What is an exempt employee?

“Exempt” in a labor law or wage-and-hour context means “exempt from overtime”. An exempt employee is a worker who does not receive overtime under the Fair Labor Standards Act (FLSA), which is administered by the Wage and Hour Division of the Department of Labor.

The FLSA is a major piece of worker-protection legislation which provides a variety of different rights to workers. Among its far-reaching comprehensive provisions, the Act provides the right to be paid at or above a minimum level (minimum wage) and the right to overtime pay (typically expressed as a rate of “time-and-a-half” times regular pay) for hours worked over 40 per work week.

The FLSA recognizes that certain employees do not need guaranteed overtime due to a combination of how they are paid, how well (how much money, that is) they are paid, and their job duties or responsibilities. As a result, the FLSA categorized certain employees as exempt.

Exempt Employees Under FLSA

FLSA section 13(a) details the requirements that must be fulfilled before an employee may be classified as exempt. These statutory requirements are supplemented by regulations and decisions rendered in specific cases or situations.

An “exempt employee” is one who meets the requirements to be exempt from—that is, not entitled to—overtime. That’s all the word “exempt” means: exempt from overtime. And conversely, a “non-exempt employee” is not exempt from—that is, he or she receives—overtime when he or she works more than 40 hours in a week.

An important thing to note: nothing stops an employer from being more generous than is required by law. An employer could choose to give an exempt employee overtime, or some other compensation for working above-and-beyond the usual call of duty: comp time, a bonus, gift cards, etc. This article discuss what employers must do, NOT what they may do.

The Basics for Exemption

A job title or classification alone is not enough to make an employee exempt. The law looks to the reality of someone’s job, not what the employer calls him or her.

Further, the fact that an employee is salaried –instead of paid based on an hourly wage –is not enough to automatically classify the employee as exempt — a common misconception. Rather, for all the most common types of exemptions, being paid on a salaried basis (as opposed to an hourly basis) is the starting point for the analysis, not the end point.

So, to fall under one of the common exemptions, an employee is to be paid an annual salary (which is then broken down into weekly “chunks”), not by the hour. This means that if the employer tracks the employee’s hours for payroll purposes, docks his or her pay if he or she comes in late or leaves early, etc., that person is NOT salaried. Salaried employees are paid the same, no matter how many or how few hours they work per day.

Tracking employee time for payroll purposes is a quick and easy way to turn an otherwise-exempt employee into a non-exempt one who gets overtime. (Note: the employer can track time for non-payroll purposes, such as to determine how much to bill different projects or clients.)

FLSA salary level test: In addition, the salary must be high enough. Under current federal law, it must be at least $455.00 per week, or $23,660.00 per year. (Even though the federal minimum threshold is $455.00, many states have set a minimum weekly wage rate for salaried workers above the federal rate—and when they have, employers must pay their higher state rate.) A salaried employee paid less than the threshold amount is not exempt.

Job characteristics: Assuming the employee is paid a large-enough salary, the final issue is whether their job duties and authority meets at least one of the several exemptions from overtime.

An individual’s job title is irrelevant and does not determine a worker’s classification of “exempt” or “nonexempt”. The law looks to the overall actual responsibilities of the job, not how the job is described. Guidelines published by the Department of Labor provide information on what duties and authority a worker must have in order to fit into a particular exemption. If a salaried employee earning at least $455.00 per week meets one or more of the criteria for an exemption, they do not receive overtime. (Note: there are overlaps between the criteria, so an employee could meet more than one of them.) Employers should use this information to ensure correct classification. Conversely, employees can use it to see if they have been misclassified.

Exempt Employee Categories: Job Duties Test

There are a number of different categories of employees who are exempt from the overtime requirements: the most common are the executive exemption, the administrative exemption, the professional exemption, the computer exemption, and the highly compensated employee exemption.

Executive Exemption: The executive exemption should be named the “managerial exemption,” since it applies to non-executive managers as well. To qualify, the executive must regularly and customarily control or direct at least two other employees. He or she must also have authority to hire, fire, or promote employees, or at least have a great deal of input into the hiring, firing, and promotion of workers. Broadly speaking, an individual whose responsibility is these primary business operations may be referred to as “the boss”. Typical management duties are listed in Fact Sheet 17B, US Department of Labor.

Administrative Employee Exemption: To be considered exempt based on the administrative exemptions, an employee must have his or her primary job being performing non-manual labor or office work. The worker must have individual discretion—or a certain amount of freedom—in how to do his or her work duties and the opportunity to express independent judgment at work, rather than just following orders.

Professional Exemption:To qualify as an exempt professional, the employee must perform work that is primarily intellectual in nature and which allows for the exercise of independent judgment and discretion. Work considered sufficiently intellectual is generally work that requires advanced knowledge obtained through prolonged education (such as a master’s degree or doctorate). The fields normally considered intellectual include science, finance or accounting, engineering, and law, although there is also a special exemption for creative professionals who perform work that requires advanced talent or skill in creative and/or artistic endeavors (i.e., composers, musicians, writers, actors).

Computer Employee Exemption: Computer employees must perform advanced-level work with computers in order to qualify as exempt. Computer systems analysts, programmers, and engineers are some examples of computer professionals typically considered exempt. Fact Sheet #17E, put out by the Department of Labor, provides more information regarding the exempt computer specialist.

Highly Compensated Employee Exemption: Any employee who is highly compensated for his work and who performs one or more duties of a professional, executive, or administrative employee may be considered exempt from overtime. The income threshold that an employee must meet or exceed to be considered highly compensated is $100,000 annually. If they are paid that much, then they do not need to meet the full test(s) for the executive, professional, or administrative exemptions to be exempt.

Other Exemptions

The above are the most often used categories, but there are others. These additional exemptions include exemptions for certain employees in sales, such as many “outside” sales representatives (sales reps working primarily outside the office) and certain agricultural workers.

If a given employee or position does not fall under one or another of the above common exemptions, it’s still a good idea to check the full list of exemptions, which can be found on the U.S. Department of Labor (DOL) website.

Either You Are Exempt or You Are Not

Exemptions are like being pregnant: either you are, or you are not. An employee who meets some or most of the criteria to be exempt but not all of them is non-exempt. There is no such thing as a partial exemption. If someone is not 100% exempt, they receive overtime.

Salaried Non-Exempt Employees

It’s possible to be paid a salary and not be exempt, if you earn too little or don’t meet the criteria for an exemption. If you are salaried but non-exempt, then if you work more than 40 hours in a week, you will earn extra pay. To calculate it, divide your weekly salary by what your employer considers the normal workweek, generally 35 or 40 hours, to get your equivalent hourly rate. Then multiply that rate by 50%–you get that amount (50% of your effective hourly rate) for each hour over 40 you work.

Other Rules About Employee Exemption

Different states may have established their own specific guidelines for applying FLSA rules. A state cannot exclude people from overtime who get it under federal law, but they can require more people—people who would not be paid under federal law—to receive overtime, too. They can also have additional situations, other than working more than 40 hours per week, in which non-exempt employees earn overtime. For example, if a non-exempt employee works more than 8 hours in a day, California gives him or her overtime.

Case Studies: Utilizing Different Types of Insurance for Exempt Employees

Case Study 1: Disability Insurance for a High-Earning Executive

John is a highly compensated executive at Acme Corporation. As an exempt employee, he is not eligible for overtime pay. However, John recognizes that his income is crucial to maintaining his family’s lifestyle. To safeguard against the risk of a disability preventing him from working, John secures a comprehensive disability insurance policy.

This policy provides him with a monthly income replacement if he becomes unable to perform his job due to a covered disability. With disability insurance in place, John can have peace of mind knowing that his financial obligations and family’s well-being will be protected even if he cannot work.

Case Study 2: Liability Insurance for a Senior Manager

Sara is a senior manager at Global Solutions Inc. Her role involves making critical decisions that impact the company’s operations and finances. As an exempt employee, Sara carries a higher level of responsibility, which exposes her to potential professional liability.

To protect herself from personal liability arising from her job performance, Sara obtains professional liability insurance, also known as errors and omissions (E&O) insurance.

This coverage provides her with financial protection in case she is held liable for errors, omissions, or negligence in the course of her professional duties. By having liability insurance, Sara can focus on her work without worrying about personal financial repercussions in case of a claim or lawsuit.

Case Study 3: Group Health Insurance for Exempt Employees

The Health Corporation employs a team of exempt employees who play critical roles in the company’s success. To attract and retain top talent, the company offers a comprehensive group health insurance plan.

This insurance coverage provides medical, dental, and vision benefits to all exempt employees and their eligible dependents. The group health insurance plan ensures that employees have access to quality healthcare services and can receive necessary medical treatments without incurring significant out-of-pocket expenses.

By providing group health insurance, the Health Corporation demonstrates its commitment to the well-being and financial security of its exempt employees.