Exempt Employee Basics - Human Resources Hero

Exempt Employee Basics

Exempt Employee Basics

The Fair Labor Standards Act or FLSA requires that most employees in the United States receive at least the federal minimum wage for all hours worked and overtime pay for all hours worked over 40 hours in a workweek.  However, the FLSA also exempts minimum wage and overtime pay for executives, administrators, professionals, sales employees, and a few others. A worker who falls under one of these rules is known as an exempt employee.

Qualifications for an Exempt Employee

Employees must generally meet specific tests regarding their job duties and receive a minimum salary to qualify as exempt.

Minimum Salary for an Exempt Employee

As of January 1st, 2020, all exempt employees in the US must receive more than  $684 per week. However, this minimum salary only applies to employees in states without their own specific exempt employee rules. While the Department of Labor has extensive regulations to determine which employees can be exempt, many states,  like California, have additional guidelines that to follow as well. In all, 29 states have different exemption rules and a higher minimum salary threshold.

An employee’s job title does not determine exempt status. You can title a job description however you choose. Still, for an exemption to apply, both the employees’ specific job duties and salary must meet all of the Department of Labor’s requirements and any state-specific rules.

If you’re ever unsure whether you’re meeting all federal and state guidelines, it’s best to consult with an HR professional for detailed guidance. Misclassification of employees can be very costly, so you must ensure all of your exempt employees are correctly classified. The consequences of misclassification include fines, penalties, and back pay to misclassified employees.

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Job Duties for an Exempt Employee

In general, exempt employees can do three different types of jobs. The three major exemption categories are Professional, Administrative, and Executive.

Professional Exempt Employees

To meet the professional exemption requirements, employees need to have a job that requires a specific degree and usually an advanced degree. For example, a food safety auditor needs a degree in food science or a research technician who requires a biology degree. Some creative professionals may also qualify depending on the extent of creativity necessary for the job. Sculptors, actors, and cartoonists can all qualify. However, graphic designers may or may not be eligible. In addition, practicing doctors, lawyers and teachers can also qualify for this exemption, but the minimum salary threshold is different for these positions.

Administrative Exempt Employees​

To qualify under the administrative exemption, an employee must spend most of their time in the office doing non-manual work. The work must be directly related to the employer’s management or general business operation or the employer’s customers and include discretion and independent judgment. These decisions must be significant to the business. The administrative exemption is for high-level employees whose job focus is to keep the business running.  Administrative assistants (and almost every job title with the world administrative in it) usually don’t qualify. 

Exempt Employee Administrator

Executive Exempt Employees

The executive (or management) exemption is for people whose primary duty is to manage an enterprise or a recognized department in a business like the sales department or accounting department. Executives must have full authority to hire fire or promote other employees or effectively recommend similar actions. They exercise independent judgment and discretion, and they direct the work of two or more full-time employees or the equivalent. Executives must spend most of their time doing things like interviewing, selecting and training employees, planning their work, handling complaints, and disciplining employees. Be careful in exempting assistant managers or working managers who only do a few of these tasks or only spend some of their time doing these tasks. Finally, owners of a business with at least  20% equity can fall under the executive exemption.

Paying an Exempt Employee Salary

Employees who are paid on a salary basis regularly receive a predetermined amount of compensation for each pay period.

The predetermined amount cannot be reduced because of variations in the employee’s work quality or quantity. You pay the employee for the job to be done, not for a set number of hours to be worked. 

There are advantages and disadvantages to paying employees on a salary basis. If the employee works more than 40 hours a week, the employer does not have to pay overtime. And the administration of payroll is a little bit easier for salaried employees. Some disadvantages include your limited when an employer can deduct when an employee misses work. Remember, only exempt employees should receive a salary.

Salary Best Practices

Even if your employees meet all of the exemption requirements and correctly classify them as exempt, you can inadvertently do things to make their status change and expose your business to significant risk.

To avoid this, follow these best practices.

First, don’t treat an exempt employee like an hourly employee. Don’t keep track of their hours worked to ensure you are getting at least 40 hours for determining their pay. This doesn’t mean you can’t hold them accountable to a schedule. Sometimes,  an exempt employee may need to work 60 hours in a week to get the job done, whereas other times, they may need to put in fewer hours to get the job done. 

You can pay a bonus to your exempt employees in the same light, but be sure to do so based on a project worked and not hours. 

Finally, there is no easier way to lose an exemption than to improperly deduct from a salaried employee’s pay, especially if you do so because they worked less than 40 hours.

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Permissible Deductions for Exempt Employees

You can deduct for full-day absences for personal reasons. You can also deduct for full-day absences for sickness or disability if the deduction is part of a bona fide leave plan. What this means is you have a PTO, sick leave, or vacation policy in your handbook.

You can deduct to offset fees paid to employees to serve as witnesses, jury, or military pay. And you can deduct unpaid Family and Medical Leave Act leaves.  You can also deduct partial weeks in the initial and terminal weeks of employment. For example, in the employee’s first week and last week, if they’re not working a full week that week. 

Finally, you can deduct disciplinary suspensions of one or more days per company discipline policy or penalties for major safety infractions. However, suppose you choose to do so. In that case, we advise that you seek a certified HR professional’s guidance beforehand, as this contains a significant amount of risk. Some states do not allow these types of deductions.

Impermissible Deductions for Exempt Employees

It is forbidden to reduce an exempt employee’s salary for partial-day absences. Remember, the key here is not to treat the exempt employees as though they were hourly employees. 

You don’t want to deduct from salary when an employee is serving on jury duty unless the employee performs no work at all for an entire workweek while serving. The employer may offset any amount received by an exempt employee as jury fees against the salary due for that particular week. However, this is another situation in which we recommend consulting with a certified HR professional before proceeding, as specific state regulations may also apply.

Exempt Employee Day Off

You will not want to make any deductions for exempt employees called to temporary military leave or training. The FLSA prohibits deductions for partial week absences due to military leave. If an exempt employee works any portion of the workweek, the employer must pay the employee their full salary as if they had worked the entire week.

Schedules for Exempt Employees

It’s a common misconception that salaried employees are at liberty to come and go as they please. However, this is impractical and disruption to your organization. Salaried employees can be held to a set schedule and expected to be present during their scheduled hours. This can include schedules of more or less than 40 hours in a workweek. If an employee fails to adhere to their set schedules, they can be disciplined subject to the company policies.

Conclusion

If you will have exempt employees make sure you know both the federal and state rules that apply. Exempt employees must always be paid a minimum salary and must have all the job duties of exempt employees. If their duties change or their salary drops for any reason, they are no longer exempt from overtime and other rules. This can cause employers significant problems and subject your business to steep fines, penalties, and back pay. If you have exempt employees in your company, consult with an HR professional to make sure that you are classifying your employees correctly.

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