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What Does an Exempt Employee Actually Mean?

As an employer, you might be tasked with setting salary rates and adhering to laws and regulations concerning pay scale and related finances. Understanding whether to classify your employees as exempt or nonexempt can help you determine the best possible payment methods. Use this guide to learn the meaning of exempt versus non exempt employee and how this relates to overtime, minimum wage and other regulations.

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The meaning of exempt employee

What does an exempt employee mean? The difference between exempt and non exempthas to do with the rights typically afforded by the Fair Labor Standards Act (FLSA). Under the FLSA, nonexempt employees are entitled to overtime pay, a minimum wage and other rights. The FLSA requires that employers pay nonexempt employees at least federal minimum wage ($7.25 per hour) for regular hours and at least time and a half for overtime hours.

In contrast, exempt (vs. non-exempt) employees aren’t entitled to benefits under the FLSA, such as overtime pay and a guaranteed minimum wage. Both exempt and nonexempt employees may have other rights according to the U.S. Department of Labor and state and local labor laws.

The FLSA exempt definition classifies employees by certain job duties and other factors.These may include:

  • How much pay an employee receives
  • How an employee is paid
  • Job role and definition
  • Level of authority
  • Place of employment

It’s important for employers to understand which employees are exempt from overtime pay so they remain in compliance with laws and regulations as well as provide accurate pay information to candidates in their job postings.

Related: Unlimited Vacation Policy: Why Employers Should Consider It

How to determine if an employee should be classified as exempt

The FLSA uses several tests to determine whether a worker may qualify for exempt versus nonexempt employee status. Although there are a few exceptions, employees usually need to pass all three of the following tests to be deemed exempt:

  • They must be paid at least $35,568 annually or $684 per week
  • They must be paid a salary not an hourly wage
  • They must perform exempt job duties

Employers may satisfy up to 10% of an employee’s standard salary level using nondiscretionary bonuses and incentive payments, including commissions, paid at least annually.

Steps for classifying employees as exempt

Follow these steps to ensure you’re maintaining labor law compliance and compensating employees appropriately:

1. Establish whether they’re salaried or hourly

The first step is determining whether an employee is paid an hourly wage or receives a salary. Hourly or nonexempt employees typically work in service and maintenance fields where the tasks they complete can be easily finished within a 40-hour workweek. Exempt employees, however, are often paid on a salary basis as their duties may include more complex tasks that require them to work inconsistent or longer hours on a weekly basis. Exempt salaried employees also may be subject to an employment agreement that obligates them to work as many hours as required to fulfill their responsibilities.

2. Determine their job position and level of authority

Although job titles don’t determine exempt status, employees with certain roles and responsibilities may meet these employment-type requirements for exemptions:

  • Executive exemption: An executive employee must be responsible for a managerial position in a business, department or subdivision. They must also be responsible for directing at least two other full-time employees, or the equivalent, and have the authority to hire, fire or otherwise change the status of another employee.
  • Administrative exemption: The employee’s main responsibility must be the performance of office or nonmanual work directly related to the company’s management or general business operations. Their primary duties must also include the use of discretion and judgement in significant company matters.
  • Professional exemption: An employee’s primary duties must involve advanced knowledge or skills and be defined as work that’s predominantly intellectual in nature. This advanced knowledge must be in a science or learning field and generally acquired by a prolonged course of specialized instruction. This usually applies to fields such as engineering, teaching and lab sciences.
  • Outside sales exemption: An employee’s primary role must be making sales or obtaining orders or contracts with clients. Additionally, they must be away from the company’s place of business on a regular basis.
  • Computer employee exemption: The employee may be compensated on either a salary or fee basis of at least $684 per week or $27.63 per hour. They must be employed as a computer systems analyst, software engineer or in a similar role. Their primary job duties must include the application of systems analysis techniques and procedures, implementing computer systems or programs or creating computer programs.
  • Highly compensated employees: Those who perform office or nonmanual work and are paid at least $107,432 per year are exempt if their duties are consistent with at least one of the executive, administrative or professional employee exemption tests.

3. Consider other possible exemptions

Other employees may also be exempt from overtime and minimum wage requirements based on their job responsibilities. Employees in retail or service businesses may make their earnings through commission rather than on an hourly basis. Mass-transit workers, such as taxi drivers, local delivery drivers and railroad and airline employees, may be paid a trip-specific rate. Essentially, employees who are paid outside of the typical hourly or salary structure may be exempt from overtime or minimum wage requirements.

4. Confirm state requirements

Each state has its own requirements apart from federal employment laws and regulations. You should review your state’s specific requirements for exemption in order to determine whether or not your employees qualify as exempt.

Related: How to Create a Time Off Policy

Exempt employee FAQs

Do you still have questions about “what does exempt employee mean?” Here are answers to some of the most commonly asked questions about employee exemptions:

How can I compensate exempt employees for working overtime without paying overtime?

In situations where an employee is salaried but not being paid a substantial amount of money, there are a few ways you can show them your appreciation for completing overtime work without getting paid.

For example, if your sales team has to stay for an additional three hours on a Friday for reasons that are beyond their control, you could offer to buy them dinner or allow them to come in at 10am instead of 8am the following Monday.

Similarly, if your entire staff puts in overtime efforts to successfully launch a marketing campaign, consider hosting a company party or providing year-end bonuses. These are great ways to show your employees that they’re valued while also compensating for a lack of pay.

If your salaried employees are regularly expected to perform overtime work, then you may be able to compensate them more fairly without raising their salary through a benefits package. These packages usually include paid vacation, health care, life insurance and other nonfinancial compensation.

Is there a situation where an exempt employee can receive overtime pay?

Certain salaried professions can potentially be offered overtime pay. Nurses and emergency service workers are good examples of this exception, as they’re often provided with overtime pay to compensate for long hours, shift work and high-stress work environments.

Are exempt employees required to work a certain number of hours?

Exempt employees aren’t required to work a set number of hours regardless of overtime, weekends or holidays. To be paid for a week of work, they must complete at least some working hours or otherwise be compensated with vacation or other absence pay.

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