An exempt employee is an employee who is not bound by the requirements of the Fair Labor Standards Act of 1938 (FLSA).
The FLSA requires non-exempt employees to be paid the federal minimum wage as well as overtime if they work for more than 40 hours per week. However, exempt employees have different minimum pay and do not need to be paid overtime.
Which Employees Qualify as FLSA Exempt?
To qualify as FLSA exempt, an employee must meet three criteria—commonly referred to as “tests”. If an employee fails any one of these three tests, they must be classified as FLSA non-exempt.
Test #1: Salary basis test
Exempt employees must receive the same compensation each week regardless of how many hours they work. This means that most hourly employees are FLSA non-exempt since their pay changes depending on whether they work 30 hours or 50 hours. Most salaried employees pass this test because they earn the same amount each week no matter how many hours they work.
Test #2: Salary level test
Exempt employees must make at least $684 per week or $35,568 per year. This minimum salary level is set by the US Department of Labor and is adjusted every few years, so keep in mind that it could change in the future. Any employees making less than this amount must be classified as FLSA non-exempt even if they are salaried.
Test #3: Duties test
The FLSA lays out three broad categories of job duties—executive, professional, and administrative—for which employees are eligible for exemption.
Executive employees are those whose core job duties include managing at least two other employees. To qualify as executive employees, employees must also play a role in the hiring and firing process for employees under their supervision.
Professional employees are those whose job duties require specialized education or knowledge or creative talent. Professional employees include doctors, lawyers, engineers, writers, teachers, musicians, and others. Most computer and knowledge workers are also professional employees.
Administrative employees are those who perform non-manual tasks that are related to a business’s core operations. Administrative positions require the employee to exercise judgment or discretion on matters of significance.
Any employees who do not fall into these three categories must be classified as FLSA non-exempt. When in doubt about whether an employee passes the duties test, you should consult an employment attorney.
Outside sales employees
Employees who are involved in outside sales and are working on commission may be considered FLSA exempt even if they do not pass the three tests above. These employees need to receive a guaranteed salary. However, this salary doesn’t need to meet the minimum amount specified by the Department of Labor as long as their total compensation exceeds $35,568 per year after commissions.
Should an Employee be Classified as FLSA Exempt?
Any employee can be classified as FLSA non-exempt, even if they meet all of the requirements for exemption from the FLSA. So, if a position qualifies for exemption, should your business classify the position as exempt or non-exempt?
Benefits of exempt employees
The main benefit of classifying qualifying employees as FLSA exempt is that they don’t need to receive overtime pay. Overtime pay must be paid at a rate at least one and half times an employee’s normal wages for non-exempt employees. So, not having to pay overtime can save your company a significant amount of money. It also makes it easier to budget for payroll since an employee’s salary is fixed.
Disadvantages of exempt employees
There are some drawbacks to classifying an employee as exempt. First, it is more difficult to adjust their pay based on output and there is less incentive for employees to work more than 40 hours a week during busy periods. In addition, employers may need to be more explicit with employees about when they are expected to be at work and how many hours they are expected to complete.
It is also difficult to deduct pay from an exempt employee. Employers may not reduce an exempt employee’s base pay due to poor performance or working fewer than 40 hours per week as long as work is being done. Pay can only be deducted in certain disciplinary situations or if an employee takes time off that is not covered by paid leave.
FLSA exempt employees are not subject to requirements around overtime pay. In order to qualify for FLSA exemption, an employee must pass the salary basis, salary level, and duties tests. There are pros and cons to classifying an employee as exempt, so employers should carefully consider whether it makes sense for them to do so or not.