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Exempt vs. Nonexempt

So, just exactly who is eligible for overtime and minimum wage, and who is not? The answer turns out to be relatively complicated. It depends on job title and duties, which determine whether someone is exempt or nonexempt. To make matters more confusing, the definitions of exempt and nonexempt employees are roughly equivalent to, but not the same thing as, salaried and hourly employees.

The concepts of minimum wage and overtime became law in the United States with the passing of the Fair Labor Standards Act, which was designed to protect and maintain fair, just working conditions. The act's provisions, which include minimum wage, overtime, and a few others, do not apply to all employees, however. Some employees are legally exempt from the regulations, and others are legally nonexempt. Those who are nonexempt get overtime and must be paid at least minimum wage; while those who are exempt are not eligible.

The government may inspect or investigate a company to determine whether it is in compliance with the FLSA.

Basic definitions
According to the Bureau of Labor Statistics, the distinctions among various types of employees are as follows.

  • Nonexempt. Nonexempt employees are those who are covered by the provisions of the Fair Labor Standards Act. Examples include employees engaged in or producing goods and services for interstate commerce; employees of certain hotels, restaurants, or motels; and others. Nonexempt employees may be salaried or may be paid according to a variety of other structures, as long as minimum wage standards and overtime regulations are met.
  • Exempt. Exempt employees are those who are not subject to the provisions of the Fair Labor Standards Act. Examples include executive, administrative, outside sales, and professional employees; and employees of federal, state, and local governments. Exempt employees are almost always salaried (except various computer professionals).
  • Salaried rate. For workers hired on a weekly, monthly, or annual basis (for example, clerical, technical, and managerial employees), the rate of pay normally expressed in terms of dollars per week, month, or year, as opposed to payment for an hour of work. Salary cannot be altered as a result of a change in productivity or quality of work; shortened work week; or other short-term leaves, such as jury duty or witness leave.
  • Hourly rate. Usually the rate of pay, expressed in dollars and cents per hour, for manual and other work paid on a time basis. Also used to designate the earned rate per hour under incentive methods of wage payment.

An employee may be exempt from only certain provisions of the act. Most white-collar workers are exempt from both the minimum wage and overtime regulations, but not from the remaining sections of the act.

State regulations may override those established by the FLSA. An employee is exempt only if he or she has met both federal and state exemption requirements.

Basic provisions of the FLSA

  • Minimum wage is one standard of the FLSA. Currently, nonexempt workers must earn at least $5.15 per hour.

    Some people may earn a subminimum wage. Examples include some disabled workers; people under 20 who have been working at their present job less than 90 days; employees who receive tips of more than $30 per month; full-time students; and high-school students enrolled in vocational programs.

  • Overtime is calculated weekly. While state regulations override the FLSA standard, overtime is generally one-and-a-half times normal hourly pay for each hour worked over the standard 40 hours per week.

    Nonexempt salaried employees whose job is to work a fixed number of hours each week receive one-and-a-half times their regular rate for any hours over 40 per week.

    Nonexempt salaried employees whose weekly hours are not specified receive one-half their standard pay rate for any hours over 40 per week.

  • Child labor regulations under the FLSA are intended to protect children's education and welfare. Under these policies, fourteen- and fifteen-year-olds may work 3 hours during a school day, 18 hours a week, 8 hours on a nonschool day, and 40 hours in a nonschool week. These students may not hold a job in manufacturing, mining, or any hazardous environment. Older children may work at nonhazardous jobs without additional requirements.

  • Recordkeeping restrictions are part of the FLSA to ensure that employees are paid regularly according to established pay schedules.

The tests
There are two tests, short and long, to help employees and employers establish exemptions. If an employee meets either set of requirements, he or she is exempt. The short test is geared toward employees who make higher salaries.

Within the tests, distinctions are often drawn between salary and duties, giving rise to the terms salary basis test and duties test.

The following are the short and long test requirements for exemption, based on position.

Executive: short test
You are exempt if

  • you earn more than $250 per week; and
  • you are primarily a manager of an enterprise, department, or subdivision, with at least two employees working under your management.

Executive: long test
You are exempt if

  • you receive a salary of at least $155 per week;
  • your primary duties are to manage the company, or some subdivision of the company;
  • at least two employees work under your supervision;
  • you have the power to hire and fire those who work under your supervision; and
  • no more than 20 percent of your time (40 percent for retail or service) is spent on duties outside exempt duties (those described above).

Administrative: short test
You are exempt if

  • you earn more than $250 per week;
  • you primarily perform general tasks related to basic business operations; and
  • you exercise independent discretion when performing tasks.

Administrative: long test
You are exempt if

  • you receive a salary, at a rate no less than $155/week;
  • you primarily perform general tasks related to basic business operations;
  • you exercise independent discretion when performing tasks; and
  • no more than 20 percent of your time (40 percent for retail or service) is spent on tasks other than those detailed above.

Professional: short test
You are exempt if

  • you earn more than $250 per week; and
  • the nature of your work either requires advanced knowledge in a specialized field; or is highly creative and artistic, and is within a recognized artistic field.

Professional: long test
You are exempt if

  • you receive a salary of at least $170 per week; or
  • you are a licensed lawyer or doctor; or
  • you are performing a certified medical residency, or the like; and
  • the nature of your work requires advanced knowledge in a specialized field, generally requiring an established course of study; or
  • your work is highly creative, and is within a recognized artistic field; or
  • you exercise routine discretion and judgment when performing the tasks associated with your position;
  • no more than 20 percent of your time is spent on nonexempt duties; and
  • your work is considered intellectual rather than mechanical.

Computer software professionals: the only test
You are exempt if

  • you receive either hourly pay of at least $27.63 or a salary of at least $170 per week; or
  • you receive less than $27.63 per hour, but fall under exemptions within another job category; and
  • your primary duties involve the application of systems analysis techniques, the design of computer systems, or programming;
  • your work requires the constant use of independent judgment; and
  • you are considered highly trained and skilled.

Outside sales personnel: the only test
You are exempt if

  • your primary job is sales or obtaining orders for various services and
  • you regularly work away from the base business location; and
  • you spend no more than 20 percent of your time on duties other than the above.

There is no salary basis test for outside sales personnel.

Government employees
Employees of state and local governments (public agencies) are often exempt from the FLSA, and must meet different regulations. In addition to provisions for minimum wage, overtime, child labor standards, and pay periods, government employees are eligible for the following.

  • Instead of overtime pay, some employees of public agencies receive compensatory time off (also known as "comp time"), accumulated at the same rate as overtime pay, that is, one-and-a-half hours for every overtime hour. The cap on compensatory time for police, firefighters, emergency response personnel, and seasonal workers is 480 hours per year. For any other worker, comp time stops after 240 hours. FSLA regulations also cover the manner in which comp time may be used, whether it is paid in cash when an employee leaves, and other practices.
  • Hospitals and residential care programs may create a work period of 14 days. In these instances, overtime is issued only after an employee has worked 80 hours, rather than 40 hours in a week.
  • Mass transit employees may exclude time spent on charter activities, for example, when a bus is chartered for a special trip.
  • Some seasonal workers (such as those in national parks, recreational facilities, and the like) may be exempt from minimum wage and overtime requirements.

Workers may be exempt from these regulations if

  • they work occasionally as a part-time employee under the same public agency in a different capacity;
  • they work as a substitute for another employee, at the approval of the agency.
  • they meet the exemption requirements of the executive, administrative, professional, or outside sales industries.

Fire protection and law enforcement employees

  • may not include time spent performing special duties for a separate and independent employer;
  • may create a work period, from 7 to 28 days, in which overtime is paid after a certain amount of hours in the pay period have been reached;
  • may be exempt if their employing agency has fewer than 5 employees.

Time for revisions?
The Society for Human Resource Management, the world's largest human resource management association, has argued that the above tests and regulations are complicated, out of date, and difficult to apply to occupations that did not exist in 1938, such as computer programming.

In testimony on May 3, 2000, before the Subcommittee on Workforce Protections, the House Education and Workforce Committee, Dennis Sutpen, speaking on behalf of SHRM, said, "Workers were also expected to meet high productivity demands, and in many cases forced to work in hazardous conditions. From the standpoint of management, there was no benefit to ensuring on-the-job safety or paying an employee for overtime. For those purposes, the FLSA was enacted." Sutpen is the owner of HR Consulting.

Changes in the workforce over the past 60 years, including different methods of compensation, Sutpen explained, have not been reflected in the FLSA, making it extremely difficult to determine who is exempt and nonexempt in some cases.

Some managers, for example, spend at least 50 percent of their time on functions other than management, such as accounting, customer service, and administration. This type of higher-level employee uses a significant amount of "judgment and discretion." But what exactly does this mean?

There are other examples: "outside sales activities." Should "inside" sales activities be classified the same way? And what about doctors, lawyers, and teachers, whose jobs generally require an advanced degree. But what about equivalency tests?

Sutpen said, "The problem is when we look inside the employment structures of corporate America where jobs, the duties performed, and proper compensation for those jobs are much more complex than the simplistic outline of the 'duties' or 'salary basis' tests. The result is employers are left with little else but to guess if they have classified their employees correctly. Most of the time they don't know until they are on the receiving end of a lawsuit. A law that is intended to protect the individual should not be so unjust."

For more information on FLSA and the regulations concerning exemptions, contact the U.S. Department of Labor and the federal government's Office of Personnel Management.

- Leslie Tebbe, contributor

Copyright 2000-2004 ©, Inc.

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