What is the salary exempt test?

The salary exempt test is one of two main tests to determine an exempt or nonexempt status for an employee under the Fair Labor Standards Act. The salary exempt test has two individual requirements within it that must be satisfied to be exempt from overtime pay as outlined in the FLSA.

Employees that are categorized as exempt mean they are not entitled to overtime pay protection that is covered in the FLSA. Employees that are classified as nonexempt are afforded protection for hours worked over their 40-hour work week.

The two salary-based tests for exemption status are related to:

  • The structure with which that employee is paid
  • How much an employee earns

While an employee may pass both of the salary tests required for exemption status, they also must pass a duties test which outlines that employees must perform certain job tasks to be exempt from overtime pay. Unless exempt, employees that are covered for overtime pay in the FLSA must be paid at least their regular and one-half their pay rate for all additional hours.

Exempt or nonexempt

The classifications of exempt or nonexempt determine an employee's status as outlined in the FLSA. While payment type and rate are two critical tests to determining one's exemption status, so too is the type of work that employee performs.

Most employees in the U.S. are nonexempt from overtime pay. For a majority of instances, employees must meet all of the following conditions:

  • You must earn a salary
  • Your salary must be at least $47,476 annually
  • You must perform exempted job duties

The FLSA goes into much more details about information like youth employment standards, record keeping, hours worked, minimum wage, and overtime pay.

Because there are a lot of flexibility to jobs and company structure, it can be difficult to put every situation into context. Thus, there are exceptions to the rules. For instance, if you own 20% or more equity in a business and are engaged in the management of the company, you can be classified as exempt regardless of your salary or job duties.

Exempt employees are not entitled to receive any overtime pay for additional hours worked, whereas nonexempt employees must be paid overtime in the amount of at least one and a half their typical pay rate for each additional hour worked in a pay period.

Exempt employees' rights

Unfortunately, the Fair Labor Standards Act offer no rights for exempt employees seeking overtime recourse. As long as the employee is paid their base salary in full, minus permissible deductions, the employer is not obligated to pay overtime pay to exempt employees.

In fact, the FLSA allows employers to require exempt employees to track their worked hours, make up absences, and work specific schedules dictated by the employer. While the FLSA doesn't cover overtime for exempt employees, there are several other laws and employee-protective regulations that relate to working conditions and employee rights.

Nonexempt employees' rights

While the FLSA doesn't protect exempt employees, it does offer protection to nonexempt employees that work overtime for their employer. The act specifies that employers must pay an employee time and a half of their original pay rate for every hour worked over their designated threshold.

For example, if someone is typically paid $20/hour and they work overtime, they'd earn $20 x 1.5 = $30/hour for each additional hour.

Salary basis test: How an employee is paid

The first of the salary exempt tests is the salary basis tests which considered how exactly an employee is paid. To qualify for the exemption, one must be paid a salary. In other words, an employee is paid a guaranteed amount of money to perform the designated work by an employer. This baseline salary isn't necessarily the only form of compensation they may receive, but it does indicate the minimum total amount that employee will earn annually.

The other forms of payment for employees could include hourly-pay which is determined by the total number of hours worked by that employee or commission-based which could or could not have a salary component and is based on the quality of work performed.

One test to determine if you're a salaried employee is to see if your pay varies by the number of hours you work for a pay period. If you determine that your pay total fluctuates based on the number of hours you work, you're probably not a salaried employee. Salaried employees receive the same payment amount for a pay period regardless of the hours worked or quality, as long as it aligns with the employer's expectations and approvals.

The FLSA looks at reductions in payment amounts to determine the status using the salary basis test.

Typically, there are no reductions to salaried employees based on the quality and quantity of their production. The base payment to that employee should be consistent regardless of the hours worked, so long as they are within the employer's internal guidelines and expectations.

An employees exemption status can be affected by impermissible reductions. The FLSA says that employees that are subjected to impermissible salary reductions are considered nonexempt for overtime payment. It is highly unlikely that an employee will go from exempt to nonexempt based on impermissible reductions, but it can happen.

There are certain job types that are considered exempt regardless of their salary basis. For instance, lawyers, doctors, and teachers are classified as exempt regardless if they are paid hourly or salary.

Salary level test: How much an employee earns

The first prong in the salary exempt test is known as the salary level test which evaluates how much an employee earns. The salary level test helps determine whether that employee is exempt or nonexempt from earning overtime on additional hours worked in a pay period.

The salary level test is updated every three years to represent the 40th percentile of the lowest wage-earning sector of the country, which is currently the Southeast. Thus, on December 1, 2016, this requirement increased from $23,660 annually ($455 weekly) to $47,476 annually ($913 weekly).

Thus, an employee earning a salary more than $47,476 passes the salary level exempt test and continues to the subsequent exemption tests to determine overtime status. For example, if you earn $30,000 a year you would not be considered exempt, but if your salary is $100,000 a year, you would be considered exempt from overtime as outlined in the FLSA.

Modifying the salary exempt test

Both the salary basis test and the salary level test are adjusted every three years based on the lowest-wage section of the country. Because the salary level is a precise number, that number is updated based on the 40th percentile of pay within the lowest-wage sector of the U.S. As mentioned, we recently increased the baseline for the salary level test from $23,660 to $47,476 annually which is more than two times the previous level.

Fair Labor Standards Act

The salary exempt test is a part of the Fair Labor Standards Act (FLSA) which is used to determine whether employees are exempt or nonexempt from overtime pay. The FLSA covers the entire U.S., but most states also have their own regulations and laws dictating overtime exemptions.

The FLSA covers many different types of jobs, but some are not covered because of legal statues. Any jobs that are not covered by the FLSA will not be governed by the overtime rules.

To keep your company in compliance with FLSA it's recommended that you conduct frequent audits of your employees' wages and make salary adjustments when relevant. This will help prevent you from legal recourse that can happen from not following the FLSA's overtime payment policy.

The United States Department of Labor (DOL) estimates that 35 percent of salaried employees meet the salary requirements outlined in the new rules put forth May 18, 2016. The DOL also anticipates the baseline salary, currently $47,476 annually, to raise to $51,000 by 2020. These changes to the FLSA are designed to improve the working conditions and payment security for employees in the United States.

Result of changes to the salary exempt test in the FLSA

One of the reasons that changes are frequently made to the exempt test requirements in the FLSA is to improve the working conditions for U.S. employees. When the baseline salary increased from $23,660 to $47,476 annually, it put pressure on employers to do one of three things.

  1. Increase the salaries of their employees to meet the minimum salary requirement to pass the salary basis test to make exempt from overtime pay
  2. Leave the salaries of their employees at the current rate and pay the earned overtime pay
  3. Create a more structured process and guidelines for limiting overtime work of their employees

It's important to note that employers are still required to pay overtime pay to employees that work extra hours, even if those additional hours were not approved.

Job duties test

Following the salary exempt tests is the job duty test which determines if employees are exempt based on the tasks they perform for the company. The FLSA has three categories that it looks for with the job duty test to determine if an employee is exempt or nonexempt. These three categories are professional, administrative, and executive.

Professional duties test

Employees that work in the professional service industry may immediately be classified as exempt via the FLSA. Some examples of careers that fall into the professional category include:

  • Doctors
  • Dentists
  • Lawyers
  • Registered Nurses
  • Teachers
  • Accountants
  • Architects

The reason these fields are labeled exempt is because the duties required to execute their job effectively are intellectual and skill-based in nature. These careers often require specialized training and higher education, with the job also needing autonomous decision making, personal discretion, and judgment calls.

While the professional careers above are deemed exempt via the Fair Labor Standards Act, there are other, more creative based professions that can also be classified. Sometimes, creative professionals like artists, designers, actors, musicians, writers, journalists, or composers may be labeled as exempt if their job requires extensive talent, training, originality, and creative imagination.

The professional duty test is usually straightforward, but occasionally, when it involves creative professionals, it can be difficult to classify. Thus, it may be a good idea to seek an expert in labor law to help with your duty test.

Administrative duties test

The most difficult duties test is the administrative designation. It's classified as job duties that are office or non-manual in nature that directly impacts management or the general business operations of your company or relevant customer. The most important characteristic of administrative duties is one's right to make critical decisions using personal judgment and expertise.

Furthermore, administrative duties are marked for higher-level employees whose role is to dictate the management or success of a business. Their primary role should be supporting the production or operational employees and their daily tasks should reinforce that.

Some common examples of jobs with administrative duties include human resource department, payroll or finance managers, tax and accounting personnel, quality control teams, compliance departments, and occasionally, computer-based roles.

Computer-based designation for administrative duties can be tricky, so you should seek professional counsel if you want to learn more about the administrative duties test for computer-based employees.

Executive duties test

The FLSA has a pretty straight forward process for determining executive duties tests to determine exempt and nonexempt status. Executive duties are defined as a role where the responsibilities and decisions made by someone directly impact other employees. This effect could be related to hiring, promoting, firing, assigning, supervising, or any other number of tasks that relate to subordinate employees.

While supervising and controlling other employees is the staple of executive duties, an employee can perform other roles outside of just management. In fact, many employees who meet the requirements of the executive exemption test are department heads or supervisors to a specific area where they also work.

Employees whose input and opinion carries a lot of weight in personnel decisions within an organization are considered executive. The employee does not need to be the one who makes the final decision, they just need to have their input strongly considered.   

Some tasks that are typically performed by someone who qualifies for the executive duties exemption include employee reviews and performance evaluations, interviews, new-hire training, and employee terminations. While not always outlined in the job title or description, employees may be reviewed for executive duties on a case by case basis.

If you need help with issues involving salary exempt tests, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.