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When Time and a Half Doesn’t Apply: Exempt vs Non-Exempt

Updated: May 30, 2023

By: Sean Hansen, HR Compliance Coordinator

Summary: The article discusses the exemptions from overtime pay under the Fair Labor Standards Act (FLSA) in the United States. It explains the criteria for exempt vs non-exempt status based on job categories, emphasizing the importance of meeting specific tests and salary thresholds. The article also highlights the consequences of misclassifying employees and provides recommendations for ensuring compliance.

When 'Time and a Half' Doesn't Apply: Exempt vs Non-Exempt

Have you ever wondered why some people aren’t eligible for overtime (exempt vs non-exempt)? They can work as many hours as they’d like, but no matter what, they won’t earn that prized time and a half. What makes them exempt from overtime? Is it profession? Income? Something more complicated? Let’s talk about it.

How We Got Here

The split between exempt and non-exempt employment classification comes from the Fair Labor Standards Act (FLSA), established back in 1938. It’s the federal law that established minimum wage, recordkeeping standards, and the most relevant subject to this article: overtime pay.

This is the portion that says overtime pay must be granted to any person working over 40 hours a week, and when working overtime, they cannot be compensated less than time and a half of their regular wage. This all applies to what we would regularly refer to as “non-exempt employees”. They are protected by the law against overtime work without compensation. However, the FLSA provides an exemption to the rule, and that’s where we can begin unraveling what it means to be “exempt”.

Who Can Be Exempt?

The FLSA says in order to be exempt, the employee must be employed in a “bona fide executive, administrative, or professional capacity”. It also includes exemptions for outside sales, computer, and highly compensated employees. We’ll talk about what each of those means soon, but it’s important to note a few things about this law. First of all, each category has a series of tests to determine whether or not an employee’s role falls into the exemption. Secondly, these exemptions granted under the FLSA only applies to white-collar workers. Manual laborers, electricians, carpenters, and other professions colloquially referred to as “blue-collar workers” do not qualify for exempt status, no matter how high they are paid. The FLSA defines blue-collar work as “involving repetitive operations with their hands, physical skill and energy”. Exemption also does not generally reply to first responders, such as police or firefighters.

We’ll talk about it later in this article, but there’s a point that is too important to only mention once. All of this information, unless otherwise stated, is specifically derived from the FLSA. That is a federal law, so while it applies to all states, it gets tricky when considering state-specific requirements. When it comes to state versus federal law, remember: the more generous benefit supersedes the less generous one. If your state, for example, provides a higher minimum wage than the federal amount, you have to follow the state law.

The Salary Test

Let’s create a hypothetical situation. You have a position that you are not sure if it should be classified as exempt or non-exempt. You’ve confirmed it doesn’t classify as a blue-collar job, so it does potentially qualify. The first test that every category (except for outside sales employees) has to pass is what is known as the salary test. This states that in order to be exempt, qualified employees have to make at least $684 a week ($35,578 a year!) The FLSA notes up to 10% of this compensation can be satisfied by non-discretionary bonuses and incentive payments. However, some states have stricter rules. Colorado, for example, upped the requirement to $50,000 a year for 2023. For more information on state salary thresholds, check out our blog post.

Here's a topical example of failing the salary test. An employee was making over $200,000 a day, well with in the pay scale laid out in the FLSA. However, the employee was being paid on a daily basis. The Supreme Court ruled that the employee should not be classified as exempt. Even though he was being paid a handsome amount, being paid daily is not the same as being paid on a salary basis, and does not meet the salary test under the law. For more information, check out this article:

Once the salary test is passed, the next question is to determine which category the position might apply to. There are a few special rules, but for the majority of positions, they will fall under one of three categories: executive, administrator, or professional. Each of these has its own set of qualifications the position must meet in order for it to be considered an exempt position.

Do You Have What It Takes To Be An Executive?

What do those categories actually mean? Let’s start with an executive. According to the FLSA, they have to meet three qualifications, in addition to the salary test. First, the employee’s primary duty needs to be managing an enterprise, or at least a recognized department/subdivision of said enterprise. Notice the terminology; the department has to be “customarily recognized”, which means it can’t be a group of employees that are asked to perform a series of duties on occasion. It needs to be a permanent unit with a defined function. Second, an executive must regularly supervise and direct two or more full-time employees. These employees must be full-time, or the combination of employees must equal the equivalent of two full-time employees. The FLSA provides an example of this; two part-time employees are equal to one full-time employee, so an executive managing one full-time employee and two part-time employees would qualify for the exemption. Finally, the executive has to have hiring and firing powers, or if not, their recommendations must be given a “particular weight”. Multiple factors go into determining “particular weight”, and the FLSA doesn’t spell all of them out. Some of the factors include the frequency of such recommendations, or if making the recommendation is part of the job.

It should be noted that there exists a special rule for business owners. An employee who owns at least 20% equity in the business that employs them, regardless of the type of business, is considered an executive and qualifies for the exemption.

For All The Administrators Out There

There are a lot of people whose job falls under administrative work. For the exempt ones, after they pass the salary test, they must meet two additional requirements. Their primary duty must be office/non-manual work, and that work must directly relate to the business operations of the employer or their customers. This means consultants or advisors that work with their business’ clients can possibly qualify as exempt. The second requirement is that the employee must use discretion and their own judgment when performing their primary duties. Much like “particular weight”, whether or not the employee exercises their own judgment is determined by a number of factors, but generally it means they are allowed to make an independent choice that is unaffected by their supervisor or other direct superiors. This decision can be overturned later by a superior, as long as they came to that decision on their own.

Much like the executive exemption, there is a special rule that exists for administrators in educational establishments. They actually can qualify for the exemption if they meet the salary test, or at least a salary equal to the entrance salary for teachers in the same school. This means the FLSA allows them to be paid less than the $684 a week and still qualify as exempt- but remember, this is federal law. Your state might have stricter rules regarding exemptions. For example, Colorado does not allow administrators in educational establishments to be paid less than $961.54 a week. Consider contacting your state’s Department of labor, or if you are a Vida HR client, contact your HR Business Partner.

A Bona Fide Professional

The FLSA splits up a professional into two categories: a learned professional and a creative professional. Both of them need to meet different requirements to qualify as exempt. For the learned professional, in addition to the salary test, they need to work in a field where their primary duty requires advanced knowledge that requires using independent judgment. That advanced knowledge can be in a field of science or other learning, but either way, must be gained through “a prolonged course of specialized intellectual instruction”. To break down some of those terms, “advanced knowledge” means work that is predominantly intellectual, which differentiates it from jobs that involves routine work. Generally, work that requires advanced knowledge requires the employee to use said knowledge to “analyze, interpret, or make deductions”. The FLSA also makes a point to say this sort of knowledge cannot be gained in high school. Continuing on, “fields of science or learning” includes many different occupations that fall under that umbrella, but at its core, it is a field that has a recognized “professional” status and can be distinguished from skilled trades.

Finally, let’s break down what they mean by a “prolonged course of specialized intellectual instructions”. Having an academic degree in whatever field is the best way to tell if someone passes this test, but that’s not the only way. If the employee works in a field that requires the same level of knowledge and work, and the knowledge was obtained through a combination of experience and instruction, then they may also qualify. “Combination” is key, as the exemption cannot apply if they only acquire the knowledge through work experience.

Moving on to the creative professional, they only have one additional requirement after the salary test. Their primary duty has to be work that requires “invention, imagination, originality, or talent”, in a recognized creative field. Determining exactly what qualifies is usually on a case-by-case basis, since pinning down exact requirements for creativity is very difficult. To give some examples, actors, musicians, and writers usually meet the requirement.

Teachers also fall under the professional exemption, as long as their primary duty involves instructing or lecturing for the sake of imparting knowledge, and if they are working at an educational establishment. Much like the administrators in educational establishments, teachers do not have to pass the salary test under the FLSA. To hammer the point home, all of this is strictly federal law. If a state has a stricter requirement, you must follow that one.

It’s important to note the FLSA has a section detailing practicing law or medicine, in which they qualify only if they hold the license/certificate and are actively practicing, or at least in an internship or resident program for the profession. The salary test also does not apply to them, at least with respect to federal law.

But Wait, That’s Not All!

The FLSA also denotes three other exemptions in addition to the executive, administrative, and professional categories. Employees working in the computer or outside sales fields, or a highly compensated employee, also can qualify.

For computer employees, there are a few requirements they need to meet. First, they can either be paid on a salary or hourly basis, but no matter how they're paid, they have to meet the minimum pay threshold. If they are hourly, then they must be paid at least $27.63 an hour.

Second, they must be employed as a computer systems analyst, computer programmer, software engineer, or similarly skilled computer worker, as long as it meets the primary duties of a computer employee. Those duties must consist of one of three requirements or a combination of those requirements:

  • The application of systems analysis technics and procedures.

  • The design, development, testing, modification, analysis, or documentation of computer systems based on user or system design specifications.

  • The design, documentation, testing, creation, or modification of computer programs related to machine operation systems.

For outside sales employees, the requirements are a little different. For one, they are not required to meet the salary test. Instead, their primary duty has to be making sales. The exemption also includes employees whose primary duty is obtaining orders or contracts, for the purposes of gaining services or use of facilities. This is as long as a promised amount will be paid to the client or the customer. The second requirement is that the employee must complete outside sales regularly away from their company’s place of business. This means the salesperson cannot make sales by phone, mail, or online at a fixed site, as those would be considered a place of business. This includes a remote workspace because even a home office if regularly used by the outside sales employee to conduct business, is considered an extension of the employer’s place of business.

Finally, there’s a special exemption in place for highly compensated employees. Highly compensated is defined as being paid a total annual compensation of $107,432 or higher ($112,500 for Colorado employers). These employees must still make at least $684 per week as defined in the salary test, or the applicable state threshold. Their primary duty must be office or non-manual work, and they must regularly perform one of the duties of an exempt executive, administrator, or professional. It’s important to note that while the $107,432 minimum can include bonuses and other nondiscretionary compensation, it cannot include credit for board or lodging, payments for insurance, or fringe benefits. In addition, the weekly base salary must be paid in its entirety and can’t be substituted by bonuses or incentive payments.

When You Are Still Unsure

Sometimes, it’s just not quite clear if the employee’s role falls into an exempt category. So what do you do? Well, you can always consult an HR professional, and if you are a Vida client, your HR Business Partner can help make the determination. At the end of the day, if you really can’t tell, and you are worried about misclassifying your employees, go with non-exempt. There are no employer penalties for classifying a position as non-exempt when it could qualify as exempt; however, the penalties can be steep for incorrectly classifying a role as exempt when it does not qualify.

The Cost Of Misclassification

What’s the worst that could happen if you fail to classify your employees correctly? The law states that employers who “willfully or repeatedly” violate the requirements can be fined up to $1,000 for each such violation. Purposely ignoring the FLSA can result in criminal charges and fines of up to $10,000.

Employees in a role classified as exempt do have the option to file suit for unpaid wages including overtime and other damages with the Department of Labor and/or a state agency. When an employee complaint is received by the DOL or a state agency, a written notice is sent to the employer to start the audit process.

A wage and hour audit typically includes requests for timekeeping records, pay stubs, any documentation the business has on how positions are or have been classified, job descriptions, and anything else the DOL or state agency asks for.

What Should You Do?

Don’t wait for an audit, if you find a position is misclassified, make corrections. Assess the job description and make sure it includes language that clearly conveys the responsibilities of the role, as well as making note that is an exempt position. Make sure to update your payroll system with the correct classification and timekeeping rules to make sure overtime hours are being calculated based on your state’s overtime rules.

Communicate the reason for the change to your employees and make a good-faith effort to look back through the last two years to capture any missed overtime wages. Vida HR can help with this process, so contact us today!


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