This article was updated on Oct. 4, 2018.
When classifying workers on your payroll as exempt or nonexempt employees, it's important to know the differences between each so that you comply with regulations issued by the Department of Labor (DOL).
Most employees are covered by the Fair Labor Standards Act (FLSA); therefore, they are considered "nonexempt" from its rules. For these employees, you'll need to track their hours, follow minimum wage guidelines, offer breaks and — most importantly — offer overtime pay for time worked over 40 hours per week. Remember that your particular state may have overtime rules that vary from the federal regulations; you'll need to follow whichever is more generous to employees.
When employees are exempt, however, they fall outside the minimum wage and overtime pay requirements of the FLSA. You won't need to track their hours or pay overtime, but you are required to pay exempt employees a fixed salary. According to the DOL, the FLSA allows exemptions for seven categories of employees: executive, administrative, creative professional, learned professional, outside sales, computer sales and highly compensated.
Classification of exempt or nonexempt employees is important because nonexempt employees generally have more protections under the FLSA than exempt ones. Businesses must be careful to follow the rules. The exemption is narrowly interpreted, and misclassifications that circumnavigate the FLSA's requirements could result in costly regulatory penalties.
Whether an employee can be considered exempt or nonexempt under the FLSA may depend on a few criteria such as:
- How much you pay the employee
- How you pay the employee
- The type of work the employee performs
According to existing regulations, exempt employees should be paid at least $913 per week on a salary basis. The DOL reports that the minimum salary of highly compensated individuals is $134,004 per year.
From there, FLSA rules vary depending on their employment category.
- According to the DOL, to be considered exempt, executive employees, for example, must have a primary duty of managing the organization or a department within the organization, including managing two or more other employees. Further, the executive employee must be part of the hiring and termination process.
- Exempt administrative employees are, according to the DOL, have job functions that may include "directly related to management or general business operations" and the exercise of "discretion and independent judgment" with respect to "matters of significance."
Outside sales employees', according to the DOL, "primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer." These employees are not subject to a salary-level test, and they must perform most of their work away from the employer's place of business.
Before classifying your employees as exempt or nonexempt, inform yourself. Review the DOL website and any relevant state regulations in advance of hiring new employees to determine what the role will require. When in doubt, consider speaking with a trusted HR or legal adviser.