Exempt vs. Non-Exempt Employees. When Do Employees Get Overtime Pay?

Under the Fair Labor Standards Act (FSLA) a full-time work week is 40 hours/week and employees fall into two categories: 1) exempt from overtime pay and 2) not exempt from overtime pay.  Exempt employees are paid on a salary basis and are not entitled to any overtime pay. A paycheck for an exempt salary-based employee would be the same for a week they worked 35 hours and a week they worked 50 hours. Whereas non-exempt employees are paid hourly and are entitled to overtime pay at 1.5 times their regular rate. An employer must pay an hourly-based employee 1.5 their hourly rate for any hours worked over 40 hours per week.

an exempt employee’s salary is not reduced due to quality or quantity of work

For businesses and employees, it’s important to know when an employee is entitled to overtime pay. Although one key distinction between the categories is how the employee is paid, there are other factors that must be met. The FLSA provides three different tests to determine if an employee is exempt or not exempt. An employee must fulfill each of these tests to be exempt from overtime pay under FLSA.

Salary Level Test

An employee classified as exempt from overtime pay must be paid a salary. This test sets a minimum level for salary-based employees. The salary minimum recently changed on December 1, 2016 to $47,476 per year or $913 per week. This increase doubled the previous salary minimum of $455 per week.

Salary Basis Test

As discussed above, exempt employees are paid on a salary basis, whereas non-exempt employees are paid hourly.  The key question to ask is whether an employees’ pay varies by the number of hours worked. An exempt employees’ salary must have a “guaranteed minimum.” This means the employee is paid a guaranteed amount of money every pay cycle regardless of how many hours worked during the week. This does not mean salaried employees cannot receive bonuses, this just means their regular pay check has a guaranteed minimum amount.

In addition, an exempt employee’s salary is not reduced due to quality or quantity of work. An employer may only deduct salary employee’s pay for absences lasting the entire day. If a salaried employee leaves work early or takes a half day off, the salaried employee gets paid for the full day. In contrast, an hourly employee only gets paid for the time they are actually working.

Sometimes an employment contract will use hourly terms to describe a salaried employee. Just because a contract expresses pay in hourly terms does not always mean the employee is classified as hourly. Other things to consider include whether the employee gets paid sick days or paid vacation time. Paid sick and paid vacation time are not determinative but are more likely to suggest a salary status.

Duties Test

The final test is the job duties test. This test examines the tasks and duties the employee performs for the company. There are three general categories work duties fall under: professional, administrative, and executive.

Professional

Some occupations require high level skills and are automatically classified as exempt from overtime pay. Those occupations include: doctors, lawyers, dentists, teachers, accountants, and architects. Generally, positions that require high levels of education and specialized training fall under the professional category for the duties test. Occasionally, it can be difficult to classify a certain position and a business attorney or an employment attorney can help with the duties test.

Administrative

The administrative category includes jobs that have a direct impact on management or business operations of a company. In other words, and individual that has the authority to make critical decisions using their own judgment and expertise would be considered administrative. Traditionally, these positions include the human resource department, payroll or finance manager, and tax and accounting personnel.

Executive

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Some occupations are automatically classified as exempt from overtime pay

Individuals that fall into this category have responsibility and decision-making authority over other employees. This could involve decisions related to hiring, promotions, firing, and supervising. However, the employee does not need to be the one making the final decision. As long as the employee makes a significant input to the decision they would be considered executive.

Whether an employee is classified as exempt or non-exempt under FLSA  has many different consequences for the individual and their employer. Those classified as non-exempt are subject to the FLSA overtime provision. This means if the individual works over 40 hours a week, their employer must pay 1.5 their hourly rate for any overtime hours. For hourly workers this is beneficial because it means more compensation for working more hours and it gives the employer an incentive to limit work weeks to 40 hours. On the other hand, employees exempt from overtime requirements usually have benefits in the from of paid time off or paid sick leave. This is beneficial for employers because salary-based employees are not entitled to additional compensation if they work over 40 hours a week.  

The distinction between exempt and non-exempt employees depends on the three tests described above, however determining employee status can be complicated. A business lawyer or employment lawyer can help.

 

If you’d like more information on exempt and non-exempt employee designations feel free to reach out to us at 720-999-5517. We’re happy to help.