Generally speaking, Exempt employees are exempt from the FLSA provisions on overtime and minimum wage and are paid on a salary basis. In contrast, Non-Exempt employees are subject to FLSA’s minimum wage and overtime provisions. Non-exempt employees are normally paid hourly (although you are allowed to pay non-exempt employees on a salary basis as long as you still require them to track hours and pay them overtime when it is earned).
Exempt employees are paid for the job performed, not the time spent performing job duties. This means that if the job takes less than 40 hours a week, the employee still gets paid their full salary. Reducing an exempt employee’s pay based on the number of hours worked is not legal and could jeopardize the employee’s exempt classification! If the job takes more than 40 hours per week (or 8 hours a day in a state like California), you guessed it – the employee gets paid their salary rate and would not be paid overtime.
Classifying an employee as exempt does not affect how they are taxed, though. Their exemption status is relative to the minimum hourly wage they earn and whether they will receive overtime pay.
One of the most common misconceptions that we encounter is assuming that paying an employee on a salary basis makes them exempt, but this is not true! To be considered exempt, the employee must meet three qualifications: be paid on a salary basis, be paid at least the minimum salary required by the Department of Labor, and perform the exempt job duties as outlined by the Department of Labor.
How do I know when to make a job exempt versus non-exempt?
We get asked this question all the time!
What complicates this subject is the multiple factors and pay ranges that go into making the distinction between exempt and non-exempt. In most states, the decision is not up to the employer. Instead, these factors are set by the Department of Labor and the Fair Labor Standards Act (FLSA).
It comes down to three main areas:
- How do you pay the employee
- Hourly employees cannot be considered exempt as they do not meet the requirement of being paid on a salaried basis (with an exception for computer employees).
- Salaried employees may be considered exempt if their salary meets the minimum requirements AND their job duties satisfy the exempt job duty requirements.
- How much the employee gets paid
- If the employee is paid on a salary basis, their salary must satisfy the minimum requirements set forth by the Department of Labor to be considered exempt.
- Highly compensated employees are those making at least $132,964 (as of July 1, 2024) and performing at least one of the exempt job duties listed under the Administrative, Professional or Executive Exemption.
- What kind of work does the employee does
- By default, blue-collar workers and those who perform manual labor are considered non-exempt.
- Only employees performing job duties listed as exempt job duties can legally be considered exempt employees.
How The Employee Gets Paid – Should They Get Overtime Pay?
Non-exempt employees are entitled to be paid at the federal minimum wage and receive overtime pay (one and a half times their regular rate of pay) for time worked over 40 hours in a work week. In Alaska, California, Nevada, and Puerto Rico, you must calculate daily overtime for time worked over 8 hours per day. This means that non-exempt employees must track the hours that they work each day to ensure that they are paid accurately.
In contrast, exempt employees, regardless of their hours worked, are considered Exempt from overtime pay. However, they must qualify for the exemption based on the wage limits and job duty requirements discussed in more detail below. Exempt employees are not required to track their hours worked by law, but employers may require exempt employees to track their time for internal purposes.
Wage Limits and Factors for Exempt Employees
The US Department of Labor set new wage thresholds for exempt and highly compensated employees this year. As of July 1, 2024, the minimum salary threshold for exempt employees is $844 per week, with a planned increase to $1,128 per week beginning January 1, 2025. This means that if you deem an employee to be exempt from overtime, you must pay them a salary of at least $844 per week or $43,888 per year.
You will have to increase that weekly salary to $1,128 (a 33% increase!) beginning January 1, 2025, if the role remains salary-exempt. This increase has a substantial budget impact, so you’ll want to consider all factors to ensure the position should be exempt. Even with overtime costs, you could find savings by moving employees whose salary falls below the new threshold limits to non-exempt status.
A second tier of the wage limit factor relates to highly compensated employees. This factor looks at total annual compensation, including nondiscretionary bonuses, commissions, and salary. Discretionary bonuses are typically unplanned and not performance-based. Nondiscretionary are more commonly known in advance and are awarded based on performance, goal achievement, or milestones.
A highly compensated employee must earn at least $844 per week in salary (as of July 1, 2024) and a total annual compensation of at least $132,964. The annual compensation requirement will increase to $1,128 per week in salary and $151,164 in total annual compensation on January 1, 2025.
Highly compensated employees perform office or administrative work—not manual labor—and perform at least one of the job duties listed under the Executive, Administrative or Professional Exemption on Fact Sheet 17A.
Employees who work in a computer-related capacity could also be considered exempt if they are paid a minimum salary of $844 per week or an hourly rate of $27.63 if they perform exempt job duties. This exemption factor applies to jobs like systems analyst, programmers, software engineers and other skilled computer work according to the Department of Labor. It’s important to note that this factor does not apply to the repair of the computers or computerized manufacturing equipment. This type of work would be considered manual labor and therefore non-exempt.
And finally, outside sales employees can be considered exempt, but do not have a minimum salary requirement.
Type of Work Performed Defines Exempt Status
Just to recap, to be considered exempt, the employee must meet the salary requirements AND perform exempt job duties. The Department of Labor defines five types of exempt employees – Executive, Administrative, Professional, Computer, and Outside Sales.
Fact Sheet 17A defines these exempt job duties for each of the listed exemptions. The employee must perform ALL of the job duties listed under their relevant exemption in order to legally be classified as exempt. For example, an Administrative Exemption requires that the employee be paid on a salary basis of at least $844 per week, that the employee’s primary job duty is performing non-manual work directly related to managing the business, and that their primary job duties include “the exercise of discretion and independent judgment with respect to matters of significance”. If all three are not true, the employee would not qualify for the Administrative Exemption.
Computer employees are the only exempt employees who are allowed to be paid on an hourly basis, but the Department of Labor still sets the minimum hourly rate required.
For the outside sales exemption, it’s important to note that this pertains SPECIFICALLY to outside sales and would not apply to inside sales personnel. The Department of Labor defines outside sales employees as those who are “customarily and regularly engaged away from the employer’s place or places of business.” Outside sales employees, unlike the other exempt employee classifications, do not have a minimum salary or hourly pay requirement.
By definition, blue-collar workers will always be considered non-exempt. Blue collar refers to the more physical, skilled work that involves repetitive operations. Laborers who perform jobs like maintenance, construction, plumbing, HVAC, machine operators and the like are classified as Non-exempt no matter how highly compensated they are. This is a firm exception. These positions must be paid an hourly wage at least equal to the minimum wage and are entitled to overtime pay for time worked over 40 hours per week or 8 hours per day in the applicable states.
In addition to the exemption status, it’s important to understand the rules and regulations in your payroll states. Local regulation can override the examples provided here, such as Minimum Wage and pay frequency, so be sure to check out our State Handbooks – an uncomplicated guide to the details you need to remain compliant with all of your payroll states.
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