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Exempt vs non-exempt workers: simplify employee classification

[Written for Replicon blog]

In the United States, most jobs are governed by the Fair Labor Standards Act (FLSA), which classifies workers into two broad categories: exempt and non-exempt. Under the FLSA, non-exempt employees are entitled to overtime pay, while exempt employees receive no overtime pay, regardless of how many hours they work.

This sounds straightforward, but the FLSA has a number of exemptions when it comes to overtime pay and minimum wage requirements. These include white-collar exemptions for administrative, executive, and professional employees, computer professionals, and outside sales employees, as well as the highly-compensated workers exemption.

To understand if an employee is exempt or non-exempt, you’ll need to review the following three tests:

  • Salary level test: Under the new overtime rules, employees paid less than $913 per week are considered non-exempt.
  • Salary basis test: This determines if an employee is paid a guaranteed minimum, regardless of the number of hours they work. This amount need not be the entire compensation received, but the employee must have some amount of expected pay for any given workweek.
  • Duties test: This determines if the nature of role is categorized as “administrative,” “executive,” or “professional.” The FLSA exemptions are limited to employees who are deemed to perform relatively high-level work, rather than based on job titles or position descriptions.

Classifying employees as exempt or non-exempt has been a hot topic lately, and a particularly fruitful area for lawsuits – contributing to 17 percent of wage and hour litigations since 2007. With the new overtime rules and the recently released sick leave mandate (applicable in a number of states and cities), businesses will need to consider multiple factors when it comes to reassessing and possibly reclassifying their workforce.

There are a number of other approaches businesses must consider as part of a holistic process, people, and technology approach to effective employee classification. Below are four critical tips for successfully managing both exempt and non-exempt employees.

1. Ask employees to schedule and track hours

The FLSA does not prohibit tracking of exempt employees. In fact, the Department of Labor states that employers can require exempt employees to work a specific shift and/or track their hours without affecting their exempt status. For example, Illinois (a jurisdiction with work time requirements) requires employers to keep a record of exempt employees’ hours worked. It is recommended that the exempt employees are tracked separately from the non-exempt employees.

2. Ensure salaries don’t fluctuate based on number of hours worked

No matter how many hours an exempt employee works, those hours tracked should in no way be used to manage the pay that an exempt employee receives. If their hours affect the salary and the salary fluctuates based on this, then the employee will no longer be considered exempt.

3. Update corporate policy and job requirements accordingly

If a business needs its exempt employees to work a shift and track their hours, the company’s corporate policy needs to emphasize that employees are not being treated as non-exempt. The best approach is to show that these additional requirements are part of the employee’s job responsibilities – that they need to work specific hours to perform their managerial, professional, executive duties effectively. For example, shift supervisors need to work in the same shift as the employees they are expected to oversee (and thus should track their hours), but can still be considered non-exempt.

4. Train employees on policy changes

Businesses should involve all parties affected by the new rules, ensuring they understand both the changes themselves, as well as their implications to employee management, morale, and compensation. As part of the communication process, training should also be conducted so that employees – particularly those in managerial roles – can play an active role in unveiling these changes to the business. Changes to wage and hour regulations can have unintended consequences (such as these additional business costs), so engaging the workforce on any updates is crucial.

While reclassifying, increasing the salary threshold, or limiting overtime hours may seem like clear options to tackle the overtime rule changes, there are numerous considerations from a business, technology and legal standpoint.