Who Is Exempt From Overtime Pay? Understanding Salary and Exemption Status

Will income alone make an employee exempt from earning overtime wages when working more than 40 hours a week (8 hours a day in some states)?

NO. Here’s why.

In addition to meeting the minimum salary compensation rate of at least $684/week, a “white collar” employee must still meet one of the following exemption categories to be ineligible for overtime wages: Executive, Administrative, Administrative Employee Exemption, Professional, Creative Professional, and Computer Employee.

A highly compensated employee is also exempt if they earn at least $107,432 annually and perform at least one of the duties of an exempt executive, administrative, or professional employee.

Understanding Exempt and Nonexempt Employees

Understanding the differences between exempt and nonexempt employees is crucial for employers to ensure compliance with the Fair Labor Standards Act (FLSA). Exempt employees do not qualify for overtime pay, while nonexempt employees are entitled to earning at least minimum wage and overtime pay.

Exempt employees must also meet specific criteria to be classified as such to ensure they are not eligible for overtime pay. Correctly classifying workers is essential for maintaining fair labor practices per FLSA standards and avoiding potential legal issues.

Exemption Criteria

To qualify for exemption status under the FLSA, employees must meet several specific criteria:

Salary Basis or Fee Basis Test

For most exemption categories (executive, administrative, professional, creative professional, computer employee, and highly compensated), employees must earn a regular salary above a certain threshold, which is currently set at $684 per week. Per the salary basis test, employees must receive their salary amount each workweek regardless of the quality or quantity of work performed.

Some exemption categories (administrative, professional, and computer employees) may be paid on a “fee basis” rather than on a salary basis. This is when an employee is paid an agreed amount for a specific job. If the job takes less time than 40 hours/week, you must consider the time worked and calculate the rate as though the employee had worked 40 hours to ensure it meets the minimum salary requirement. See this DOL fact sheet for more details.

Job Duties Test

Employees must also perform specific job duties that fall under exemption categories. These criteria ensure that only employees who meet all the necessary conditions are classified as exempt, meaning they are not entitled to overtime pay.

Types of Exemptions

There are several types of exemptions under the FLSA, each with its own set of requirements. To qualify for one of these exemptions, each condition must apply as outlined below (source: dol.gov):

Executive Employee Exemption

Primary duties include:

• Manages the company, department or subdivision;
• Regularly directs the work of at least 2+ full-time employees; and
• Has the authority to hire or fire other employees, or make suggestions and recommendations as to the change of status of other employees.

Administrative Exemption

Primary duties include:

• Performance of office or non-manual work directly related to the management or general business operations; and
• Exercises discretion and independent judgment with respect to matters of significance.

Professional Exemption

Primary duties include

• Work requiring advanced knowledge (“predominantly intellectual in character”), including work requiring discretion and judgment; and
• Advanced knowledge should be from a field of science or learning and be customarily acquired by a prolonged course of specialized intellectual instruction.

Creative Professional Exemption

Primary duties include:

• Performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

The creative professional employee exemption requires that the employee's primary duty involves work that demands creativity and originality in a recognized artistic or creative field.

Computer Employee Exemption

Primary duties include any of the following:

• The application of systems analysis techniques and procedures to determine hardware, software, or system functional specifications (including consulting with users);
• The design, creation, development, documentation, analysis, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
• The design, creation, documentation, testing, or modification of computer programs related to machine operating systems; or
• A combination of the aforementioned duties, the performance of which requires the same level of skills.

The employee's primary duties must involve specialized knowledge and expertise in the computer field to qualify for the computer employee exemption.

Highly Compensated Employees

Employees who earn at least $107,432 or more per year and do office or non-manual work may be exempt from overtime. They must perform at least one of the duties outlined under the executive, administrative, or professional employee exemption requirements listed above and be paid on a regular salary or fee basis of at least $684/week.

Do All Exemptions Have Minimum Salary Requirements?

There are other FLSA exemption categories that do not have minimum salary amounts, such as an outside sales exemption, seasonal and recreational establishments, farmworkers, some drivers (and driver helpers), commissioned sales employees, and computer professionals. Learn more about these exempt categories here.

The outside sales employee exemption requires that the employee's primary duty is making sales or obtaining orders or contracts for services, and they must regularly work away from the employer's place of business.

Consequences of Misclassification

Misclassifying employees as exempt or nonexempt can have serious consequences, including:

• Fines and Penalties: Non-compliance with the FLSA can result in civil money penalties of up to $1,000 for each violation.

• Back Pay: Employers may be required to provide back pay for employees who were misclassified as exempt.

• Damage to Relationships: Misclassification can harm employer-employee relationships and damage the company’s reputation.

• Increased Risk: There is a higher risk of lawsuits and audits when employees are misclassified.

These consequences highlight the importance of correctly classifying employees to avoid legal and financial repercussions.

Ensuring Correct Classification

To ensure correct classification of employees, employers should:

1. Review Job Duties and Pay Structure

Regularly review employee job duties and pay structure to ensure compliance with the FLSA.

2. Apply the Tests

Use the salary level or fee basis test, as well as the job duties test, to determine exempt status.

3. Keep Accurate Records

Maintain accurate records of employee hours worked, along with paid amounts.

4. Provide Training

Offer training to managers and supervisors on the classification of exempt and nonexempt employees.

5. Conduct Regular Audits

Regularly review and update employee classification to ensure compliance with changing laws and regulations.

By following these steps, employers can ensure that their employees are correctly classified, thereby avoiding potential legal issues and maintaining fair labor practices.

Are there resources to know if someone should receive overtime pay?

If you are unsure whether or not an employee should be classified as exempt, especially for salaried employees, please contact your certified HR expert.

Not a current Stratus HR client? Book a free consultation and our team will contact you shortly.