious legal and monetary consequences for employers, so it’s important to seek guidance from legal professionals if necessary. By properly classifying employees, employers can avoid costly legal consequences and maintain compliance with federal labor laws.
