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What is an Exempt Employee?

definition

An exempt employee is one who is not entitled to overtime pay, or covered under the minimum hourly wage, by nature of their job duties and manner of compensation.

🤔 Understanding exempt employees

Exempt employees are generally those in management or executive-type roles. The Fair Labor Standards Act (FLSA) creates standards for overtime pay and minimum wage. For example, they require employers to pay employees a certain amount per hour, and to pay them extra when they work more than 40 hours. These standards regarding overtime pay and minimum wages do not apply to exempt employees. For an employer to consider an employee exempt, they must meet certain income and job-responsibility requirements, such as exercising discretion and independent judgement for more than 50% of their job or managing employees. In general, exempt employees are paid for the responsibilities they perform rather than the hours they work. The requirements vary slightly from one industry to another. Individual states may also enact laws that apply to exempt employees, including setting higher minimum wages that someone must receive to be considered exempt.

example

Imagine Anna accepts a new job as the manager of a department at her company. Due to the nature of her job managing a department, she is considered an exempt employee. Because of this, Anna earns an annual salary. She makes the same amount of money, whether she works 40 hours a week or 60 hours a week.

Takeaway

An exempt employee is like a monthly music subscription, while a nonexempt employee is like paying per song…

You might have to pay the exempt employee more money, but you don’t pay extra the more work you give them. With nonexempt employees, your money only buys you 40 hours of their time. If you want them to work longer, you have to pay more.

Tell me more...

What is the Fair Labor Standards Act?
What is the difference between an exempt and nonexempt employee?
What qualifies as an exempt employee in 2020?

What is the Fair Labor Standards Act?

The Fair Labor Standards Act (FLSA) became law in 1938 to provide certain protections to employees. The FLSA requires employers to pay their employees a minimum wage. In 2009 that wage was set at $7.25 — Where it remains today in 2020. However, states can set their own higher minimum wages. As of 2019, 32 states and Washington D.C. have opted to set a higher minimum wage, with the highest being $13.25 in D.C.

The FLSA also provides rules about overtime. It states that for every hour over 40 that an employee works, the employer has to pay them at 1.5 times their regular pay (aka “time and a half”).

The FLSA also provides protection for children by banning children under the age of 14 from working, and children under the age of 18 from working in hazardous occupations.

The purpose of the FLSA is to make sure employers are treating their employees fairly. Here’s the catch, though — these protections only apply to nonexempt workers. The FLSA provides several different exemptions that could apply to employees and qualify them as exempt employees, including exemptions for executive, administrative, professional, computer, and outside sales employees.

What is the difference between an exempt and nonexempt employee?

When it comes to employee protections under the Fair Labor Standards Act (FLSA), there are two classifications of employees — exempt and nonexempt. The two types of employees are treated very differently when it comes to wages and overtime treatment.

Nonexempt employees

Nonexempt employees are entitled to each of the protections under the FLSA. They are required to be paid at least the federal minimum wage ($7.25 in 2020). Employers have to pay nonexempt employees for every single hour the employee works. If the employee works 40 hours, they get paid for 40 hours of work. If the employee works 50 hours, they get paid for 50 hours of work.

Not only do employers have to pay nonexempt employees for every hour that they work, but they also have to pay them a higher hourly wage for every hour the employee works over 40 hours. Under the FLSA, employers have to pay their nonexempt employees 1.5 times their normal hourly wage.

Let’s say Nick has a job where he makes $15 per hour. For the first 40 hours of every work week, his employer pays him his $15 per hour. But for every hour over 40 that Nick works, his employer has to pay him $22.50 per hour.

Exempt employees

The protections that the FLSA provides do not apply to exempt employees. Exempt employees are salaried, meaning they get paid a certain amount of money every week. Whether they work 40 hours a week or 60, their employer doesn’t have to pay them more (though the employer can pay them overtime if they want).

Exempt employees are still entitled to a minimum wage, but it’s not the one set in the FLSA. For an employee to be considered exempt, an employee must make at least $684 per week as of 2020, which comes out to $35,568 per year.

What qualifies as an exempt employee in 2020?

Several different exemptions could qualify an employee as an exempt employee. Each of these exemptions has different requirements that a job must meet for an employer to consider that employee to be exempt. It’s not about the job title they have, but rather the responsibilities they do in their job.

The exemptions the FLSA provides only apply to white-collar workers. Blue-collar workers, meaning those who have physical jobs or jobs working with their hands, cannot be exempt employees. Police, firefighters, paramedics, and other first responders also cannot be exempt employees.

Executive exemption

For an employee to qualify for the executive exemption, they have to be in a position of power. They must be the head of either the company or a department within the company. They must manage at least two other full-time employees, and they must have the power to hire and fire those employees. Or, at the very least, they must be able to suggest or recommend that an employee be hired, fired, or promoted. This exemption usually refers to department heads.

Administrative exemption

For an employee to qualify for the administrative exemption, they have to perform non-manual office work that relates to the company’s general business operations. In other words, they help to keep things up and running at their place of employment. Their primary duties must allow them to exercise independent judgment and discretion. For this position, you might think of an office manager.

Professional exemption

For an employee to qualify for the professional exemption, they have to have advanced knowledge in a particular field. They work in a specialized, intellectual job, and they must be able to exercise judgment or discretion in their work. This exemption might include a professional in the legal or medical field. The professional exemption can also apply to creative professionals if their duties require some artistic talent or creativity. This creative exemption might apply to a writer, musician, or other kind of artist.

Computer employee exemption

For an employee to qualify for the computer exemption, they have to work as a computer systems analyst, programmer, or software engineer (or some other similar position in the technology field). They also must meet several responsibility requirements, such as the application of systems analysis procedures and techniques or the design, development, creation, or analysis of computer programs.

Outside sales exemption

An employee might be exempt if their primary duty is making sales or getting new clients for the company. And they can’t be just any kind of salesperson. The outside sales exemption only applies to employees who are regularly away from the company — this exemption does not apply to those who make sales calls from their place of employment.

Highly compensated employees

A worker who does not fit into one of the other exemption categories might be an exempt employee if they are highly compensated. A highly compensated employee must be performing office work (non-manual) and must make at least $107,432 per year, as of 2020. They also must regularly perform at least one of the duties of an exempt executive, administrative, or professional employee.

Other exceptions

Other employees don’t necessarily fit into the primary exemptions, but may still be exempt from certain requirements under the FLSA. In some of these cases, it varies from one week to the next as to whether the employee is exempt based on the tasks they carried out that week. Some of these employees are exempt from only certain FLSA requirements.

For example, an employee might be exempt for purposes of overtime laws, but not the minimum wage law. Other jobs, especially family or home-based businesses, might exempt a worker from the child labor laws included in FLSA. Those employees include:

  • Salespeople working on commission, if more than half of the employee’s pay is commission and if they average at least 1.5 times the minimum hourly wage

  • Drivers, if they work for a motor carrier and their duties affect vehicle safety in the transportation of property for interstate or foreign commerce

  • Farmworkers, if they work on small farms, or if they are children working on a small family farm

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