¶ Intro / Opening
Non exempt, non exempt salaried, and exempt employee classifications are some of the most misunderstood terms when it comes to the Federal Fair Labor Standards Act, also known as the FLSA. Unfortunately, misunderstanding these terms and the rules that govern them can result in costly penalties. In this podcast, we'll cover key details about these classifications and discuss what employers need to know about them. Welcome to HRpreneur.
I'm Jim Duffy. From Main Street to your street the HRpreneur podcast is centered around helping small businesses like yours gain the knowledge you need from HR, payroll and hiring to time, taxes, benefits, and insurance. Today we'll talk with our guest Meryl Gutterman about classifying an employee as non exempt, non exempt salaried or exempt. Meryl is senior counsel with ADP's HCM group. Hey, Meryl, it's great once again to have you back on the show.
Thanks, Jim. It's great to be here today.
¶ What are non-exempt employees?
First off, what should employers understand about non exempt employees?
So, under the Federal Fair Labor Standards Act, or the FLSA, an employee who is considered non exempt is entitled to at least the minimum wage for each hour worked and overtime pay at one and a half times the employee's regular rate of pay whenever they work more than 40 hours in a work week. Non exempt means that the employee is not exempt from the protections of the FLSA, such as overtime and minimum wage.
Also, keep in mind that there are some states that may require overtime in additional circumstances. Employees are considered non exempt unless they meet the FLSA tests for exemption.
Oh, great. Thank you, uh, for that, Meryl. We're going to get to those exemption tests in a minute. Uh, but let's go back here.
¶ What are non-exempt salaried employees?
What, then, is a non exempt salaried employee?
So, most non exempt employees are paid on an hourly basis. However, there are employers who choose to pay non exempt employees on a salary basis, but to do so, they have to make sure that the employee's pay for each hour of work meets or exceeds the minimum wage, and that employee is paid overtime whenever they work more than 40 hours in a work week.
So a non exempt salaried employee is one who is entitled to the minimum wage and overtime, but is paid a salary instead of an hourly wage, and they, too, are subject to the same recordkeeping requirements as other non exempt employees.
¶ Are “salaried” and “exempt” the same?
Meryl, we sometimes see employers use salaried and exempt interchangeably for employees who are classified as exempt from the minimum wage and overtime. Should these terms be used interchangeably?
No, no, they shouldn't. While employers sometimes use the terms salaried and exempt interchangeably, not all employees who are paid a salary are exempt from overtime. So we should use the term exempt when we're talking about an employee who is not entitled to overtime, meaning they are exempt from the FLSA overtime requirements.
¶ How to calculate overtime for non-exempt salaried employees
As you just made clear, non exempt salaried employees are entitled to overtime whenever they work more than 40 hours in a work week under the FLSA, and overtime must be paid at 1.5 times the employee's regular rate of pay. How do you calculate the regular rate of pay for a non exempt salaried employee?
Well, under the FLSA, calculating a non exempt salaried employee's regular rate of pay for overtime purposes depends on the number of hours that the employer and the employee understand that the salary is intended to cover, provided the employee is reasonably expected to work for that number of hours.
So, for example, if the employer and the employee understand the salary to cover 45 hours, Then the employer may calculate the regular rate of pay by dividing the weekly salary, in addition to any other form of compensation, by 45 hours. Keep in mind, though, that some states have different rules. So in California, for example, employers are limited to dividing the weekly salary by a maximum of 40 hours when calculating the regular rate of pay for non exempt salaried employees.
¶ Keeping accurate time records for non-exempt employees
So Meryl, when it comes to non exempt and non exempt salaried employees, is there anything else you'd like to cover? 70,
Yes, there is. So with non exempt and non exempt salaried employees, keeping an accurate record of hours worked is critical to help employers comply with the law. And keep in mind that under the FLSA, hours worked includes not only productive time, which is the time you actually spend working, but also certain non productive time, such as rest breaks, travel time, and training time. And all of this must be included when determining whether you have met your minimum wage and overtime obligations.
So Meryl, in addition to keeping an accurate record of hours, what other types of records must employers keep for non exempt employees?
There are a number of records. So employers have to maintain the employee's name, their home address, occupation, sex, and birth date if they're under 19 years of age. They have to keep the hour and day when the work week begins, the total hours worked each work day and each work week, the total daily or weekly straight time earnings. Um, the regular hourly pay rate for any week when overtime is worked, the total overtime pay for the work week.
They also have to maintain deductions from or additions to wages and the total wages that are paid each pay period, in addition to the date of payment and the pay period that's covered.
¶ Pay requirements for unauthorized overtime
So Meryl, what if the regular time or overtime that the non exempt employee worked wasn't authorized in advance?
Under the FLSA, if a non exempt employee has worked overtime, they have to be paid an overtime premium regardless of whether the overtime was preauthorized. So if you have a policy that no overtime work is permitted unless it's authorized in advance, that still doesn't relieve you as the employer of this requirement. And also, employers can't withhold pay for time worked. If the employee clocks in before their scheduled start time either.
¶ What are exempt employees?
All right, Meryl, let's switch gears. Let's turn to exempt employees. What is an exempt employee and what sets them apart?
So as I briefly mentioned earlier, under federal law, an exempt employee is someone who is not subject to certain requirements under the FLSA, including federal overtime and minimum wage. These employees typically work in the administrative, professional, and executive roles, and to be considered exempt, they have to satisfy three tests. So the first is the. Salary level test.
As of July 1, 2024, employers must pay employees a salary of at least 844 per week to meet the salary level test for these exemptions and then effective January 1st, 2025. The minimum salary required for these exemptions is scheduled to increase to 1,128 per week. And then the second test is a salary basis test.
And this means that with very limited exceptions, the employer must also pay employees their full salary in any week they perform work, regardless of the quality or the quantity of the work. And then the third test, which is just as important, is the duties test. And under this test, the employee's primary work duties have to meet certain criteria.
So unless all of these tests are met, the employee must be classified as non exempt, and they would then be entitled to at least the minimum wage for each hour worked and overtime pay if they worked more than 40 hours in a work week.
So Meryl, a moment ago you mentioned that some states have their own rules for exemption. How do these impact employers?
Yes, a number of states do have their own salary and duties tests for determining whether an employee is exempt from overtime under state rules. And generally, if the state law is more protective of the employee, and that means the law requires a higher salary amount or has a duties test that's harder to meet, then the state law should be followed. Complicating matters is that some states have exemptions from
overtime, but not from minimum wage. 135, So in those states, an exempt employee's salary generally must also be sufficient to satisfy the minimum wage for all hours worked in a work week to maintain that exemption.
Meryl, it's always fascinating to hear and have you share your information with us. It's useful and helpful. And this actually brings us to the end of our episode. Thanks once again. I enjoyed having you here on the show. So let's, um, let's recap some notes I've taken. And please keep me honest. Um, I'll start with non exempt employees are entitled to at least the minimum wage for each hour worked and overtime whenever they work more than 40 hours in a work week.
Non exempt employees are typically paid on an hourly basis, but may be paid as a salary instead, 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 work week.
Third point here is, for overtime purposes, the regular rate of pay of a non exempt salaried employee depends on the number of hours the employer and the employee understand that the salary is intended to cover, provided the employee is reasonably expected to work that number of hours. State rules may differ. Another point here was accurately recording hours worked is key to complying with minimum wage and overtime requirements for non exempt employees.
Another point here I took was, uh, under the FLSA, if a non exempt employee has worked overtime, they must be paid an overtime premium, regardless of whether the overtime was preauthorized. And my last summary here is state laws should also be considered.
Well said and well summarized. Okay. Thank you, Meryl.
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