Exempt or Not: Do You Have to Classify Some Employees as Hourly?

Along with classifying employees as part-time or full-time, employers are also required by federal law to correctly distinguish between exempt and non-exempt employees.

So, here's what employers need to know about exemption status compliance.

What's the Difference between Exempt and Non-Exempt Employees?

Under the Fair Labor Standards Act (FLSA), employers are required by law to pay non-exempt employees the federal minimum wage and overtime pay at one-and-a-half times their hourly rate beyond a standard 40-hour work week. Employers are also required to post overtime and minimum wage standards in high-traffic, visible areas in the workplace.

Currently, the federal overtime income threshold is $35,568 per year or $684 per week. This means that employees who earn less than that amount automatically qualify for overtime. The federal exempt earning threshold establishes a minimum requirement, but states may implement higher thresholds, which a handful of states--such as California and New York--have done. Always check your local and state requirements.

On a federal level, there is no maximum limit to overtime unless an individual is younger than 16 years old.

Exempt employees, on the other hand, are not covered by the FLSA--which also means they are not eligible for overtime pay. To qualify as exempt, an employee must receive a salary (not hourly wages) of at least $684 a week (or $35,568 annually). Additionally, the employee must not fall under any of the other exemptions established by the US Department of Labor.

How to Classify Employees as Exempt or Non-Exempt

Under the FLSA, employers are required to classify each employee as exempt or non-exempt. When determining how to classify a position as one or the other, consider the following questions:

1. How much does my employee make? As stated above, any employee earning less than $35,568 per year or $684 per week should automatically be classified as a non-exempt, hourly worker, eligible to receive overtime pay at one-and-a-half their regular hourly rate.
2. What are my employee's responsibilities? Day-to-day duties--rather than a job title--should determine whether an employee is classified as exempt or non-exempt. There is a common misconception that only working-class employees performing manual tasks should be classified as hourly.
   This is not entirely the case, though the following non-management "blue-collar" positions should always be classified as non-exempt: production, maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers. Additionally, employers should always classify police, fire fighters, and other first responders as non-exempt.
   As mentioned, some so-called “white collar” positions should actually be classified as hourly as well. For instance, many employers wrongly assume that commissioned inside salespeople should be paid on a salary basis when, in fact, these employees should be classified as hourly and overtime non-exempt.
   To help employers determine which duties qualify an employee for exempt status, the DOL breaks positions down into six categories:
   
   • Executive
   • Administrative
   • Professional (learned & creative)
   • Computer-related
   • Outside sales
   • Highly-compensated

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2. What are the legal implications of misclassification? The risk of a lawsuit is highest when employers misclassify non-exempt employees as exempt. In this situation, an employer may be liable for unpaid overtime wages. Employers who repeatedly misclassify the exemption status of employees may be subject to civil penalties as well. 

How to Audit and Correct the Exemption Status of Employees

In order to stay compliant with FLSA regulation, an employer should monitor and record employee payroll and hours, among other things. If you need to restructure some positions from exempt to non-exempt, the following steps can help guide you:

1. Look at the Numbers. Review the salaries of your employees and calculate the actual amount of hours each employee is working week-to-week. A good first step is to adopt a reliable and robust human resources informations system (HRIS) like BerniePortal to track time and attendance, which can remove any ambiguity about when employees are working and when they aren’t.
2. Make Necessary Adjustments to Compensation. Once you’ve analyzed workers’ pay and time data, determine how you'll comply with exemption status requirements. Employers can choose to increase some salaries to meet the minimum threshold, pay outstanding overtime to eligible employees, make compensation and duty adjustments to eliminate overtime-eligible positions in the company altogether, or reduce base salary to absorb the costs of paying overtime to newly non-exempt employees. 
3. Communicate Changes with Your Team. Once you’ve analyzed your numbers and figured out how you’re going to comply as a company, hold a meeting with your employees to communicate what these regulations mean for your business, how you’re going to comply with the regulations as an organization, and how the new policies will affect employees on an individual basis. Clarify and specify as much as possible, encourage questions, and reassure your employees that you’re committed to them as individuals and to upholding the company culture you’ve worked so hard to cultivate all along.
   

Additional Resources

You can stay informed, educated, and up-to-date with important HR topics using BerniePortal’s comprehensive resources:

• BerniePortal Blog—a one-stop-shop for HR industry news
• HR Glossary—featuring the most common HR terms, acronyms, and compliance
• HR Guides—essential pillars, covering an extensive list of comprehensive HR topics
• BernieU—free online HR courses, approved for SHRM and HRCI recertification credit
• HR Party of One—our popular YouTube series and podcast, covering emerging HR trends and enduring HR topics