Non-Exempt Employee

A non-exempt employee is someone who is entitled to overtime pay for working more than 40 hours a week. They are called “non-exempt” because they are not exempt from state and federal overtime regulations.

Exempt vs Non-Exempt Employees

Virtually all employees in US workplaces fall into one of two categories, “exempt” or “non-exempt”. This refers to their eligibility, or lack of eligibility, to receive overtime pay when they work more than 40 hours in a single week. It’s confusing because the non-exempt employees are entitled to overtime pay, and the exempt employees are not. The term really refers to whether the employer is or is not exempt from overtime pay requirements regarding that employee. The overtime pay requirements are contained in the federal Fair Labor Standards Act (FLSA) as well as state laws.

Generally, employees the law regards as “non-exempt” are those most people refer to as “hourly” workers and those the law regards as “exempt” are those most people refer to as “salaried” workers. Non-exempt workers are entitled to an hourly wage of at least the state or federal minimum and to overtime pay of time and one-half for hours worked in excess of 40 in a single week. Exempt employees are typically paid a salary (a fixed sum per week or month, regardless of the number of hours worked) and are not entitled to overtime pay.

While the exempt and non-exempt statuses cover many American workers, there are some other categories and legal requirements related to them. These include independent contractors, volunteers, workers in training, interns, temporary employees and certain foreign workers. In addition, there are some very specific FLSA requirements that govern specific types of workers such as child workers and agricultural employees.

Tax Liability Differences: There is no difference in the income tax treatment of exempt versus non-exempt employees. For both categories, whatever the employer pays them is “earned income” taxable according to their income bracket and any credits or deductions they may be entitled to.

Definition of an Exempt Employee

Under the FLSA an exempt employee is one who meets both a salary test and a duties test contained within the law. There are multiple duties tests for specific categories of employees. The requirements are somewhat subjective and can be confusing to interpret and apply. The salary test for most employees is that you need to earn more than $455 per week ($23,660 per year) to be an exempt employee.

Types of Exempt Employees

The most common categories of non-exempt employees under the FLSA are those who fall within what are called the “white collar” exemptions for:

  • Administrative employees
  • Executive and professional employees
  • Computer professionals
  • Outside sales employees

There are some lesser known exemptions but the overwhelming majority of exempt employees fall within these categories.

Administrative Employees Exemption Test: To qualify as an exempt administrative employee a worker must earn at least $455 per week and meet the following duties test:

  • The work they perform is non-manual (“office work” or “desk work”)
  • The work relates directly to the management of the business or to general business/client operations
  • The work requires the worker to exercise independent judgment and discretion about matters which are significant for the business

These employees are at a higher level than those performing basic clerical work. They perform jobs that have a direct impact on the business and they frequently need to make “judgement calls” in the performance of their duties.

Executive and Professional Employees Exemption Test: To qualify as an exempt executive or professional employee a worker must earn at least $455 per week and meet one of the following duties tests:

  1. Executive:
    1. Supervises at least two employees
    2. Management is the primary duty of the position
    3. Has significant input into major job decisions for other employees, such as hiring, firing, promotion and assignments
  2. Professional: Professional employees are those with specialized education performing jobs that require significant levels of judgement and discretion. Some common examples are doctors, lawyers, teachers, nurses, accountants, and creative professionals like musicians, actors, journalists and novelists.

Computer Professionals Exemption Test: To qualify as an exempt computer professional a worker must earn at least $455 per week and be employed as a systems analyst, programmer, software engineer or other IT professional performing skilled work and their primary duties must consist of:

  • Application of systems analysis techniques and procedures to determine hardware, software and functional systems specifications. This can include consulting with users
  • Designing and developing computer systems or programs, including prototypes. This includes creation and analysis as well as modification and testing, based on or related to system or user design specifications
  • The design and testing of computer programs related to machine operating systems including documentation and modification.
  • Some combination of two or more of the duties mentioned above

Outside Sales Employees Exemption Test: There is no salary test for the outside sales exemption. To qualify as an exempt outside sales employee a worker must meet the following duties test:

  • The employee’s primary duty is making sales or obtaining orders or contracts for goods or services for which the customer is going to pay the employer
  • The employee must be regularly “in the field” away from the employer’s place or places of business to perform their work. Usually this means they are traveling to customer sites or to conferences and events to meet with customers

Overtime Pay Requirements

Under the FLSA, non-exempt employees are entitled to pay at 1.5 times their normal hourly rate for any hours in excess of 40 that they work during a single work week. Averaging the hours over the course of a two week pay period is not permitted. In calculating overtime, the employer should use their regular workweek, whether it runs from Monday to Friday or on some other schedule.

An employer does not need to pay overtime or a higher rate of pay simply because an employee works on a weekend, at night, or on a holiday. However, if that work takes the employee over the top of the 40-hour threshold, then they would be entitled to overtime pay for the hours in excess of 40.

Changes to the Law in 2016 (on hold)

In 2016 the US Department of Labor issued a final rule making the first changes to the FLSA exempt employees criteria in decades. The final rule raised the salary threshold for exempt status from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). This change would have pulled many workers into the non-exempt category (provided they also met the duties test). However, the final rule was enjoined (put on hold) by a federal judge and the case is still pending now. The old salary test remains in effect until a final decision is reached in court.

Exclusions from FLSA Coverage

There are certain limited exclusions from FLSA coverage for certain types of agricultural workers as well as certain retail and service industry workers, truckers, and movie theater employees. These exclusions are very limited and employers need to be extremely careful in applying them.

Other Issues to Consider

Overtime May Not Be Waived: The right to overtime may not be waived by an agreement between the employer and a non-exempt employee, and a declaration by the employer that no pay will be available for hours worked in excess of 40 and/or that working more than 40 hours a week is not allows does not deprive the non-exempt employee of eligibility for overtime pay if he or she does work more than 40 hours in a given work-week.

State Law Needs to Be Considered: States need to abide by the requirements of FLSA at a minimum but can impose additional or stricter requirements at their option. Some states have minimum wage requirements that are higher than the federal minimum wage and or additional overtime requirements.

Wage and Hour Enforcement

The FLSA is enforced by the US Department of Labor and state wage and hour laws are enforced by the applicable state department of labor. A wage and hour enforcement action may start as the basis of a complaint or tip from an employee, a random audit or an intra-agency referral (for example from the IRS).

Even if only one employee complains about an overtime violation, the enforcement agency can look at all of the employer’s workers to see if classifications and overtime payments are appropriate and can demand enforcement and penalties and fines related to the entire workforce.

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