Exempt Employees | consulting

What Is an Exempt Employee?

The term “exempt employee” is frequently used to refer to employees who are paid a salary and do not receive overtime pay for hours worked beyond 40 hours per week. However, the term has a much broader meaning.

From What May an Exempt Employee Be Exempt?

An exempt employee is one who is not covered by one or more provisions of the Fair Labor Standards Act. (The Fair Labor Standards Act (FLSA) is Title 29 of the United States Code, Chapter 8, and the regulations governing the application of the law are contained in the Code of Federal Regulations (CFR).) There are three primary provisions of the Act from which a designated employee may be exempt:

Overtime pay
Minimum wage
Child labor restrictions

Whether or not an employee is defined as exempt is dependent on the type of work that is performed by the employee during a workweek. In many cases, the type of work may be inherent in a job title, so an individual with a certain job title may be classified as exempt. On the other hand, an employee may be exempt one week, but he may not meet the criteria for exemption the next week.

Many jobs listed by the U.S. Department of Labor are exempt from just the overtime provisions of the Act. As examples, these may include live-in domestic employees, local delivery drivers and driver’s helpers, certain employees of automobile dealerships (salesmen, partsmen, and mechanics), railroad employees, seamen on American vessels, taxicab drivers, and firefighters or police officers working in public fire or police departments with less than 5 firefighters or officers.

On the other hand, many workers are exempt from two or more provisions of the FLSA. For instance, the following employees are exempt from both the overtime and minimum wage provisions of the Act:

Casual babysitters
Companions for the elderly
Federal criminal investigators
Farm workers on small farms
Fisherman
Seamen on non-American vessels
Switchboard operators

Whereas some exempt employees are defined by their job description, some other employees are exempt only if certain conditions are met. These include the following situations.

Commissioned Sales Employees of Retail or Service Establishments.

If more than half of the employee’s earnings are from commissions, and the employee’s earnings average more than one-and-a-half times the minimum wage, then he is exempt from overtime. [29 CFR 779.411-419] However, such an employee may be exempt from overtime pay one week, but not the next week.

For instance, suppose that an employee works 50 hours in a workweek at $4.75/hour. (Please note: The hourly rate of an employee who receives both commissions and hourly wages may be less than minimum wage as long as the average hourly pay, or regular rate of pay, is more than minimum wage. The regular rate of pay for a workweek is defined by the Code of Federal Regulations as the total remuneration earned by the employee divided by the total number of hours worked.) During the workweek he earns $300 in sales commissions. Is he exempt from overtime for the workweek?

50 hrs x $4.75/hr = $237.50
Total earnings = $237.50 + $300.00 = $537.50
Regular rate of pay = $537.50 / 50 hrs = $10.75/hr
One-and-a-half times minimum wage = $7.25/hr x 1.5 = $10.87/hr

The employee has earned more than 50% of his earnings from sales commissions, but his average hourly earnings are less than one-and-a-half times the minimum wage. Therefore, during this workweek this commissioned sales employee is not exempt from overtime pay. He must be paid overtime pay for the 10 hours worked over 40.

As explained in another article, overtime pay is calculated as 50% of the employee’s regular rate of pay times the number of overtime hours worked. In the above case the overtime pay would be equal to $53.75 ($10.75/hr x 50% x 10 hrs). So his total earnings for the week would be $591.25 ($537.50 + $53.75).

Computer Professionals

Certain computer professionals are exempt from the overtime provisions of the FLSA. [29 CFR 541.400] However, these professionals must be involved in systems analysis, the design of computer systems or applications design, testing of computer systems or applications, or the documentation of such activities. Employees who are involved in the manufacture or repair of computer hardware or related equipment do not qualify for this exemption.

In addition to the above requirement, the employee must be paid either a salary of at least $455 per week, or he must be paid an hourly rate of at least $27.63 per hour.

Executive, Administrative, Professional and Outside Sales Employees

These are the types of employees that are most commonly referred to exempt employees. The actual descriptions of the types of work covered by this exemption are found in the Code of Federal Regulations. [29 CFR 541] In general, an employee could be classified as exempt under these provisions if his work can be described in any of the following ways:

His work is directly related to the management of his employer's business
His work is directly related to the general business operations of his employer or the employer's clients
His work requires specialized academic training for entry into a professional field
All of his sales are made away from his employer's place of business
His work is in a recognized field of artistic or creative endeavor.

If the employee’s work meets any of the above criteria, and the employee is paid on a salary basis of at least $455 per week, then he would be exempt from the overtime provisions of the FLSA.

Use of the Terms Exempt and Nonexempt

Any employee whose work does not qualify for exemption is covered by the provisions of the FLSA, and is, therefore, often referred to as nonexempt. As noted in this article, the term exempt should be used carefully because any specific employee may only be exempt from certain provisions of the FLSA. And every employer should carefully review the Code of Federal Regulations before classifying any employee as exempt.