Unsure whether you have an exempt or non-exempt employee? If you classify an employee incorrectly, you could be putting your business at risk.
Does “Salaried Employee” Mean the Same as “Exempt Employee”?
Salaried employee vs. an employee that doesn't have to track time because they aren't subject to overtime wages -- is this the same thing?
Have you ever used the term “salaried employee” as a way of describing someone who doesn’t track time because they’re paid the same amount each week? While I’m not here to correct you on your HR jargon, it’s valuable to understand the similarities and differences of “salaried” and “exempt” --- and how they don’t necessarily mean the same thing.
What does “salaried employee” mean?
In an HR-appropriate world, a salaried employee refers to someone who is paid on a salary basis, regardless of hours worked. This means the amount they earn one week is the same amount they earn the following week, even if they worked less than 40 hours during one (or both) of those weeks.
However, the term “salaried employee” doesn’t necessarily mean they don’t (or shouldn’t) track time. Why? Because salaried employees are not automatically exempt.
Confused? Let’s break this down a little.
Salaried employees must be exempt from overtime to not have to track work time. And to be exempt, the employee must meet one of the below-mentioned exemption statuses. Otherwise, the employee is nonexempt and must track their work time and be paid overtime wages whenever they work more than 40 hours in a week (or 8 hours in a day in CA).
What does “exempt employee” mean?
An exempt employee is a white-collar worker who is exempt from receiving overtime wages, regardless of the number of hours worked. To qualify for this status, the role must meet specific criteria that include the following:
- Minimum salary: An exempt employee must be paid at least $684/week (except for an outside sales rep) and meet at least one of the allowable exemptions.
- Executive exemption – Performs management duties and can hire, fire, and promote staff.
- Administrative exemption– Primary duty includes the “exercise of discretion and independent judgment with respect to matters of significance.” Here’s a more detailed explanation of what that means.
- Professional exemption– Performs a job requiring advanced knowledge in a field of science, learning (typically a college degree is required), or a creative field.
- Computer employee exemption– Serves in a role that is highly skilled at computers. This fact sheet from the DOL has more information.
- Highly compensated employee exemption– Receives annual compensation of at least $107,432 annually and performs office or non-manual work.
- Outside sales exemption– Primary responsibility is to make sales away from the employer’s place of business.
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What does “nonexempt employee” mean?
If a worker cannot meet the exemption criteria listed above, they are considered “nonexempt.” This means they must track hours and receive overtime pay for any compensable time beyond 40 hours worked in a week (8 hours/day in California).
You can be a nonexempt hourly employee or a nonexempt salaried employee. “Hourly” means you’re paying the employee by the hour, whereas “salaried” means a fixed regular payment.
If my salaried employee is nonexempt, how do I calculate their overtime wages?
When nonexempt salaried employees consistently work about the same number of hours from one week to the next, simply divide their weekly salary amount by the fixed number of hours agreed to work (typically 40) to get the hourly equivalent rate. Then, multiply this amount by 1.5 to get their hourly overtime rate.
Another method of calculating overtime wages for nonexempt salaried employees is called the fluctuating workweek method. This is for salaried employees whose work hours change from week to week. While this method could save your company money spent on overtime wages, it’s prohibited in some states. Be sure to check state law before making an agreement with your nonexempt salaried employees for this payment method.
Not sure which is which? Be cautious or get professional guidance.
If you’re unsure whether a role can be classified as exempt, you have two options:
- Err on the side of caution and classify as nonexempt. While it can be more expensive, classifying an employee as nonexempt will prevent legal challenges. Remember that the employee needs to track their time and will be eligible for overtime wages for any hours worked more than 40/week or 8/day in CA.
- Talk to an expert. Contact your certified HR expert to advise on whether a role meets the criteria associated with “exempt” status.