Are They Exempt or Non-Exempt? Sorting Through the Maze

As an employer, you know that all employees must be classified as either “exempt” or “non-exempt” to comply with the Fair Labor Standards Act (FLSA). But the big question is: Which employees are exempt and which aren’t?

You can’t just decide to call someone exempt or pay him or her a salary. The FLSA provides specific guidelines for which employees can be categorized as exempt.

Here are some basic guidelines to help you classify your employees properly.

“Hourly” or non-exempt employees

Non-exempt employees often are referred to as “hourly” workers. As a general rule, non-exempt employees must receive at least the minimum wage (at the rate dictated by federal or state law) for all hours worked. When non-exempt employees are paid in any manner other than an hourly basis (such as salary, commissions or a piece-rate basis), their pay must generate an hourly rate of at least the minimum wage when divided by the actual hours worked in the workweek.

Non-exempt employees also are entitled to overtime pay (at the rate of 1.5 times their regular hourly rate) for each hour worked over 40 hours in any given workweek. Certain states have daily overtime standards, meaning employees are entitled to overtime for every hour worked beyond eight per day.

Exempt Employees

Just paying someone on a salary basis does not necessarily make him or her exempt from minimum wage and overtime rules. To be considered exempt, an employee must fall into one of the following categories:

Executive Exemption

Under the executive exemption, all of the following must be true:

1. The employee is paid at least $913 a week on a salary basis.
2. The employee’s primary role is to manage the overall business or a commonly recognized department or subdivision.
3. The employee regularly directs the work of two or more employees.
4. The employee has authority to hire or fire other employees, or his or her opinion weighs heavily in those decisions.

Administrative Exemption

Under the administrative exemption, all of the following must be true:

1. The employee is paid at least $913 a week on a salary or fee basis.
2. The employee’s primary role is to perform office or non-manual work directly related to the management or general operations of the business or its customers.
3. The employee’s primary duties call for using discretion and independent judgment regarding matters of significance.

Learned Professional Exemption

Under the learned professional exemption, all of the following must be true:

1. The employee is paid at least $913 a week on a fee or salary basis (with one narrow exception: there is no minimum salary or fee for lawyers, physicians, professors or teachers).
2. The employee’s primary role is to perform work requiring advanced knowledge.
3. The employee’s advanced knowledge must be in a science or learning field.
4. The advanced knowledge must be obtained by a lengthy course of specialized intellectual instruction.

Creative Professional Exemption

Under the creative professional exemption, both of the following must be true:

1. The employee is paid at least $913 a week on a fee or salary basis.
2. The employee’s primary role is to perform work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor (such as music, writing, acting or graphic arts).

Computer-Related Professional Exemption

Under the computer-related professional exemption, both of the following must be true:

1. The employee is paid at least $913 a week on a fee or salary basis, or at least $27.63 an hour.
2. The employee’s primary role is to:

• Conduct analysis and consult with users to determine hardware, software or system requirements.
• Design, develop, document, analyze, create, test or modify computer systems or programs based on design specifications.
• Design, document, test, create or modify computer programs related to machine operating systems.
• Perform a combination of these duties, requiring the same level of skills.

Highly Compensated Employees

The U.S. Department of Labor (DOL) defines “highly compensated employees” as those who perform office or non-manual work and whose total annual compensation equals $134,004 or more (including at least $913 a week on a salary or fee basis).

These employees are exempt if they regularly perform at least one of the duties of an exempt executive, administrative or professional employee as defined in the exemption tests explained above.

Outside Sales Exemption

Under the outside sales exemption, both of the following must be true:

1. The employee’s primary role is to make sales or obtain orders or contracts for paid services.
2. The employee regularly performs his or her primary duties away from the employer’s place(s) of business.

Note that there is no minimum pay requirement (salary or otherwise) for an outside sales exemption. Employees in these positions often work primarily or even entirely for commissions.

Inside/Commissioned Sales Exemption

For the most part, “inside” salespersons are not exempt employees. But a limited exception exists for commission-based salespersons who satisfy all three of the following:

1. The individual works at a retail establishment (75% of the establishment’s gross annual revenues must be sales to an end user vs. wholesale).
2. The employee regularly receives more than half of his or her compensation from commissions.
3. The employee receives at least 1.5 times the minimum wage for all hours worked. (This is a partial exemption that only affects the requirement of paying overtime compensation.)

Exempt inside salespeople must keep time and attendance records to ensure that they meet this last requirement.