A Guide to Exempt vs. Nonexempt Worker Classification
Prior to hiring an employee, it’s important to develop a fundamental understanding of how employees are classified under the Fair Labor Standards Act (FLSA). Certain conditions must be met in order to classify as exempt or nonexempt, and that dictates whether an employee is eligible to earn overtime, whether their worked time must be tracked, and how their income is measured.
The FLSA is a federal statute that was enacted by the United States Congress in 1938. It establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. Employees are presumed to be covered by the FLSA unless an employer can prove he or she isn’t (such as an exempt employee or an independent contractor). Key provisions of the FLSA include establishing the forty-hour work week, and overtime pay at a rate not less than one and one-half times the regular rate of pay after 40 hours of work in a workweek.
The majority of U.S. workers are covered by the FLSA, making them nonexempt employees. Nonexempt employees are normally required to account for all hours and fractional hours worked. They are paid a regular hourly rate, and are eligible to earn overtime for all hours worked over forty in a workweek. Employers must keep employee time and pay records for covered, nonexempt employees, and comply with additional minimum wage, overtime pay, and hours worked provisions outlined under the FLSA.
Exempt employees are exempt from the overtime provisions of the FLSA. Some of these professions are governed by labor laws other than the FLSA, but typically, exempt employees are exempt because of their duties, responsibilities, method of compensation, and level of decision-making authority.
The FLSA exempts dozens of professions by name, i.e. many agricultural workers, employees of movie theaters, truck drivers, and the list goes on. The most common exemptions are the white-collar exemptions for administrative, executive, and professional employees, computer professionals, and outside sales employees.
According to Chamberlain, Kaufman and Jones, Attorneys at Law, “with few exceptions, to be exempt an employee must (a) be paid at least $23,600 per year ($455 per week), and (b) be paid on a salary basis, and also (c) perform exempt job duties. These requirements are outlined in the FLSA Regulations (promulgated by the U.S. Department of Labor). Most employees must meet all three “tests” to be exempt.”
Exempt workers are typically salaried professionals who manage employees and have the authority to make decisions that significantly impact the business’s standing. Exempt employees are paid based on the job they do, not the hours they work. Typically they do not need to be time tracked unless they earn under the salary cap of $23,660 per year. Those who earn below that cap are eligible for overtime, which means that their worked time must be tracked.
As an employer, it‘s important to properly classify your workers, not only to reduce risk but to treat your employees lawfully, complying with the appropriate provisions that pertain to them under the FLSA.