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What Is an Exempt Employee?

Max Freedman
Max Freedman

While they may cost a bit more, exempt employees can bring a lot of advantages to your business.

  • Exempt employees are not regulated under the Fair Labor and Standards Act, which sets the federal requirements for overtime pay and minimum wage.
  • Exempt employees must meet the Department of Labor's salary level, salary base and duties criteria.
  • Exempt employees may be more knowledgeable than nonexempt employees, but they also may cost more to hire.
  • This article is for business owners who need to hire staff and want to know what hiring exempt employees would entail.

While your employees might not like being told they need to work more than 40 hours in a given week, that doesn't mean it's illegal to demand it of them. In fact, there are no federal laws that prevent you from having most of your salaried employees work more than 40 hours per week. These employees are called exempt employees. As an employer, you need to understand exactly what an exempt employee is, how they differ from nonexempt staff and what you can legally ask of these workers.  

What is an exempt employee?

The Fair Labor and Standards Act does not apply to exempt employees. In other words, "exempt" actually means "FLSA-exempt." As such, an exempt employee does not receive overtime pay, and sometimes, they aren't required to be paid minimum wage either. Determining who qualifies as an exempt employee can seem a bit complicated, but it's easier than you might think.

Exempt vs. nonexempt employees

All exempt employees are salaried, though not all salaried employees are exempt. All hourly employees, on the other hand, are nonexempt. This means they are entitled to overtime pay and pay rates of at least the FLSA or state minimum wage, whichever is higher. The FLSA does not enforce these regulations for most salaried employees.

Key takeaway: Exempt employees are not covered by FLSA regulations regarding overtime pay and minimum wage, and most (but not all) exempt employees are paid an annual salary.

How many hours must an exempt employee work per week?

An exempt employee's weekly work hours are not regulated, because the FLSA does not govern their work. As an employer, you can have your exempt employees on the job for 40 hours, 20 hours or 70 hours per week without altering how much you must pay them. Of course, you'll want to consider the distinctions of full-time vs. part-time employees, but exempt employees' work hours have no bearing on their exempt status.

Key takeaway: Exempt employees have no maximum or minimum number of work hours allowed per week.

What does the FLSA consider an exempt employee?

The Department of Labor (DOL) has three tests for exempt status, and an employee must pass all of these tests to be classified as exempt.

  • The salary level test: For a salaried employee to be exempt, you must pay them at least $684 per week, which equals $35,568 per year. Any employees whom you pay less are not.

  • The salary base test: Exempt status requires that your employee's salary is not subject to decrease, even as a penalty for poor performance.

  • The duties test: According to the duties test, employees must work in executive, administrative, professional, computers/systems or outside sales roles to qualify as exempt. This test holds even if your employee's job title excludes these words; their tasks supersede their title.

Despite these three concrete rules, determining exemption can be tricky. For example, it's extremely common for employers to mistakenly conflate salaried employees with exempt employees. As you'll see from these rules, the two are not mutually inclusive, and the DOL does not have exempt-status tests regarding hours worked per week.

Key takeaway: All employees who meet the Department of Labor's salary level, salary base and duties criteria are exempt.

What are the pros and cons of hiring exempt employees?

Before you decide whether to hire exempt or nonexempt employees, it is important to understand the advantages and disadvantages of having exempt employees on staff.

Pros of hiring exempt employees

  • You don't have to pay overtime. When you hire exempt employees, you won't pay overtime no matter how many hours these employees work per week. Exempt employees' salaries do not change based on how much time they work. Conversely, you often have to pay nonexempt employees 1.5 times their usual pay rates when they work more than 40 hours in a week.

  • You can assume they're more experienced. Knowledge is increasingly seen as a crucial business asset, and exempt employees usually bring more expertise to the table than their nonexempt counterparts. If you're looking for highly skilled employees, the exempt route may be your best bet.

  • You can give them more responsibility. Exempt employees are the ones you'll rely on to power your company through crunch time ahead of major events such as business mergers, conferences and seasonal deadlines. Not only are these employees the backbone of your business, but you can feasibly ask them to work longer hours without the expectation of additional pay.

Cons of hiring exempt employees

  • You might have to pay them more. Although you'll never pay exempt employees overtime, they'll likely cost you more than nonexempt employees. That's because exempt employees are likely more experienced and tasked with high-responsibility assignments, which often demands a higher rate of pay. These salaries may amount to more than you would pay nonexempt employees for their regular and overtime hours combined.

  • You can't deduct pay for hours not worked. Let's say you calculate your exempt employees' salaries based on the assumption of a 40-hour workweek. Even if you find your exempt employee is regularly working fewer than 40 hours per workweek, you cannot deduct from an exempt employee's pay for hours not worked. In other words, you might sometimes pay exempt employees for hours they don't work.

Key takeaway: The advantages of hiring exempt employees include no overtime pay and more knowledge and responsibility. Downsides include higher pay rates and no ability to deduct pay for hours not worked.

What else should employers know about exempt employees?

You should keep these three considerations in mind for exempt employees:

1. Seasonal employers and FLSA exemption

If you run a seasonal company, FLSA and exemption rules may work differently for you. Your company may be entirely exempt from adherence to the FLSA if you meet either of these criteria:

  • Your company operates for no more than seven months of the year. Months during which your company solely focuses on maintenance, internal operations or supply orders do not count as operation.

  • You pass the 33.3% test. To pass this test, your company's average monthly receipts for any six months of the year must not exceed 33.3% of its average monthly receipts for the remaining six months of the year.

If your seasonal company meets either or both of these criteria, the FLSA does not apply to any of your employees.

2. Exempt employee pay for time off

While exempt employees often receive paid time off, they can also be subject to any policies you enact for unpaid time off. However, unpaid time off rules do not allow you to dock exempt employee pay for hours not worked in a workweek – you can only withhold pay for full weeks without work.

3. Exempt employee unpaid suspension

Just as the FLSA allows employers to give employees unpaid time off, you may not have to pay exempt employees whom you suspend. If an exempt employee commits a top-level company policy violation, one that could merit eventual firing, you can suspend them without pay.

Key takeaway: You can legally give exempt employees unpaid time off or unpaid suspension, and some seasonal companies are entirely exempt from FLSA adherence.

Image Credit: jacoblund / Getty Images
Max Freedman
Max Freedman,
Business News Daily Writer
Max Freedman is a freelance writer who covers best business practices for business.com and culture for publications including The A.V. Club, MTV, Paste, FLOOD, and Bandcamp. He lives in Philly and doesn't miss his native New York.