Key Takeaways

  • "Salary exempt" refers to employees who are exempt from FLSA overtime rules due to their job duties and salary level.
  • Being salaried does not automatically mean an employee is exempt; the FLSA requires a duties test and salary basis test.
  • The minimum salary threshold for exemption under the FLSA is currently $684/week ($35,568/year).
  • Exempt employees do not receive overtime pay and typically perform executive, administrative, or professional duties.
  • Non-exempt employees are entitled to overtime pay and greater legal protections under the FLSA.
  • Misclassification of exempt vs. non-exempt status can lead to legal liability for employers.

What Is Salary Exempt?

Salary exemption occurs when a worker makes enough money in their salary to qualify for exemption from the Fair Labor Standards Act (FLSA). The FLSA covers various overtime regulations and employee rights. The FLSA exempts certain professionals based on their job position, but salary exemption specifically regards exemption based on weekly earnings. Understanding salary exemption is best done by learning the differences between exempt and non-exempt workers to see who FLSA applies to.

Common Misconceptions About Salary Exempt Status

It’s a common misconception that all salaried employees are automatically exempt from overtime pay. In reality, exemption is not solely based on whether an employee earns a salary. The Fair Labor Standards Act (FLSA) requires that employees meet both a salary threshold and a specific set of job duties to qualify as exempt.

Another common misunderstanding is that employees can waive their right to overtime if they prefer a salaried arrangement. However, employee preference does not override legal classification under the FLSA. Employers must classify positions properly, regardless of agreements with employees. 

What Are the Differences Between Exempt and Non-Exempt Workers?

Salary exemption is determined by the FLSA. Exempt employees are not covered by the FLSA rules and regulations while non-exempt employees are. Non-exempt employees must be paid at least the federal minimum wage for their hours worked. They must be paid at one-and-a-half times their normal wage for any hours worked over 40 a week. Other rights and protections are offered as well. If employees make less than $23,600 a year, they are non-exempt.

Exempt employees are excluded from minimum wage laws. They also do not receive overtime pay. Exempt positions are paid through a salary rather than an hourly wage, so they are typically already above minimum wage.

Contracts for exempt employees are not subject to 40-hour limits or minimums. Exempt employees work the required hours for completion of their tasks. As a result, they must have a guaranteed minimum pay that can only be reduced in a few situations. Exempt positions require independent judgment in situations and generally call for work without supervision, such as executive, supervisory, professional, or outside sales. These positions also often relate to the company's management. If an employee makes more than $23,600 a year, they qualify for a salaried position.

How the FLSA Defines Exempt Status

The FLSA outlines three primary criteria for determining exempt status:

  1. Salary Level Test – The employee must earn at least $684 per week ($35,568 annually).
  2. Salary Basis Test – The employee must be paid a predetermined and fixed salary that is not reduced due to quality or quantity of work.
  3. Duties Test – The employee must primarily perform executive, administrative, or professional duties as defined by the FLSA.

Each of these tests must be met to lawfully classify an employee as exempt. Failure to satisfy even one component could result in the employee being legally entitled to overtime, regardless of how they are paid. 

Salary Basis Test

If an employee has a guaranteed minimum amount of money received every workweek, they are salaried. However, salaried employees can still have their pay expressed in hourly terms, which is helpful for an employer trying to keep track of hours. The FLSA salary basis test is applicable only to reductions in monetary amounts.

Salary-based pay cannot be reduced based on the quality or quantity of work. Reductions in pay can be permissible and impermissible. Permissible reductions do not affect an employee's exempt status, but impermissible reductions take them off salary pay. This could reduce them to hourly wages, which can be bothersome if they tend to finish work early, but also might be beneficial if they have numerous large projects.

Updated Salary Thresholds and State Variations

The federal minimum salary threshold for exemption is $684 per week as of the most recent FLSA update. However, several states impose higher minimum salary requirements. For example:

  • California requires twice the state minimum wage for full-time employment, which means a higher salary threshold.
  • New York sets different salary thresholds based on location (e.g., NYC, Long Island, or upstate).

Employers must comply with the stricter standard—whether federal or state. Additionally, highly compensated employees (HCEs) may qualify for exemption under a relaxed duties test if they earn over $107,432 annually, including at least $684 per week on a salary basis.

The Duties Test

Job duties must also be exempt and are restricted to high-level work. Job titles and descriptions are not as useful in determining exempt status as job duties are. The actual job must be evaluated regardless of title or description. That evaluation separates qualifying job duties into three categories to determine the employee's role in overall business operations.

Three Categories of Exempt Job Duties

Exempt job duties come in three distinct categories with strict regulations: executive, professional, and administrative. These three duties can be exempt if they involve supervision of two or more employees, are primarily management, and have the authority to hire, fire, promote, and assign employees in various ways. Supervision must be regular and supervising non-employees will not meet the standard. If the supervised employees are not full time, their combined work hours a week must equal the equivalent of two full-time employees. In that case, the manager would have to supervise more than two employees.

Management duties must be the employee's primary responsibility in order to qualify and must include:

  • Interviewing and training
  • Setting pay rates and hours
  • Maintaining sales or production records
  • Evaluating productivity and handling grievances
  • Choosing work techniques
  • Planning work
  • Delegating tasks
  • Choosing equipment or materials needed for work

Determining whether management is the primary duty follows a case-by-case evaluation. Generally, employees have to be in charge of a department or subdivision of the business. Employees with managerial duties can perform regular job tasks at times and still qualify for exemption. Exempt employees must also place genuine input into personnel matters. The employee does not have to be the final decision-maker, but they need to demonstrate an authority of a particular weight. Recommendations must be carefully considered, reliable, and frequent enough to be a regular part of the job.

Various professional job duties are exempt: lawyers, doctors, dentists, teachers, architects, clergy, nurses, accountants, engineers, actuaries, scientists, and pharmacists. In order for work to be considered professional, it must be predominantly intellectual and require very specific education or training. These fields tend to be more academic, requiring advanced degrees as the most common measure. Employees can also qualify if they obtained a similar level of education through means other than university.

Creative professionals may also be exempt, such as writers, cartoonists, musicians, actors, and some journalists. If a job requires imagination, originality, talent or invention, it can qualify as an exempt position. These positions also must be held by people who can offer a unique interpretation of situations or projects.

Administrative duties can also be exempt. They provide support to general operation or production, depending on the business. Authority to make independent decisions is essential for such a position. Administrative exempt positions include duties such as office work, non-manual work, work directly related to management or general operations, and work requiring independent judgment and discretion about important matters. Essentially, these positions can be easily identified because they keep the business running.

Rights of Exempt Employees

According to the FLSA overtime rules, exempt employees aren't eligible for nearly any additional rights. They are only paid the base salary for any period they work. Employers are allowed to require time clocks from exempt employees if they want, but that is just for record keeping.

Exempt salaried employees are paid the same amount, whether they work 40 hours, 50 hours or 30 hours. Exempt employees can also work a different schedule to make up for missed time. The employer can also set any work time they want for exempt employees. The limited rights the FLSA offers exempt employees is clearly evident and causes some workers to search for non-exempt positions.

Limitations and Risks for Exempt Employees

While exempt employees often enjoy greater flexibility in their work schedule, they also face specific limitations:

  • Lack of Overtime Pay: Exempt employees cannot earn overtime, even during peak workloads or long weeks.
  • Job Security Risks: Exempt employees are usually expected to meet job expectations regardless of time required, which may lead to burnout or job dissatisfaction.
  • Unpredictable Hours: Unlike non-exempt roles, exempt positions often have fluid schedules based on project demands.

Some employers also mistakenly require exempt employees to clock in and out, which is not prohibited but can cause confusion if pay is reduced due to partial-day absences—a potential violation of the salary basis requirement. 

Rights of Non-Exempt Employees

For non-exempt employees, the rules are different. The FLSA allows them time and a half for any additional hours they work. They can enjoy overtime benefits, but requesting or working overtime must be done in moderation, as their employers might be less likely to make their workweek exceed 40 hours. The closer employees are to working 40 hours, the greater the risk of exceeding 40 hours.

From the employer's perspective, they in essence give a raise to that employee for any additional hours worked, which can be a serious problem if multiple employees do it at once. For these reasons, a prospective non-exempt employee may need to think twice before expecting overtime and budgeting accordingly.

Legal Errors Employers Make

If an employer cannot keep up with the FLSA requirements, they could face severe legal trouble. An employer needs to effectively track overtime and hourly rates for salaried associates to calculate extra pay. Employers should keep a record of employee absences and resolve issues related to that. In those cases, it may be necessary to make deductions from an absent employee's salary. The Department of Labor also plays a role in these instances, as the employer must understand regulations for overtime pay for employees who work irregular hours.

All time worked must be tracked, according to the FLSA. The FLSA also allows employers to pay non-exempt employees however much they choose, but they must be able to show at least a minimum wage equivalent. They also must show that any overtime was paid accordingly.

Numerous problems may arise from assumptions and compromises. Employers might assume employees will obey when they are asked not to work overtime. However, the employee might stay late and clock overtime without first asking permission if big projects come up on their task list. Other times, employers will ask employees to work overtime and offer a day off to balance it out. Either way, the overtime still needs to be recorded. The employer must have precise records for hours that can match an employee's honest testimony should the Department of Labor decide to interview them.

Utilizing a time clock and giving harsh punishments for time manipulation are common solutions employers implement. The courts will rule against the employer in cases of overtime dispute if the employer cannot provide accurate records of time worked.

Best Practices to Avoid Misclassification

To prevent legal issues associated with employee misclassification, employers should:

  • Conduct a duties analysis during hiring or promotions to ensure roles meet FLSA exemption criteria.
  • Keep thorough records of job descriptions and actual responsibilities.
  • Avoid salary deductions that jeopardize the employee’s exempt status.
  • Stay updated on state-specific exemptions and wage thresholds.
  • Implement periodic audits of employee classifications, especially when job roles evolve.

Misclassifying employees can result in back pay for unpaid overtime, legal penalties, and potential class-action lawsuits. 

Tax Liability Differences and Unemployment Implications

Both exempt employees and non-exempt employees are taxed the same way. Pay for either is still considered earned income that is taxable based on which tax bracket the employee falls into. Whether income is earned hourly or through a salary, it is all the same to the government.

Unemployment benefits are different in each state. Regardless of whether an employee is exempt or not, they're still eligible for unemployment benefits. State governments have a vested interest in protecting all workers to keep unemployment rates down as much as possible. States look better on a national scale with lower unemployment rates, so no matter where you are or what kind of profession you specialize in, you are eligible for unemployment benefits if you lose your job, but those benefits will differ from state to state.

Workers' Rights and Benefits Implications

The federal law protects non-exempt employees more than exempt employees. Despite this difference, employers tend to treat all employees the same. Favoritism in the workplace generally creates a bad work environment, which can lead to law violations. Some of the primary rights that apply to everyone include the right to a healthy and safe work environment, equal employment opportunities, and child labor laws. Additional rights are offered by the Family and Medical Leave Act (FMLA); non-exempt workers and exempt workers may take advantage of these rights.

Which Is Better: Exempt or Non-Exempt?

Exempt employees generally make more than non-exempt employees, but they are required to finish their tasks no matter how long it takes. For example, exempt employees are expected to do their work even if it takes 70 hours a week. If they cannot do this, they can be fired without warning. If an employee is exempt, they may have less legal protections from any abuses by the employer. However, exempt employees can work less if the tasks they're assigned can be finished in less than 40 hours a week. That means that if weekly tasks are finished within 30 hours, for example, that employee would be paid 40 hours for 30 hours of work.

Non-exempt employees differ in that they can expect regular hours and fluctuating weekly pay based on those hours. However, they can do especially well with overtime. This is why many people prefer non-exempt positions. While salaried positions offer latitude if employees can finish their tasks quickly, non-exempt employees can take advantage of this, too, by simply taking longer to complete tasks. Time is closely monitored for non-exempt employees. This is especially true regarding breaks, which must be set at designated times. Exempt employees, on the other hand, can enjoy plenty of downtime so long as their tasks can be completed.

Deciding between exempt or non-exempt status largely depends on the employee's needs. If an employee regularly works more than 40 hours a week, an exempt position might be unappealing. However, exempt positions are generally high paying in the first place, so it might be difficult to find a non-exempt position with equal pay.

Frequently Asked Questions

What is salary exempt under the FLSA? Salary exempt refers to employees who are not entitled to overtime pay under the Fair Labor Standards Act due to meeting salary and duties tests.

Does being salaried automatically mean I’m exempt? No. A salary alone doesn’t determine exemption. The employee must also meet job duty and salary threshold requirements.

Can exempt employees receive bonuses? Yes, but bonuses must not affect the guaranteed minimum salary or be used in place of meeting the FLSA threshold unless the bonus is nondiscretionary and limited in proportion.

What happens if an exempt employee’s salary is reduced for poor performance? Reducing pay due to performance may violate the salary basis rule and cause the employee to lose exempt status.

Are state laws different from the FLSA for exempt status? Yes, some states like California and New York have stricter rules for salary thresholds and duties. Employers must follow whichever law is more favorable to the employee.

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