Decoding Employment Status: What is an Exempt Employee?

As an employer, it’s your responsibility and concern to make sure that payroll is run accurately and perfectly each pay period. In order to run payroll effectively, employers need to be familiar with the classification of employees, whether they have an exempt or nonexempt employee status. 

The Fair Labor Standards Act (FLSA) classifies all employees as either exempt or nonexempt. When an employee is exempt, it means they are not allowed to receive minimum wage or overtime pay, regardless of how many hours they work in a week.

All employers must ensure they understand the regulations and criteria for exempt employees so they can remain in compliance with laws and regulations, as well as ensure an accurate and successful payroll.

What is an Exempt Employee?

Exempt employees are employees who are excluded from certain rights and regulations under the Fair Labor Standards Act, such as qualifying for minimum wage and receiving overtime pay. Qualifying as an exempt employee depends on the type of work an employee performs. 

To be exempt, an employee must be paid a salary above a certain threshold and work in either an administrative, professional, executive, computer, or outside role (such as sales). These employees cannot be paid hourly wages.

In addition to the FLSA regulations, classification laws may vary from state to state. All employers should familiarize themselves with their state’s exempt regulations to ensure they classify employees correctly and according to their state laws. The FLSA only applies to employees working for an employer; independent contractors and volunteers cannot be classified as exempt. 

Key Criteria for Exempt Status Classification

To determine whether or not your employee should be classified as exempt, they must meet certain key criteria. The FLSA uses several tests to determine whether a worker may qualify for exempt vs. nonexempt employee status. 

There are a few exceptions to this rule, but most employees must pass all three of the following tests before they can be considered exempt:

1. Must be paid a salary, not an hourly wage. Exempt employees must be paid a salary, not an hourly wage. The duties of an exempt employee may include more complex tasks that require irregular or longer work hours on a weekly basis; therefore, exempt employees are often paid on a salary basis. They may also be under an employment agreement that requires them to work as many hours as necessary to perform their duties.
   
   
2. How much they are paid: Employees must be paid at least $35,568 annually, or $684 per week. Employees who make less than this will have to legally be paid an overtime rate of one and one-half of their regular pay per overtime hour worked. 
   
   
3. What kind of duties they perform: They must perform job duties such as executive, administrative, or professional. Outside sales, computer positions, and highly compensated employees are also exempt. Highly compensated employees are classified as those who receive an annual compensation total of $107,432 or more. In addition, they must perform at least one of the executive, administrative, or professional duties.
   
   
4. Check 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.

Exempt vs. Non-Exempt: Understanding the Differences

Now that we have gone over the classifications of an exempt employee, let’s look at what a nonexempt employee looks like. Contrary to exempt employee rights, under the FLSA, nonexempt employees are entitled to overtime pay of at least time and a half when they work over 40 hours in a week. In addition, they must also be paid a minimum wage of at least the federal minimum wage ($7.25 per hour).

Nonexempt employees can be salary employees who don’t meet the FLSA exempt status. If a nonexempt employee is paid a salary, then their overtime rate can be calculated by dividing the total compensation earned by the total hours worked.

As discussed, exempt employee regulations make it impossible for these employees to receive overtime or the minimum wage. In addition to being paid a salary and highly compensated, exempt employees are found in executive, administrative, professional, computer, or outside sales positions.

Pros and Cons of Being an Exempt Employee

With all positions, there are advantages and disadvantages. Let’s go over the pros and cons of employees being classified as exempt.

Advantages

Exempt employees who are salaried have the security of having a steady paycheck and the knowledge of how much their paycheck will be, while hourly employees' paychecks vary depending on their hours. 

These employees often enjoy higher pay than hourly workers. Salaried positions also give employees the benefit of a more flexible schedule at times, with the potential opportunity to adjust their hours as long as they get their work done at the end of the week.

In addition, they often have access to better benefits. This includes paid vacation time and sick days, as well as potentially extra retirement benefits such as 401(k) plans, pensions, and other bonuses.

Disadvantages

Exempt employees may have to work longer hours to ensure they meet all of their deadlines and criteria for the week. This can lead to long hours and late nights, unfortunately, without the perk of receiving any overtime pay. This is the biggest downside of being an exempt employee.

Due to the nature of exempt employees’ positions, such as executive, administrative, or professional roles, these employees also tend to have more responsible and high-stress jobs. 

Legal Implications of Misclassification

It is very important for employers to be aware of which employees are exempt so that they can remain compliant with laws and regulations pertaining to overtime pay and provide candidates with accurate information about the pay they can expect in their job postings. 

If you classify an employee as exempt when they are legally considered nonexempt, employees can sue for misclassification and recover earned overtime, back wages, and lost benefits. If an employee is wrongfully classified for an extended period of time, the back pay of unpaid wages, benefits, and overtime can add up to a significant amount. Employers should also be careful of misclassification so they don’t gain a reputation for withholding employee compensation.

Exempt employees should be communicated with clearly. In the interview and hiring process, make sure to clarify that future employees are not entitled to overtime pay. Employers should try to prevent any misunderstandings and wage disputes in the future.

If your salaried employees work more than 40 hours a week regularly, you might want to consider increasing their pay. Employers shouldn’t take advantage of the fact that they cannot be paid overtime and compensate them poorly.

Ensure Payroll Success

Hopefully, you now have a clear understanding of the differences between an exempt employee and a nonexempt employee. What is an exempt employee? An exempt employee is someone who falls under FLSA exempt status and is not qualified for overtime pay or minimum wage.

Understanding what this entails and what their exempt employee rights are will better help businesses and HR managers run a successful and legally compliant payroll. How you classify your employees will greatly affect your payroll management, so you want to ensure that you are properly and legally classifying each employee accurately. 

If you need expert advice on classifying your employees correctly, we’re here to help. Contact our HR and payroll specialists today!

About the Author

Rick Fish, Jr., COO (C.P.P)

Rick Fish, Jr., is a former CEO and current COO (Chief Operations Officer) at Complete Payroll, as well as a Managing Partner at the company. Rick is a Certified Payroll Professional (C.P.P) as designated by the American Payroll Association (APA), and a licensed Life, Accident, and Health Insurance Agent. Rick graduated Magna Cum Laude from the State University of New York at Oswego with a B.S. in Accounting.