Exempt and Non-Exempt Employees
The Federal Labor Standards Act of 1938 sets the standards as it relates to Exempt and Non-Exempt employees and their associated compensation and work standards. The Labor Standards Act is located in Chapter 20 Section 201 of the Federal Code. This Act is applicable to those small business operations with more than $500,000 of annual revenues and who participate in interstate commerce. Compliance with the Act is a function of the human resources director.
The issue centers on the compensation package paid to employees. When an employee works overtime and is exempt, the employer does not have to compensate the employee at higher overtime rates. The employer is protected under the Federal Labor Standards Act from an employee lawsuit.
To understand what this is all about, I need to first explain the concept of overtime compensation. The federal law requires employers to pay any hour worked in excess of a physical 40 hour work week at least one and half times the regular wage. The exception to this rule relates to ‘Exempt’ employees. So what are ‘Exempt’ employees?
Below I explain the definition as stated by the Federal Department of Labor for Exempt Employees. In addition, the department does define non-exempt employees as illustrated further below.
Section 13(a)1 of the Fair Labor Standards Act sets the standard to meet to exempt an employee for overtime wages associated with their position. Those individuals who are ‘bono fide executive, administrative, professional or outside sales employees’ are considered exempt from the requirement to compensate overtime at the rate of at least one and half times the regular hourly compensation. In general those individuals must meet the following three requirements [Section 13(a)1 requirements]:
1. The employee’s primary duty must be to perform work requiring advanced knowledge;
2. The advanced knowledge must be in a field of science or learning; and
3. The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
Further examples and explanations clarify the executive, administrative, professional and outside sales terms used above and are described below:
Executive – for this exclusion from overtime compensation to be in effect the individual must meet four tests as described in Fact Sheet #17B.
1) The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week;
2) The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
3) The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
4) The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
The fact sheet defines management as a broad base of duties in setting the conditions and controlling the outcome of employee work.
One of the key definitions relates to the owner of a business. If you have a vested interest in at least 20% of the operation under any entity format, you are considered a bona fide exempt executive.
Administrative – to qualify as exempt the administrative duties must meet the following tests [Section 13(a)1 tests for administration exemption]:
1. The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
2. The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
3. The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Examples of these jobs include:
- Insurance Claim Adjusters
- Financial Services (except agents such as brokers)
Professional – The Federal Department of Labor puts out a fact sheet (#17D) defining professional employees. Go here for the actual source Exemption for Professional Employees.
The worksheet explains the primary duty of a professional as the most important duty of the employee in the context of the job as a whole. Advanced knowledge is defined as predominately intellectual in nature. It furthers describes the field of science as ‘law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, physical, chemical and biology, and pharmacy …’. The Department of Labor defines Specialized Intellectual Instruction as required academic training to obtain a license in the profession. It does go on to state that in some instances the required intellectual instruction may include some experience, however, any position requiring experience only does not qualify to meet the test of Specialized Intellectual Instruction.
Examples of individuals meeting the professional exemption include:
- Certified Public Accountants
- Registered Nurses (LPN’s are considered non-exempt because the requirements lack an extended education as is customary for registered nurses)
Outside Sales – there are two tests to meet to qualify as an outside salesman. The first is the defining the primary duty of sales as obtaining orders or contracts for the employer. The second defines the term outside as spending his time away from the office as customarily and regularly away from the place of business.
For those individuals that drive and sell, if the primary duty is as a salesman, than you will be considered exempt, however, if there is an equal mix of delivering goods and selling than the employee will be considered a driver and classified as non-exempt.
In addition to the above, there are other jobs strictly defined as exempt by law and they include:
- Commissioned based salesmen and those paid by commission for auto, truck, heavy equipment, marine, and RV sales
- Those involved in the transportation industry and paid by approved trip plans
- Domestic employees that reside at their place of employment
- Farm Workers
- Employees of motion picture theaters (this one perplexes me because it doesn’t make sense)
There are more but they are very well defined and if you need guidance go the Department of Labor website at http://www.dol.gov/compliance/guide/minwage.htm.
The Federal Government defines a non-exempt employee as a worker that is protected by the minimum wage and/or overtime compensation rules and regulations of the Department of Labor.
The following is a short list of non-exempt employees under the regulations. These employees must be paid minimum wages and time and half for any time in excess of the standard 40 hour work week.
Blue-Collar Workers – work involving routine operations with their body, skills or energy. These include [Section 13(a)1 examples] :
- Iron Workers
- Construction Laborers
First Responders – individuals involved in preventing crime or dealing with emergencies such fire fighters, paramedics, and hazardous material handlers. These include [Section 13(a)1 examples]:
- Park Rangers
- Emergency Medical Technicians
- Correctional Officers
Journalists/Reporters – because their duties are general and manual in nature and lack the definition of creative, journalists and reporters are considered non-exempt. The key based on case law is the reporters generally post public information and are repeating what is already a known piece of information. Therefore those involved in media (newspapers, magazines etc.) and in television/radio, can not pass the test of the ‘professional’ definition to be defined as exempt.
Summary – Exempt and Non-Exempt Employees
Exempt employees are defined as those individuals performing services as executive, administrative, professional and outside sales. The employer is not required to compensate their overtime with a higher legally mandated minimum. They are in effect excluded from the requirement. As an employer you may seek guidance for any particular case by contacting your local Wage and Hour Division. Act on Knowledge.
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