What does exempt mean? Why it matters for your business

Many businesses need employees to work more than 40 hours in a given week from time to time. Generally, that means paying employees overtime for those extra hours. However, businesses don't have to pay overtime to exempt employees.

Here's what it means for an employee to be exempt and who qualifies.

What is an exempt employee?

The Fair Labor Standards Act (FLSA) is the federal law dictating minimum wage, overtime pay, youth employment, and employer recordkeeping requirements. Certain businesses are exempt from the overtime and minimum wage provisions of the FLSA. A business cannot treat its employees as exempt without first meeting certain criteria.
The Department of Labor (DOL) has three tests an employee must meet to be classified as exempt:

1. Salary level. The minimum salary for exempt employees is $684 per week ($35,568 per year) and not less than $27.63 per hour for certain computer employees.
2. Fixed salary. Exempt employees must receive a salary each pay period which is not reduced based on the work produced. 
3. Duties. The employee must work in an executive, administrative, professional, computers/systems, or outside sales role. The employee's job title is less important than their actual job duties.

An employee receiving salary instead of hourly wages is not alone sufficient to classify them as exempt. The employee must pass all three tests outlined above.

Keep in mind that states may have their own criteria for determining who can be an exempt employee, and an employee's duties supersede their job status in making an exempt determination. For example, exempt California employees must spend more than 50% of their work time performing exempt duties, their duties must involve employee discretion, and the employee must earn a minimum monthly salary of at least two times the state's minimum wage for full-time employment. To ensure your business is compliant, contact or review the requirements of your state’s Department of Labor.
 

Exempt vs. non-exempt employees

The federal minimum wage for non-exempt employees is $7.25 per hour as of 2023. However, many states have minimum wage laws in addition to the federal law. Non-exempt employees working more than 40 hours per week are entitled to overtime pay of at least 1.5 times their normal hourly rate. 

One of the biggest advantages to hiring exempt employees is the overtime pay exception. Exempt employees can work an unlimited number of hours without entitlement to overtime rates; however, due to the nature of duties that qualify a worker as exempt, hiring such employees may still be more expensive than hourly employees.

Consequences of misclassifying employees

Employers often mistake workers as exempt simply because they receive a salary rather than hourly wages. However, salary alone is not enough. The employee must meet all three tests.

To ensure you're classifying employees correctly (and to ensure your classification withstands Department of Labor scrutiny):

• Create clear job descriptions for each role
• Review your payroll practices to ensure you're not improperly docking the pay of salaried employees
• If you're unsure how to classify an employee, seek professional advice or contact your state’s Department of Labor

If employees are misclassified, the Department of Labor and state labor board may issue penalties, order back payment of wages, and assess fines for damages. Employers that intentionally or repeatedly misclassify employees as exempt may face criminal charges. For these reasons, it is vital that employers research their options and clearly outline their employment expectations.