Non-exempt, non-exempt salaried and exempt are some of the most misunderstood terms when it comes to the federal Fair Labor Standards Act (FLSA). Unfortunately, misunderstanding these terms and the FLSA’s rules that govern them can result in costly penalties. To help you understand these classifications better, here are some key points about each.
Non-exempt
Under the FLSA, non-exempt employees must be paid at least the minimum wage for each hour worked and overtime (1.5 times the employee's regular rate of pay) whenever they work more than 40 hours in a workweek. Your state may require overtime in additional circumstances.
Most non-exempt employees are paid on an hourly basis. However, employers may pay non-exempt employees on a salary basis, provided the employee's pay for each hour of work meets or exceeds the minimum wage and the employee is paid overtime whenever they work more than 40 hours in a workweek. Most employees must be classified as non-exempt since they don’t meet the tests for exemption (see Exempt section below).
We provide more details on non-exempt salaried employees below.
Non-exempt salaried
While employers sometimes use the terms "salaried" and "exempt" interchangeably, not all employees who are paid a salary are exempt from overtime. As mentioned above, employers can pay non-exempt employees on a salary basis as long as the employee is paid at least the minimum wage for all hours worked and overtime when they work over 40 hours in a workweek.
Under the FLSA, calculating a salaried non-exempt employee's regular rate of pay, for overtime purposes, depends on the number of hours the employer and employee understand that the salary is intended to cover, provided the employee is reasonably expected to work that number of hours. For example, if the employer and employee understand the salary to cover 45 hours, then the employer may calculate the regular rate of pay by dividing the weekly salary by 45 hours. Some states have different rules. For example, California limits employers to dividing the weekly salary by a maximum of 40 hours when calculating the regular rate of pay for salaried non-exempt employees.
Exempt
The FLSA allows for exemptions from the federal overtime (and minimum wage) requirements for certain employees who work in administrative, professional and executive jobs (known as "exempt" employees). To be considered "exempt," these employees must generally satisfy three tests:
- Salary-level test: Employers must pay employees a salary of at least $684 per week. The FLSA's minimum salary requirement is set to remain the same for at least part of 2024, but the United States Department of Labor (DOL) has published a proposed rule that would increase the minimum salary requirement sometime later in 2024 (see below).
- Salary-basis test: With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.
- Duties test: The employee's primary duties must meet certain criteria.
On August 30, 2023, the DOL released a proposed rule that, if finalized, would increase the minimum salary required to $1,059 per week in order for administrative, professional and executive employees to be considered exempt from the FLSA overtime pay requirements.
The proposed rule was open for public comment until November 7, 2023. The DOL will now review the comments before issuing a final rule, which is expected sometime in 2024. The final rule is likely to be challenged in court. We will be monitoring the status of the proposed rule closely and updating our FLSA and Overtime Exemption Rule Guide as developments unfold.
State exemptions
Many states have their own salary and duties tests for determining whether an employee is exempt from overtime under state rules. Generally, if state law is more protective of the employee (i.e., requires a higher salary amount or has duties tests that are more difficult to satisfy), then state law should be followed. Complicating matters is that some states have exemptions from overtime but not the minimum wage. In these states, an exempt employee’s salary generally must also be sufficient to satisfy the minimum wage for all hours worked in a workweek.
Conclusion
Before classifying an employee as exempt, carefully apply federal and state tests for exemption from overtime.