When you roll out the welcome mat to your next employee, you may see two eerily similar words flying around: exempt and nonexempt. If exempt is just a fancy way to say “excused,” what would your employees actually be excused from? Excellent question with a really distinct answer: They’re excused from the rules in the Fair Labor Standards Act, or FLSA. That means they may not be entitled to a minimum wage, overtime, or other protections most hourly workers receive.
In this article, we’ll clarify what all of those terms mean so you can get the differences down pat.
Okay, what’s up with the FLSA?
The FLSA is a law that explains how people should be treated at work. It includes details on minimum wage, leave, overtime, record-keeping, and much more. When it comes to classifications, the FLSA divides employees into two spheres:
They do this to make it really obvious who their laws apply to.
Defining exempt employees
This group of folks are exempt, or not covered by, the FLSA rules. This means that because they’re salaried and have certain responsibilities explained here, they don’t receive overtime pay and may also be ineligible for minimum wage. What’s minimum wage, you ask? It’s simply the smallest amount you can pay your team, which is outlined by both your federal and state governments. This definition is state-specific, so scan through your state’s labor website to see if there are any extra rules added to the equation.
There’s a common misconception that if you pay someone a salary, they’re automatically labelled as exempt. Spoiler alert: this isn’t true. Exempt status is linked to a person’s duties, salary, and how much independence they have over their work. Here are the three conditions folks need to meet in order to be labeled as exempt, as outlined by the DOL:
- Salary level test: You have to get paid above a certain salary for the year. Employees must be paid a salary of at least $455 per week ($23,660 per year).
- Salary base test: You have to receive a concrete salary that can’t be changed, even if you make a mistake on the job.
- Duties test: You need to be in an executive, administrative, outside sales, professional, or computer/systems-related role to be seen as exempt. However, you don’t need to have one of those words in your job title. It’s really about the tasks you perform every day that influence whether you’re exempt or not. Fun fact: Babysitters, sugar processing workers, and cab drivers are all exempt.
As you can see, this determination can get fairly complicated, so if you have any questions, talk to an attorney, CPA, or other business advisor to help you set things straight.
Note: The applicability of this law is in flux for the time being, but here’s where things currently stand.
Defining nonexempt employees
In contrast, this group is not excused from the FLSA rules. Therefore, they need to receive overtime pay if they work over 40 hours in a given week. Be sure to check with your state regulations as well. For example, if you’re an employer in California, overtime kicks in if a nonexempt employee works eight hours or more in a single day — not just at the 40-hour tipping point.
Remember this: Hourly workers are always nonexempt, but salaried workers are not always exempt. Confusing, right?
An overview of overtime pay
If you have nonexempt workers on your team, overtime pay is something you’ll want to sink your teeth into. Since the FLSA laws cover nonexempt employees, you’ll have to make sure you know the nuts and bolts of how to pay them overtime. This is the gist:
Overtime pay = 1.5 times an employee’s wage
So if you made $20 an hour, your overtime rate would come out to $30 (1.5 x $20). Keep in mind that employees should get their overtime pay in the same pay period it was earned.
There’s also a wrinkle in all of this thanks to the mix of state regulations out there. For example, in California (one of the most employee-friendly states), if you work beyond 12 hours in a single day your compensation progresses from time and a half to double time (or $40 in the example above). California also requires overtime pay for the first eight hours on the seventh consecutive work day, and double-time for all hours worked in excess of eight hours on the seventh consecutive day of work in a workweek. Be sure to check your state’s labor website to make sure you know all the laws inside, out, and upside down.
Now, take some time to review the people on your team to double (and triple!) check that they’re in the correct bucket. Once you do, take a deep exemption exhale. You know which laws apply to each type of employee, and you’re ready to pay them fairly and on the dot.