Published on April 25th, 2018 | by Dack Varss0
Exempt vs. Non-Exempt Employees under the FLSA
The Fair Labor Standards Act of 1938 (FLSA) is the “primary federal wage-hour legislation,” which sets minimum wage, overtime, and minimum age requirements for employers and employees and restricts child labor.129 U.S.C. §201 et al.
For the purposes of the minimum wage and overtime requirements, the FLSA established two classification of employees. Those classifications are referred to as exempt employees and non-exempt employees. The FLSA is not the only law that sets legal standards for the employee-employer relationship.
Several states have legislated their own labor standard laws, some of which have higher minimum wage rates, more stringent overtime rules, and different child labor requirements with which employers must also comply.229 CFR § 541.4.
The FLSA only applies if an employment relationship exists. It does not apply to independent contractors.329 U.S.C. §203(r)(1). An “employer” is considered any person acting directly or indirectly in the interest of an employer in relation to an employee. The term includes public agencies, but excludes labor organization and anyone acting in the capacity of officer or agent of a labor organization.429 U.S.C. § 203(d).
An employee’s exemption status will depend upon how the employer elects to classify that employee. Ultimately, this classification will determine the employee’s right to overtime, meal periods, minimum wage, and rest breaks.
The FLSA regulates these rights, as well as individual state labor laws, such as the California Labor Code. Note, these exemptions can vary under state or federal law.
The minimum wage rates and overtime requirements are set forth in the FLSA.529 U.S.C. §206. For non-exempt employees, the standard federal minimum wage is $7.25 per hour. Employees under the age of 20 may be paid no less than $4.25 per hour of the first ninety (90) consecutive calendar days of employment. The ninety (90) consecutive calendar days include both days worked and days not worked.629 U.S.C. § 206(g).
Non-exempt employees are entitled to time and one-half their “regular rate” of pay for each hour they actually work over a 40 hours work week as required under the FLSA overtime rules.729 U.S.C. § 206. Employers are subject to monetary penalties and punishment for failure to comply with the minimum wage laws.
The FLSA groups employees into two categories of exemptions: (1) employees who are exempt from both minimum wage and overtime requirements; and (2) employees who are exempt from only the overtime requirements.
Under the FLSA, employees are exempt from its overtime and minimum wage rules if employed in a bona fide executive, administrative, or professional capacity, as a skilled computer employee, or as an outside sales employee. These are known as “white collar” exemptions.829 U.S.C. § 213(a)(1), (17). The exemptions are not applicable to “blue collar” employees, such as police and correctional officers, or emergency personnel.
Employers must exercise great care in how they classify their employees. For example, an “outside sales” employee will be classified as exempt, while an “inside sales” employee will be classified as non-exempt.
Consequently, how an employer elects to classify an employee as exempt or non-exempt will be governed by (1) how much that employee is paid; (2) how the employee is paid; and (3) what kind of work does the employee perform.
Under the FLSA Regulations, to be considered an “exempt” employee, one must: (a) be paid at least $23,600 per year ($455 per week); (b) be paid on a salary basis; and (c) perform exempt job duties.929 CFR § 541.602. In addition, there are three “tests” employees must meet to be deemed exempt.
The first test an employee must qualify for is the “Salary Basis Test.” Under that test, an employee is paid on a “salary basis.” The employee is paid on a weekly or less frequent basis, a “predetermined amount” of wages that is not subject to any type of reduction, because of the variations in the quality and quantity of the work performed.1029 CFR § 541.602(a).
The second test for qualification is the “Salary Level Test.” The FLSA demands that employees paid less than $23,600 per year ($455 per week) are non-exempt.
The third test is the “Duties Test,” which requires an exemption status for those employees who meet the salary level and the salary basis tests if he or she performs exempt job duties.
An employee’s job title will not determine their exempt status.1129 CFR § 541.2. The exemption status for any employee is applicable if their job duties and their salary meet the standard requirements under the FLSA. Courts look at the agreed upon salary between the employer and employee, when determining whether the salary satisfies the minimum requirement and not what the employee actually received.12Nicholson v World Bus. Network, Inc. (11th Cir 1997) 105 F.3d 1361, 1365.
The benefits an employer provides to its’ employees, such as life insurance, cash bonuses, educational assistance, severance pay, vacation, holidays, and sick leave are usually based on an agreement between the employee and the employer.
However, all employers are required to comply with the federal and state hour and wage laws. When a conflict arises between the federal and state laws, courts will apply the law that established the higher standard.1329 U.S.C. § 218(a).
For example, in California, the FLSA does not supercede California’s wage orders, which generally provide more extensive right to its’ employees. But the relationship between the two is harmonious. It does not overlap.
Exempt Job Categories
As noted before, the FLSA divides exempt job duties into three categories, executive, professional, and administrative.
To determine whether an employee is considered an “executive,” his or her job duties must consist of the following:
- Supervises two or more employees on a regular basis (Note: the supervision of non-employees does not meet the standard);
- Management is their primary job duty; and
- He or she has some input regarding the job status of other employees.
A “professional” applies to those job duties of a “traditional learned profession.” For example, doctors, teachers, clergy, lawyers, dentist, etc. This would also include nurses, accountants and engineers. The work performed by these individuals is “predominantly intellectual” with an expectation of “specialized education.” The measurement being an advanced degree.
The “administrative” exempt category refers to those employees who are considered “high-level” employees. Their job duties “keep the business operating.” Their job duties must consist of the following:
- office or non-manual work, which is
- directly related to management or general business operations of the employer or the employer’s customers, and
- a primary component of which involves the exercise of independent judgment and discretion about
- matters of significance.1429 U.S.C. § 218.
Determining the difference between an exempt or non-exempt employee can be difficult. The federal and state law requirements can vary extensively depending on the industry and what the employee’s job duties and salary are with regards to the FLSA regulations. The difference between the two classifications can impact an employee’s rights to overtime, meal breaks, rest breaks, and wages.