What Is an Exempt Employee?

What is an exempt employee?

The Fair Labor Standards Act (FLSA) does not apply to exempt employees. In other words, “exempt” actually means “FLSA-exempt.” As such, exempt employees do not receive overtime pay and sometimes aren’t required to be paid minimum wage. Determining who qualifies as an exempt employee can seem a bit complicated, but it’s easier than you might think.

Exempt vs. nonexempt employees

All exempt employees are salaried, but not all salaried employees are exempt. All hourly employees, on the other hand, are nonexempt. This means they are entitled to overtime pay and pay rates of at least the FLSA or state minimum wage — whichever is higher. The FLSA does not enforce these regulations for most salaried employees.

How many hours must an exempt employee work per week?

An exempt employee’s weekly work hours are not regulated, because the FLSA does not govern their work. As an employer, you can have your exempt employees on the job for 40 hours, 20 hours or 70 hours per week, for example, without altering how much you must pay them. Of course, you’ll want to consider the distinctions between full-time and part-time employees, but exempt employees’ work hours have no bearing on their exemption status.

What does the FLSA consider an exempt employee? 

To be classified as exempt, an employee must meet three criteria set by the Department of Labor (DOL):

• Salary level test: For a salaried employee to be exempt, you must pay them at least $684 per week, which equals $35,568 per year. 
• Salary base test: The employee’s salary must not be subject to decreases, even as a penalty for poor performance.
• Duties test: According to the duties test, employees must work in executive, administrative, professional, computers/systems or outside sales roles to qualify as exempt. This test holds even if your employee’s job title excludes these words; their tasks supersede their title.

Despite these three concrete rules, determining exemption status can be tricky. For example, it’s extremely common for employers to mistakenly conflate salaried employees with exempt employees. As you’ll see from these rules, the two are not mutually inclusive, and the DOL does not have exempt-status tests regarding hours worked per week.

What are the pros and cons of hiring exempt employees?

Before you decide whether to hire exempt or nonexempt employees, it’s important to understand the advantages and disadvantages of having exempt employees on staff.

Pros of hiring exempt employees

• You don’t have to pay overtime. When you hire exempt employees, you won’t pay them overtime no matter how many hours these employees work per week. Exempt employees’ salaries do not change based on their work time. Conversely, you often have to pay nonexempt employees 1.5 times their usual pay rates when they work more than 40 hours in a week.
• You can assume they’re more experienced. Knowledge is increasingly seen as a crucial business asset, and exempt employees usually bring more expertise than their nonexempt counterparts. The exempt route may be your best bet if you’re looking for highly skilled employees. [Read related article: How to Recruit Great Employees in a Tough Labor Market]
• You can give them more responsibility. You’ll rely on exempt employees to power your company through crunch time ahead of major events such as business mergers, conferences and seasonal deadlines. Not only are these employees the backbone of your business, but you can feasibly ask them to work longer hours without expecting additional pay.

Cons of hiring exempt employees

• You might have to pay them more. Although you’ll never pay exempt employees overtime, they’ll likely cost you more than nonexempt employees. That’s because exempt employees are likely more experienced and tasked with high-responsibility assignments, and thus often demand higher pay rates. These salaries may amount to more than you would pay nonexempt employees for their regular and overtime hours combined.
• You can’t deduct pay for hours not worked. Let’s say you calculate your exempt employees’ salaries based on the assumption of a 40-hour workweek. Even if you find your exempt employee regularly works fewer than 40 hours per workweek, you cannot reduce an exempt employee’s pay for hours not worked. In other words, you might sometimes pay exempt employees for hours they don’t work.

What else should employers know about exempt employees?

Keep these considerations in mind for exempt employees:

Seasonal employers and FLSA exemption

If you run a seasonal company, FLSA and exemption rules may work differently for you. Your company may be entirely exempt from adherence to the FLSA if you meet either of these criteria:

• Your company operates for no more than seven months of the year. Months during which your company focuses solely on maintenance, internal operations or supply orders do not count as operation.
• You pass the 33.3 percent test. To pass this test, your company’s average monthly receipts for any six months of the year must not exceed 33.3 percent of its average monthly receipts for the remaining six months of the year.

If your seasonal company meets either or both of these criteria, the FLSA does not apply to any of your employees.

Exempt employee pay for time off

While exempt employees often receive paid time off, they can also be subject to any policies you enact for unpaid time off. However, unpaid-time-off rules do not allow you to dock exempt employee pay for hours not worked in a workweek; you can only withhold pay for full weeks without work.

Exempt employee unpaid suspension

Just as the FLSA allows employers to give employees unpaid time off, you may not have to pay exempt employees whom you suspend. If an exempt employee commits a top-level company policy violation that could merit eventual firing, you can suspend them without pay.

Consequences of misclassifying an employee

When you misclassify a nonexempt employee as exempt, you might fail to pay the employee in instances when they’re entitled to extra wages. If the employee realizes this, they could sue you for up to three years of missed wages. Separately, you could also face fines of up to $1,000 per misclassified employee. Misclassifying employees is costly, and that’s before you add the legal fees you could also incur.

Making the right classifications

If you remain unsure whether you’re classifying employees properly, it’s best to speak with an attorney who’s experienced in employment law. With this invaluable professional expertise on your side, you can make sure you’re complying with regulations and avoiding costly repercussions. And if you lack the time or money to consult with a lawyer, this guide can help you do much of the heavy lifting.