UPDATED 2/5/21 2:07pm PT:
With new FLSA rules taking effect in 2021, understanding the difference between an exempt and non-exempt employee is crucial.
The status of each employee is determined under federal law through the Fair Labor Standards Act (FLSA). One of the most significant differences between exempt and non-exempt employees is whether they are eligible for overtime pay.
Besides the FLSA, additional state laws apply, and employers must comply with both state and federal regulations. Many states changed their labor regulations for 2021, making this task more difficult. Before we go into exactly what exempt vs. non-exempt means, let’s talk about why it matters.
In This Article:
Exempt vs Non-Exempt: Why Does the Exemption Status Matter?
Initially passed in 1938 (and amended several times since), the FLSA is a federal law that ensures workers have sufficient protection against unfair pay practices and/or work regulations. Some examples of this include receiving unequal pay, being made to work excessive hours, lack of compensation for working overtime, and unsafe working conditions.
Defining whether an employee is exempt or non-exempt ensures that the employee is being paid fairly under the FLSA. However, the FLSA not only covers overtime but also provides standards for leave, minimum wage, and more. You determine the status of an employee by factors such as how much money the employee earns, what type of work they do, and their specific roles and responsibilities.
Recommended Reading: What Practice Owners Need to Know About Daily vs. Weekly Overtime
What has Changed in the FLSA 2021?
The DOL has announced several final rules that go into effect this year (2021). They include:
Clarification of Independent Contractor Status
The DOL issued a final rule regarding the standard for employee versus independent contractor status that will take effect on March 8, 2021. The rule “reaffirms” an “economic reality” test to determine if a worker is an independent contractor or financially dependent on a potential employer for work.
This clarification includes two basic factors that determine if a worker economically depends on someone else’s business or if they are really in business for themselves. These factors involve the nature of their work and their control over that work. Additionally, the rule evaluates the worker’s opportunity for profit or loss based on investment and initiative. In the medical profession, this includes workers such as traveling nurses, certain doctors, physical therapists and radiologists.
The rule also considers the following:
- The skill level necessary to do the work.
- Whether the work is “an integrated unit of production.”
- The “permanence” of the relationship between the worker and the employer.
Tip Regulations Under the FLSA
The Department of Labor issued a final rule on December 22, 2020, concerning tipping regulations. This rule removes the regulation that kept employers who do not claim a tip credit from establishing mandatory tip pools, which usually include employees who do not normally receive tips. Employers who legally collect tips from a mandatory tip pool must pay out the tips during every pay period.
The final rule also prevents employers from keeping employee tips for any reason. In addition, the DOL has issued guidelines on record-keeping and claiming tip credits.
Regulations Interpreting Joint Employer Status
The final rule on this issue took effect on March 16, 2020. It states that when an employee performs work for an employer that benefits another person at the same time, that person is a joint employer. Examples of joint employment include nurses who work for several clinics, nutritionists that work for multiple clinics or hospitals and social workers who do the same.
The rule also explains that a joint employer is not determined by an employee’s “economic dependence” on a potential employer and discusses other exclusions to this new final rule.
Who Are Exempt Employees?
The FLSA does not cover an exempt employee, which means they are not eligible to receive overtime pay. In fact, they may not even be eligible for minimum wage or any other protections under the FLSA. The exempt employee is typically salaried, not paid hourly, and makes at least $35,568 annually. This status can be helpful to employers. If the exempt employee does not complete the assigned work within 40 hours, the employer does not have to pay overtime to ensure completion. Whether an employee who falls under the exempt status works 35 hours or 55 hours a week, their salary will not change.
Exempt vs. Non-Exempt: How to Decide the Classification?
Typically, an exempt employee falls under one of three career categories: executive, professional, or administrative. Executive and administrative employees must meet the primary duties test to qualify for the exemption.
Executive employees must be in a position of managing a business or subdivision of the company, routinely direct the work of at least two employees, and have the authority to hire and fire employees.
You can place a professional employee into three categories: creative, learned, and teaching professionals. Professional employees should have undergone extensive academic instruction and earned a specialized academic degree in their related field. Some professions that would fall under a “professional employee” for exemption purposes are doctors, dentists, pharmacists, teachers, lawyers, accountants (not bookkeepers), engineers, clergy, and architects.
Finally, the administrative employee must have a job that comprises office (or non-manual) work relating to the management or business operations of the company. It must also involve independent judgment and discretion regarding matters of significance. While many assume a secretary is an exempt employee, that category does not normally include this position. In fact, in most cases, a secretary is non exempt. However, an office manager may be exempt.
As the name implies, employees who fall under non-exempt status are not exempt from FLSA. Any employee falling under the non-exempt status must be paid for every hour worked, up to a total of 40 hours in a week. For work done beyond those hours, they will receive time and a half pay (1.5) per hour.
It is important to check with your state’s Department of Labor to determine the state laws that govern the exemption status of employees. California, for example, says that employees are paid at their overtime rate if a non-exempt employee works more than eight hours in a day. This regulation is in contrast to most other states, where overtime pay kicks in after an employee has reached their 40 hours in a week.
Recommended Reading: How to Track Overtime and Be Proactive
Exempt vs. Non-Exempt: Some Examples
While a dentist or an optometrist is typically classified as exempt under the professional exemption, hygienists or opticians are usually classified as non-exempt. Similarly, under the administrative exemption, receptionists and secretaries are classified as non-exempt. The administrative exemption comes into play for office managers and team leaders who make decisions regarding matters of significance to the practice.
Interestingly, a registered pharmacist is generally considered non-exempt. They do not qualify under the professional exemption clause. However, a pharmacist may be exempt if they are working in an administrative or executive capacity. Similarly, a pharmacy aide or a pharmacy technician might be non exempt.
Salaried Does Not Equal Exempt Employees
A common misconception is that all salaried employees fall under exempt status. However, it only applies to salaried employees who make a fixed, full-time wage of at least $684 per week, regardless of the number of hours worked in a week.
Hourly employees, meaning an employee who earns pay based on the number of hours worked, are non exempt. You must pay them overtime under both state and federal laws.
Recommended Reading: 2021 Paid Holidays: What You Need to Know
Exempt vs. Non-Exempt: Exclusions from the FLSA
Some jobs are completely excluded from the FLSA overtime rules but may have their own governing regulations. For instance, many agricultural employees and employees of some movie theaters fall under the category of complete exclusion. Similarly, jobs such as railroad workers and truck drivers fall in the total exclusion category, since they have their own individual governing regulations.
Exempt vs. Non-Exempt: State vs. Federal Law
If your state does not specify overtime exemption laws, the FLSA applies. However, in case your state has overtime exemption laws in place, you need to check those first.
For example, New York has a multilevel minimum pay threshold for exemption status. In New York City, executive and administrative employees must make at least $1,125 per week to be categorized as exempt in companies with 26+ employees. In Nassau, Suffolk, and Westchester counties, the threshold is $1,050 per week.
Similarly, in Maine, the minimum salary threshold is $700.97 per week for exemption status. In case there is a conflict between state and federal overtime exemption laws, the one more beneficial to the employee applies.
Check Your Compliance for Exemption Status
It is important that you review your employee classifications to ensure they are all appropriately categorized into exempt vs. non-exempt. Besides the FLSA, you’ll want to double-check the laws for your state to ensure that you comply with both state and federal laws. Lastly, you'll want to update your employee handbook to outline the attendance and leave rules for both exempt and non-exempt employees.
If you still have questions, we're here to help. Schedule a call with us to go over exempt vs. non-exempt employees today.
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Quick note: This is not to be taken as legal or HR advice. Since employment laws change over time and can vary by location and industry, consult a lawyer or HR expert for specific guidance. Learn about HR for Health's HR services