HR Management & Compliance

Salaried Employees Can Be Exempt or Nonexempt—Clearing the Confusion

Determining whether to classify salaried employees as exempt or nonexempt can be tricky. We often think of salaried employees as being exempt from overtime. But salaried employees can fall into either the exempt or nonexempt categories depending upon several key factors. On the other hand, hourly employees are generally nonexempt with a few very specific exceptions.Money

Under the federal Fair Labor Standards Act (FLSA) employers must pay overtime to employees who work in excess of 40 hours per week. However, FLSA regulations exempt certain salaried employees from the overtime pay laws if:

  • The employees are paid on a “salary basis” and receive at least a prescribed minimum salary; and
  • They meet special duty criteria established by the U.S. Department of Labor (DOL).

Executive employees, professionals, and administrative employees may be classified as exempt from federal overtime requirements if paid on a salary basis.

Defining ‘Salary Basis’

The DOL enforces regulations that define the salary basis requirement for exempt status. The FLSA exempts broad categories of “white collar” jobs from minimum wage and overtime requirements if they meet certain tests regarding job duties and responsibilities and are paid a certain minimum salary.

These categories of employees are commonly known as “exempt” employees and include executive, administrative, and professional employees. The FLSA also provides exemptions for outside sales personnel, certain specialized computer personnel, certain highly compensated employees (HCE), certain retail sales employees, and employees covered by the Motor Carrier Act (MCA).

To be exempt, administrative, executive, and professional employees must generally be paid a predetermined amount each pay period that is at least the minimum weekly salary required by the regulations. The amount paid may not be reduced because of a variation in the quality or quantity of the work performed. With few exceptions, the employee must receive his or her full salary for any week in which he or she performs any work without regard to the number of days or hours worked.

The Salary Level Test, the Salary Basis Test, and the Duties Tests

Some salaried employees are entitled to overtime pay for hours worked in excess of 40 hours in a workweek. The salary level test, the salary basis test, and the duties tests must be met for an employee to be exempt from overtime requirements. Failure to meet the salary basis requirement, for example, by making impermissible deductions will negate an employee’s or group of employees’ exempt status.

Such employees may sue for retroactive overtime pay. Whether an employee is entitled to time-and-one-half for overtime will depend not only on whether he or she is paid on a salary basis, but also on whether he or she meets all other exemption requirements, especially the duty criteria.

Deductions from Pay

Employers often confuse exempt employees with nonexempt salaried and nonexempt hourly employees when it comes to deducting pay for working fewer hours in a certain week.

  • Exempt employees must be paid their full salary in any week that they work at all, even if they only work 1 hour—with a few exceptions.
  • Nonexempt salaried employees are paid on a salary basis, but if a nonexempt salaried employee works less than his or her standard hours, for example, 40 hours per week, the employer may deduct the employee’s pay for working fewer hours in a given week.
  • Nonexempt hourly employees are paid by the hour. No deductions are needed for working fewer hours in a week. The employer simply adds up the hours worked in the week and pays the employee on that basis.

Attaching enhanced job titles to nonexempt jobs and paying a fixed salary will not transform a nonexempt position into an exempt one. For example, an employer does not escape the overtime requirements simply by calling an employee an engineer, though he or she has no college degree.

Similarly, the mere fact that an employee is paid a salary does not place the employee into the exempt category. Many nonexempt employees are paid on a salary basis, so an audit of each employee’s salary and duties is necessary.

In addition, an employer should periodically review the duties of exempt employees to ensure that they still qualify for exempt status, especially if the company has undergone restructuring or downsizing.

Susan PrinceSusan E. Prince, J.D., M.S.L., is a Legal Editor for BLR’s human resources and employment law publications. Ms. Prince has over 15 years of experience as an attorney and writer in the field of human resources and has published numerous articles on a variety of human resources and employment topics, including compensation, benefits, workers’ compensation, discrimination, work/life issues, termination, and military leave. Ms. Prince also served as an expert on several audio conferences discussing the 2004 changes to the federal regulations under the Fair Labor Standards Act. Before starting her career in publishing, Ms. Prince practiced law for several years in the insurance industry and served as president of a retail sales business. Ms. Prince received her law degree from Vermont Law School.

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