How to Classify Employees as Exempt vs. Non-Exempt

One of the many responsibilities a business owner must oversee is classifying their employees as exempt or non-exempt. Although it appears to be a yes-no designation, it’s not necessarily so. As with many employee matters, there are some complexities involved. More alarmingly, misclassification can result in a stiff fine or penalty.

In this post, we’ll examine exempt vs. non-exempt employees in California and how to distinguish between the two to keep in compliance with federal regulations. 

What Is the Difference Between Exempt and Non-Exempt Employees?

The definition of exempt and non-exempt employees, at least, is fairly simple, as outlined in the Fair Labor Standards Act (FLSA). It’s all about overtime pay.

An employee is “exempt” if they receive a set amount in salary every pay period, whether or not they work more than 40 hours per week. They are therefore exempt from getting paid for overtime.

“Non-exempt” employees are eligible to receive payment of time-and-a-half, on top of their usual rates, for every unit of time they work over 40 hours a week.

Some U.S. states — including California — base overtime pay on a single workday rather than an entire week. In those states, anytime a non-exempt employee works over 8 hours in a single day, they receive the time-and-a-half rate for each hour they work overtime up to 4 hours (making a 12-hour workday). 

If they work more than four overtime hours, they get double their usual hourly rate for each additional hour. Such employees don’t have to work the full 40 weekly hours to qualify for overtime pay. 

Again, the definition is clear-cut. But how does an employer classify which employees are which? 

FLSA Compliance Tests

The FLSA outlines some quantifiable limits to determine the status of exempt vs. non-exempt employees. Those who meet or exceed the limits are considered exempt from overtime pay; those who don’t are eligible to earn it.

The limits are arrived at through tests of two factors: salary and job responsibilities.

Salary Test

An employee’s fixed salary must exceed $687 per week for them to be exempt from overtime pay. This salary works out to about $35,568 a year. Employees who make less than that amount are, for the most part, non-exempt.

The calculation of regular rates depends on whether the employee works on an hourly or salaried basis. Hourly rates are straightforward enough — whatever the employee earns in an hour is their regular rate.

If the employee is paid through a regular salary, the computation’s only a bit more complicated. Take their monthly wage and multiply it by 12. Divide the results by 52 to arrive at their weekly salary, then divide that by 40 (the maximum legal regular hours) to get the hourly rate.

Employers should note that these limits are standard for California. Other U.S. states may have limits that exceed the federal guidelines as outlined in the FLSA.

Job Duties Tests

An employee’s job responsibilities must fall into certain categories to be exempt from overtime pay. This determination is made by applying three kinds of tests, including:

The executive exemption test:

• Is the employee the main manager of a team or department?
  
• Do they delegate work to two or more full-time workers?
  
• Are they authorized to hire and fire others?
  

The administration test:

• Does the employee perform office work or non-manual labor?
  
• Is the authority to make decisions part of their job description?
  

The professional test:

• Does the employee’s work require specialized or advanced knowledge?
  
• Do they have a unique background in science or learning?
  
• Do they have an advanced graduate degree or training?
  

If the answers to all of the questions in one of these tests are “yes” and the employee’s pay tops the salary threshold, they are exempt from overtime. 

Exclusions from Overtime Pay

Even with the salary and job duty test, there are some conditions or worker types the FLSA excludes from overtime and exemption considerations.

Movie Theater and Some Agricultural Workers

It may seem strange these two types of workers share a link, but for some reason, they’re not covered under the FLSA. Therefore, employers are not required to pay them overtime.

Superseding Federal Regulations

If there’s a piece of federal legislation that addresses certain industries, it usually overrules overtime provisions of the FLSA. For example, the Motor Carriers Act releases the trucking industry from FLSA regulations.

Other federal laws treat certain types of workers as exempt or non-exempt according to some very complex criteria. For example, a journalist may or may not be exempt according to their “creative” responsibilities. 

A journalist who just rewrites press releases may not be exempt, while a T.V. pundit who gives opinions on-air may be exempt.

Figuring out these stipulations can be a bit of a mental workout, but it’s important to know if your industry has a federal law governing its overtime payment rules.

Collective Bargaining Agreements

Union contracted employees are generally excluded from FLSA rules, provided that the terms of the collective bargaining agreement meet minimum thresholds as set out by the federal government.

Highly Compensated Employees

Another federal law dictates that an employee who earns more than $107,432 annually, including at least $684 weekly in salaries or fees, whose duties include office or non-manual work, and who “customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee” is exempt from overtime. 

Penalties for Misclassification

Proper identification of exempt and non-exempt employees is vital. Not doing so can result in the recovery of unissued back pay. If the Department of Labor’s Wage and Hour Division finds that a business owner deliberately and intently misclassified a worker, they could be subject to expensive fines and penalties.

For that reason, it’s important to examine every worker’s pay rate and job duties very closely — use the test methods described above. Don’t assume anything from the job title alone. Just because an employee is labeled a “manager” doesn’t necessarily mean they have executive status or decision-making power.

Keep in mind, too, that regulations can vary from state to state. Some state laws conflict with federal regulations when it comes to exempt and non-exempt workers. In those cases, the regulation that favors the employee will generally be the one that dictates overtime pay standards.