Which Employees Are Exempt From Minimum Wage and Overtime Requirements?
The Fair Labor Standards Act (FLSA) is a significant federal labor and employment law that guarantees covered workers certain employment protections, including a minimum wage, overtime pay, and child labor protections.
Under the FLSA, covered employees must be compensated for all time spent on their principal work activities. Employers can consider various exceptions and exemptions to avoid minimum-wage and overtime-pay obligations for some employees.
[Download our Minimum Wage and Overtime Compliance Checklist to determine whether employees are covered by FLSA requirements.]
Nonexempt employees
Employees are covered by the minimum wage, overtime, and other protections of the FLSA if:
- Their work is performed within the U.S., a U.S. possession, or U.S. territory
- They work for a business that is a covered enterprise or if the employee is a covered individual employee
- A true employment relationship exists between the employee and employer
True employment relationships
Generally, employment relationships exist when employees perform work for employers in exchange for compensation. The economic realities of the parties’ relationship generally determine the degree of a worker’s economic dependence on the employer, including these factors:
- The degree of control exercised by the employer over the way the work is performed
- The degree to which the employee’s opportunity for profit or loss is determined by the employer
- The extent of relative investments of the alleged employee and employer
- The skill and initiative required to perform the job
- The permanency of the relationship
- Whether the service rendered is an integral part of the alleged employer’s business
A true employment relationship doesn’t include independent contractors, interns, or volunteers.
Sometimes it can be difficult to determine whether an employer-employee relationship exists for FLSA purposes, but it’s critical to determine the relationship between a worker and employer to know if FLSA applies. Some individuals may be compensated, but for FSLA purposes aren’t considered to have an “employment relationship” and therefore aren’t entitled to FLSA protections. Misclassification of a worker can result in a liability for unpaid wages plus an equivalent amount of liquidated damages.
Exempt employees
The FLSA creates exemptions to minimum wage and overtime provisions for white-collar employees as well as more specific exemptions in certain specialized industries:
- Agriculture
- Transportation
- Hospitals and residential care facilities
- Domestic service
- Retail and service establishments
- Fishing and seafood production
- Communications
- Lumbering, logging, and forestry
- Higher education institutions
Here, we’ll focus on the more generally applicable white-collar employee exemptions, including job duty and compensation requirements and exemption tests.
White-collar employee exemptions
For purposes of the FLSA, executives, administrators, professionals, and outside salespersons are defined as “white-collar” employees. The white-collar exemptions are also referred to as the “EAP” (executive, administrative, and professional) exemptions.
White-collar employees are exempt from minimum wage and overtime provisions if they:
- Meet corresponding occupational tests, such as spending sufficient time performing exempt work
- Meet minimum earnings requirements and are paid on a salary or fee basis
- Meet definitions of executive, administrative, professional, computer, or outside sales employees
Primary duties test
To be exempt, white-collar employees must have exempt work as a “primary duty,” meaning the principal, main, major, or most important duty that the employee performs. The determination of an employee’s primary duty must be based on all the facts in a particular case, but generally, an employee who spends more than 50% of their time on exempt work will generally satisfy the primary duty requirement. However, employees spending less than 50% of their time performing exempt work may still meet the primary duties test if other factors support such a conclusion.
Employees who perform a combination of exempt duties can qualify for the exemption. For example, employees who perform a combination of exempt administrative and exempt executive work qualify for exemption.
Exempt salary threshold
To qualify for most white-collar exemptions, professionals and administrative employees must be paid on either a salary or fee basis.
Salary basis requirement
Employees are paid on a salary basis if they receive a predetermined amount of compensation each pay period that isn’t reduced for variations in the quantity and quality of their work. The U.S. Supreme Court has ruled that a worker who is paid a day rate with no guarantee on how many days per week they will be working and who isn’t guaranteed a weekly salary isn’t exempt from the overtime requirement.
As of Jan. 1, 2020, to qualify for the white-collar exemptions, an employee’s weekly salary must be at least $684, equivalent to $35,568 per year. Employers must pay overtime to executive, administrative, and professional employees who earn less than the required compensation regardless of the employee’s job duties and responsibilities.
Fee basis requirement
Employees are on a fee basis if they are paid an agreed sum for a single job, regardless of the time required for its completion. The fee must be at a rate that would amount to at least $684 per week if the employee worked 40 hours.
Employee exemption tests
The FLSA provides specific rules that employers must use to determine which employees are exempt. Download our Minimum Wage and Overtime Compliance Checklist to determine whether employees are covered by FLSA requirements.
Executive exemption
Bona fide executive employees are exempt from FLSA provisions if they:
- Receive a salary of at least $684 per week, exclusive of board, lodging, or other facilities
- Have the primary duty of managing the enterprise in which they are employed, or a customarily recognized department or subdivision thereof
- Customarily and regularly direct the work of two of more employees
- Have the authority to hire or fire other employees or make suggestions and recommendations that are given particular weight about hiring, firing, advancement, promotion, or other changes in status
Generally, exempt executives make their own decisions regarding when to perform nonexempt duties and remain responsible for the success or failure of business operations under their supervision while they perform such tasks.
Administrative exemption
Administrative employees are exempt from FLSA protections if they:
- Receive a salary or fee basis of at least $684 per week, exclusive of board, lodging, or other facilities
- Primarily perform office or nonmanual work directly related to the management or general business operations of the employer or employer’s customers
- Exercise discretion and independent judgment with respect to matters of significance in performing their primary duties
Professional exemption
Professional employees are exempt from FLSA requirements if they:
- Are compensated on a salary or fee basis of at least $684 per week, exclusive of board, lodging, or other facilities
- Perform work requiring an advanced knowledge of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor
The category of professional employees will expand as knowledge is developed, academic training is broadened, and specialized degrees are offered in new and diverse fields. Currently, the regulations carve out special provisions for:
- Learned professionals
- Creative professionals
- Teachers
- Employees practicing law or medicine
Computer professional exemption
Computer systems analysts, computer programmers, software engineers, or other similarly skilled workers are eligible for FLSA professional exemption. Job titles aren’t the sole determinant of the applicability of the exemption.
Computer professionals are exempt from FLSA protections if they are compensated at a rate of at least $27.63 per hour and who meet any combination of the following job duties requiring the same skill level:
- Are compensated on a salary or fee basis of at least $684 per week, exclusive of board, lodging, or other facilities
- Apply systems analysis techniques and procedures, including user consultations
- Design, develop, document, analyze, create, test, or modify computer systems or programs, including prototypes based on and related to user or system design specifications
- Design, document, test, create, or modify computer programs related to machine operating systems
Computer professionals who don’t meet the exemption requirements may still be exempt under other provisions, such as those covering executive or administrative employees, if their job duties meet the requirements for one of those exemptions.
Employees who manufacture or repair computer hardware and related equipment aren’t included in this exemption. Employees whose work is highly dependent on, or facilitated by, the use of computers or computer software – for example, engineers, drafters, and others engaged in computer-aided design – are generally not eligible for the exemption, unless their primary duty involves systems analysis, programming, or another similarly skilled occupation.
Outside sales exemption
To qualify for outside sales exemption, employees must:
- Have a primary duty to make sales or obtain customers’ orders or contracts for service for the use of facilities
- Customarily and regularly perform these duties away from the employers’ place of business
The salary requirements for other white-collar exemptions aren’t applicable to the outside sales exemption.
Highly compensated employee exemption
Employees with total annual compensation of at least $107,432 are deemed exempt from FSLA provisions if they customarily and regularly perform any of the exempt duties or responsibilities of executive, administrative, or professional employees.
Total annual compensation includes:
- Compensation paid on a salary or fee basis
- Commissions
- Nondiscretionary compensation earned during a 52-week period
An employee not employed for a full year may qualify for the exemption if the employee received a pro rata portion of the $107,432 minimum compensation, based on the number of weeks the employee works that year.
However, a worker who is paid a day rate and not a guaranteed salary isn’t exempt from the overtime requirement, even if that worker earns enough to normally qualify as a highly compensated employee.
Navigate Fair Labor Standards Act exemptions with confidence
As the economy diversifies, the traditional workplace continues to change. Although lawmakers have made strides to clarify the rules, ambiguity still exists even as federal and state governments are increasing labor and employment law enforcement measures to protect employees. A company, as well as its officers, can be convicted and fined for a willful violation of the FLSA – and damages for noncompliance can cost millions. Download our Minimum Wage and Overtime Compliance Checklist to determine whether employees are covered by FLSA requirements.
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