Categorizing employees as exempt or nonexempt can be difficult, and if done incorrectly can lead to fines and penalties. Read our guide to know how to classify employees properly.
Here's what you need to know:
- An exempt employee is not entitled overtime pay by the Fair Labor Standards Act (FLSA)
- In some states nonexempt employee is eligible to be paid overtime for work in excess of 40 hours per week, per federal guidelineses, overtime is paid when workers put in more than 8 hours in a single day
- Exempt employees do not earn overtime pay, no matter how many hours they work in a week or per day
- There are 2 “tests” to determine how an employee is categorized
It’s a challenge for many small and medium-sized business owners to determine whether an employee should be classified as exempt or nonexempt.
An exempt employee is not entitled overtime pay by the Fair Labor Standards Act (FLSA). These “salaried” employees receive the same amount of pay per pay period, even if they put in overtime hours.
A nonexempt employee is eligible to be paid overtime for work in excess of 40 hours per week, per federal guidelines.
In some states, overtime is paid when workers put in more than 8 hours in a single day. For them, even if they haven’t met the minimum 40 hour per week federal threshold, any hour over 8 is paid at time-and-a-half.
Fair Labor Standards Act (FLSA) exempt and nonexempt tests
Businesses must properly classify employees as exempt or nonexempt to comply with the Fair Labor Standards Act. There are 2 “tests” to determine if an employee is eligible for overtime wages.
- The duties test, which outlines the type of work being performed
- The salary test, which sets a wage cap
Employees who meet the thresholds of both the Duties and Salary tests are considered exempt from overtime pay — or salaried. All other employees, with some exceptions listed below, are considered nonexempt, or eligible for overtime wages.
Salary basis test
The next threshold to be met to determine if an employee is exempt from overtime pay is the salary basis test. To qualify, employees must meet the current set minimums.
Executive, administrative, and professional employees must be paid:
- No less than $684 per week on a salary basis, or $35,568 annually. (Note: This does not apply to outside sales, teachers, lawyers, or physicians)
- For computer professionals, no less than $684 per week or no less than $27.63 per hour
Many states have enacted higher salary thresholds or more specific duties tests. In the event of a conflict, employers are generally advised to meet the levels most beneficial to the employee.
The duties test
The duties test lists 3 primary classifications of workers considered exempt from overtime pay.
1. Executive exemption
These employees must:
- Have a primary duty of managing a company or a department within the company
- Direct the work of at least 2 or more other full-time employees or their equivalent, and
- Have the authority to hire or fire other employees
2. Administrative exemption
These employees must:
- Perform office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and
- Have decision-making authority
3. Learned professional exemption
These employees must:
- Perform work requiring advanced knowledge (defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment)
- Work in a field of science or learning, and
- Have an advanced degree
There are also exemptions for computer professionals, outside sales staff.
Who is eligible for overtime pay?
To qualify as an exempt employee — one who does not receive overtime pay — staff members must meet all the requirements under the duties and salary basis tests.
Employees who do not meet all the duties and standards requirements are considered nonexempt, or eligible for overtime pay, based on federal or state guidelines.
Who is excluded from overtime pay?
There are some categories of workers excluded from FLSA overtime and exemption rules:
- Movie theater and some agricultural workers are not covered under the Fair Labor Standards Act and are not required to be paid overtime
- When there are other federal laws in place, like the Railway Labor Act or the Motor Carriers Act, FLSA rules also do not apply. Railroad workers and truck drivers are also excluded
- Employees covered under a collective bargaining agreement (union contract) are also excluded, providing the contract meets or exceeds the minimum threshold provided by law
Highly compensated employees who perform office or non-manual work and earn a minimum of $107,432 or more (including at least $684 weekly or on a fee basis), are excluded if they “customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee.”
How do employers categorize workers correctly?
Many businesses misclassify employees based on job title or wages paid. If the position has “manager” or “supervisor” in the title, or has historically been paid on a salaried basis, most companies believe they are in compliance with the law. But this is a mistake. The FLSA does not consider job title or history when it comes to compliance. Duties and salaries tests must both be met to exclude an employee from overtime pay.
When determining how to categorize new hires or existing employees, it’s critical to review the job duties for the position and the proposed or current salary to assure every requirement is met.
If even a single point doesn’t meet the requirements to be exempt from overtime, or it’s questionable, the employee should be classified as nonexempt, and therefore eligible for overtime pay.
Simply having the word “supervisor” in an employee’s job title doesn’t classify them as an executive. These workers must have the authority to hire, fire, or promote workers, or have their recommendations to do so carry enough weight that the action will be performed.
Once the duties have been clearly determined to meet compliance guidelines, the salary test is then applied. If the worker meets all the requirements of the duties test as an exempt employee, their minimum salary can be no less than the requirement for 2020: $35,568. An employee who doesn’t meet the duties requirements and the salary minimum must be classified as nonexempt, or eligible for overtime pay.
Penalties for misclassification
It’s crucial to review all job descriptions to assure employees are correctly classified.
Employers should be meticulous in determining whether an employee meets the exempt or nonexempt rules under the law and the new threshold. Misclassification can result in and back pay recovery, and even fines and penalties if the Wage and Hour Division finds willful violations of the law.
If in doubt, it’s a best practice to contact your local W&H office or check their website for additional information.