Exempt vs. Nonexempt: Where the Dividing Line Is

Are you sure you know whether your employees are considered exempt or nonexempt? It's important to classify workers correctly because their status determines their eligibility to receive overtime pay. Even if you think you know the difference between exempt and nonexempt status, there are some fine points of which you may be unaware.

The Fair Labor Standards Act generally requires overtime pay for employees. However, these protections do not apply to management-level employees, who are therefore known as "exempt employees." To determine whether an employee is exempt, you need to apply certain tests to that employee's salary and job duties.

Exempt employees
Employees who fall into this category receive a salary for the work they perform, not an hourly wage. They generally hold professional roles that require a higher level of expertise and knowledge than that of nonexempt roles. This makes exempt employees ineligible to receive overtime pay. To be classified as exempt, they also must earn a weekly base pay higher than the FLSA exempt minimum, which changes annually.

There are several types of employee exemptions:

• Executive exemption — For those who regularly supervise two or more full-time employees or four part-time employees. Executives must play an important role in hiring and delegating tasks. CEOs, managers and supervisors are executive exempt roles.
• Administrative exemption — For those who perform office or nonmanual work directly related to business operations or management and your customers. These employees must exercise independent judgment and discretion over business decisions. This category includes human resources, accounting, legal, public relations, compliance, finance and payroll employees.
• Professional exemption — For employees who have specialized education and exercise discretion and judgment in the workplace. They may have a college degree or other higher educational qualification: Doctors, lawyers, licensed engineers, registered nurses, dentists, architects and teachers qualify for this type of exemption. If not, they may hold a creative professional exemption, meaning they use their originality, talent, imagination and inventiveness to perform job duties: Writers, actors, musicians, journalists, artists and composers may be included in this category.
• Computer exemption — For employees in a computer-related role. These employees include programmers, software engineers and systems analysts.
• Highly compensated employees — To qualify for this exemption, an employee must have at least one administrative or professional job duty and must also earn more than the FLSA exempt minimum salary. This changes every year, but the current threshold is $684 per week.
• Outside sales exemption — For employees who make sales, securing contracts or orders. These employees conduct work outside your business premises and include salespeople and marketers.

Nonexempt employees
These employees earn an hourly wage and are covered by the following FLSA provisions:

• Companies must pay nonexempt employees overtime pay when they work more than 40 hours per week.
• The FLSA requires overtime pay to be at least 1.5 times an employee's regular pay rate.

The minimum overtime wage is determined by the Department of Labor, but states generally have their own minimum wage rules. When these differ, employers must go with the minimums that are more favorable to employees.

You must classify your employees correctly or risk costly compliance violations. Note that state laws have criteria for classification, too. In general, your assessment is based on how much money employees earn, the type of work they do and their specific responsibilities and job duties.
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This is just a summary of a complex series of laws and regulations. Work closely with financial and legal professionals to make sure you stay compliant.