Employee pay structures are primarily divided into two categories: salaried exempt and salaried nonexempt. While both involve receiving a salary, the distinction impacts overtime pay and legal protections. For employees, this classification determines how they are paid for extra hours. For employers, correct classification is a matter of legal compliance with substantial financial risk.
The Definition of a Salaried Employee
A salaried employee is paid a fixed amount of money on a regular schedule, such as weekly or bi-weekly. This predetermined compensation represents their total pay for a given period, regardless of the specific hours they work. An employee’s salary is not subject to increases or decreases based on the quality or quantity of their output during that pay period.
This model contrasts with hourly work, where compensation is directly tied to the number of hours an employee logs. An hourly worker’s paycheck can fluctuate, while a salaried employee can expect a consistent paycheck.
The Core Difference Overtime Eligibility
The distinction between “exempt” and “nonexempt” classifications lies in an employee’s eligibility for overtime pay. These terms are defined by the Fair Labor Standards Act (FLSA), a federal law establishing standards for minimum wage and overtime. The FLSA dictates how work hours are recorded and how employees must be compensated for them.
An “exempt” employee is exempt from the FLSA’s overtime provisions, meaning an employer is not required to pay them extra for working more than 40 hours in a workweek. A “nonexempt” employee is entitled to overtime pay, calculated at one-and-a-half times their regular rate of pay for all hours worked beyond 40 in a week.
Determining Exempt Status
For an employee to be legally classified as exempt, their role must satisfy three specific criteria established by the FLSA. The position’s characteristics must fit the legal definitions regarding how the employee is paid and the nature of their job responsibilities. All three tests must be met for the exemption to apply.
The Salary Basis Test
The first criterion is the salary basis test. To meet this requirement, an employee must be paid a predetermined and fixed salary. This salary cannot be subject to reduction because of variations in the quality or quantity of the work performed. An exempt employee must receive their full salary for any week in which they perform any work.
The Salary Level Test
The second criterion is the salary level test, which sets a minimum earning threshold. Under current FLSA regulations, an employee must be paid a salary of at least $684 per week, or $35,568 annually, to qualify for exempt status. If an employee’s salary falls below this amount, they cannot be classified as exempt, even if their job duties would otherwise qualify.
The Duties Test
The final and most complex criterion is the duties test. This test requires that the employee’s primary job responsibilities involve tasks that are considered exempt in nature. The FLSA outlines several categories of these duties, and the employee’s main functions must fit into one of them.
- Executive exemption applies to employees whose primary duty is managing the enterprise or a recognized department. They must customarily direct the work of at least two other full-time employees and have the authority to hire or fire, or their recommendations on these matters must be given significant weight.
- Administrative exemption requires an employee’s primary duty to be the performance of office or non-manual work directly related to the management or general business operations. This work must include the exercise of discretion and independent judgment with respect to matters of significance.
- Professional exemption has two subcategories: learned and creative. A learned professional’s work requires advanced knowledge, typically acquired through prolonged specialized instruction, such as a lawyer or accountant. A creative professional’s work involves invention, imagination, or talent in a recognized artistic field, like a graphic designer.
- Computer employee exemption is for individuals working as computer systems analysts, programmers, or software engineers. Their primary duties must consist of tasks like the design, development, documentation, or analysis of computer systems or programs.
- Outside sales exemption applies to employees whose main duty is making sales or obtaining orders and who are customarily and regularly engaged away from the employer’s place of business.
The Salaried Nonexempt Classification
It is a common misconception that all salaried employees are exempt from overtime. An employee can be paid a salary but still be classified as nonexempt if they do not meet all three of the FLSA’s exemption tests—most commonly, the duties test. A salaried nonexempt employee is entitled to overtime pay for any hours worked over 40 in a workweek.
Although they receive a consistent base salary, their employer must still track all work hours to ensure compliance with overtime laws. To calculate the overtime pay for a salaried nonexempt employee, the employer must determine their regular hourly rate. This is done by dividing the weekly salary by the number of hours the salary is intended to cover. For example, if an employee earns a salary of $800 for a 40-hour week, their regular rate is $20 per hour, and their overtime rate would be $30 per hour.
Implications of Each Classification
The classification has practical consequences for both employees and employers. For an exempt employee, the benefit is a predictable paycheck, which does not fluctuate based on weekly hours. This can be offset by the expectation to work long hours without additional compensation, potentially leading to a lower effective hourly wage.
Nonexempt employees have the advantage of being paid for every hour they work, including a premium for overtime, which can lead to higher earnings during busy periods. The trade-off may be less flexibility in their work schedule, as employers have a financial incentive to manage their hours closely.
From the employer’s perspective, classifying an employee as exempt offers budget predictability and simplifies payroll, avoiding the variable expense of overtime. For nonexempt employees, employers face the administrative task of accurately tracking all hours worked and the financial cost of paying overtime.
Consequences of Employee Misclassification
Employers bear the full responsibility for correctly classifying their employees, and the penalties for getting it wrong are significant. Misclassifying a nonexempt employee as exempt is a costly error. If an employer is found to have misclassified an employee, they can be held liable for all unpaid overtime going back two or three years.
The financial repercussions extend beyond back wages. Courts can impose liquidated damages, an additional penalty typically equal to the amount of the unpaid overtime, meaning an employer could be forced to pay double the owed wages. The employer is also likely responsible for paying the employee’s legal fees.
An employee who believes they have been misclassified can first contact their company’s human resources department. If that does not resolve the situation, they can file a complaint with the U.S. Department of Labor’s Wage and Hour Division, which investigates such claims.