Exempt vs. Nonexempt Employees: The Definitions Might Be Changing

Misclassifying exempt vs. nonexempt employees, workers, or independent contractors is one of the most common reasons small businesses are fined– sometimes with amounts of up to millions of dollars.

While workers might not be aware of why they are either salaried or hourly, Employers need to understand these regulations and abide by wage and hour laws administered by the U.S. Department of Labor’s (DOL) Wage and Hour Division. Note that this article focuses on federal regulations, and certain states have laws that supplement federal law surrounding exempt vs. nonexempt employees.

The history of categorizing exempt vs. nonexempt employees

The terms “exempt” and “nonexempt” are defined by the Fair Labor Standards Act (FLSA), also called the Wage and Hour bill, that Congress passed and Pres. Roosevelt signed into law in 1938. Concern about U.S. workers’ job prospects during the Great Depression prompted lawmakers to draft laws to protect their rights and wages. The FLSA’s major provisions included a national minimum wage, which currently is $7.25 an hour and covers most workers, and overtime (OT) compensation of 1.5 times employees’ base pay for every hour they work beyond a 40-hour work week.

When drafting the FLSA, Congress had in mind laborers and farmhands, who were paid hourly wages, more likely to work long hours and be closely supervised. Lawmakers granted these workers a minimum hourly wage that employers must pay them and an overtime rule to prevent wage exploitation. These workers are classified as “non-exempt” from these provisions.

Congressional members didn’t think these kinds of worker protections were as relevant to managers and certain professionals since they were likely to have more decision-making power over their employment condition and therefore experience less oversight on the job. As a result, the FLSA made these categories of workers exempt from the minimum wage and overtime rules.

Minimum FLSA compliance

Employers must comply with federal wage and hour laws, as well as state and municipal laws, regulations and ordinances. The FLSA’s provisions can’t be waived or reduced. However, employers and workers under collective bargaining agreements may adopt wage and hour standards that exceed the FLSA’s minimum requirements, such as setting a higher minimum wage or a lower maximum workweek.

Note: The DOL is proposing to increase the minimum salary requirement from $455 to $679 per week.

Wage tests

A common test to determine if you have exempt vs. nonexempt employees is the wage test. To qualify for exemption status, an employee must meet these three criteria:

1. Be paid at least $23,660 per year, or $455 a week*;
2. Be paid on a salary basis; and
3. Perform exempt job duties.

The FLSA requires most workers to meet these three factors with few exceptions. Those earning more than $100,000 per year, or highly compensated workers, are likely exempt.

Exempt employees

The FLSA exempts workers from the minimum wage and overtime rules under Section 13(a)(1), Regulations 29 CFR, Part 541. To be exempt from the rules, employees must meet certain tests relating to their job duties and be paid a salary of not less than $455 a week. Job titles are often associated with certain pay grades, but they don’t determine a worker’s exempt status under the law.

DOL’s Wage and Hour Division identifies six categories of exempt workers:     

Executive:

• Primary manages an organization or one of its departments or subdivisions;
• Regularly directs at least two or more full-time employees’ (or equivalents’) work; and
• Has the authority to hire or fire other employees, and whose suggestions/recommendations on hiring, firing, advancing, promoting and otherwise changing the status of other employees has weight.

Administrative:

• Primarily performs office or non-manual work relating directly to the employer’s management, general business operations or customers; and
• Exercises discretion and independent judgment on significant matters as a primary duty.

Professional:

• Primarily performs work requiring advanced knowledge, defined as mostly “intellectual”, and work that requires regularly exercising discretion and judgment;
• Must have knowledge that’s advanced in science or learning;
• Has advanced knowledge customarily acquired by ongoing, specialized intellectual instruction.
• “Creative professional” is a subcategory in which the employee’s primary duty is performing work that requires “invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.”

Computer employee:

The same $455 a week minimum-pay rule for other exempt workers applies to computer employees, unless they’re paid hourly, in which case the rate can’t be less than $27.63 an hour.

• Must be employed as a computer programmer, systems analyst, software engineer or other similarly skilled worker in the field;
• Primary performs systems analysis techniques and procedures;
• Designs, develops, documents, analyzes, tests, modifies computer systems or programs;
• Do the above tasks for computer programs related to machine operating systems; or
• Performs a combination of the above duties requiring the same skills level.

Outside sales:

• Primarily makes sales or obtains orders or contracts for services or using facilities for which a client or customer considers paying; and
• Must be customarily and regularly engaged away from the employer’s site or places of business.

Highly compensated:

Highly compensated employees perform office or non-manual work and are paid $100,000 or more annually.  Their pay must include at least $455 a week on a salaried or fee basis. Also, they’re exempt from the FLSA if they customarily and regularly perform at least one of the duties listed in the exemption test for executive, administrative or professional employees.

Non-exempt employees

Two major determining factors between exempt vs. nonexempt employees are overtime pay and minimum wage. Non-exempt workers are entitled to the minimum wage and overtime pay under the FLSA provisions, and are not exempt under Part 541 regulations, regardless of how much they’re paid. Also, they may be paid hourly or receive a salary.

DOL divides non-exempt employees into two basic categories: blue-collar and public safety employees.

Blue collar:

• Is a non-management employee in production, construction, maintenance, and similar occupations;
• Performs manual labor involving physical skill, energy, and repetitive hand motions
• Works as either a carpenter, electrician, mechanic, plumber, ironworker, craftsman, operating engineer, longshoreman, construction worker or laborer.  

Public safety employees:

• Are police officers, detectives, deputy sheriffs, state troopers, highway patrol officers, investigators, inspectors, correctional officers, parole or probation officers, park rangers, firefighters, paramedics and other emergency personnel;
• Handle hazardous materials; and
• Perform surveillance work and similar duties.

Current law’s challenges

* The Department of Labor is undertaking rulemaking to revise the regulations located at 29 C.F.R. part 541, which govern the exemption of executive, administrative, and professional employees from the Fair Labor Standards Act’s minimum wage and overtime pay requirements. Until the Department issues its final rule, it will enforce the part 541 regulations in effect on November 30, 2016, including the $455 per week standard salary level. These regulations surrounding exempt vs. nonexempt employees are available at: https://www.dol.gov/whd/overtime/regulations.pdf

Exclusions from FLSA coverage

Particular jobs may be completely excluded from coverage under the FLSA overtime rules. There are two general types of complete exclusion, and some jobs are specifically excluded in the statute itself. For example, employees of movie theaters and many agricultural workers are not governed by the FLSA overtime rules. Another type of exclusion is for jobs which are governed by some other specific federal labor law. As a general rule, if a job is governed by some other federal labor law, the FLSA does not apply. For example, most railroad workers are governed by the Railway Labor Act, and many truck drivers are governed by the Motor Carriers Act, and not the FLSA. Many of FLSA exclusions are found in §213 of the FLSA.

Final Note: Remember that this article covers the federal law and that individual states might have individual laws that supplement these federal regulations surrounding exempt vs. nonexempt employees.