As I continue to work with businesses in ensuring they are in compliance with both federal and New Jersey state employment law, including wage and hour regulations, it seems as though many businesses still do not understand the difference between exempt and non-exempt.
The Fair Labor Standards Act (FLSA) is best known as the law determining the exempt or non-exempt status of jobs and overtime requirements. But the law also covers minimum wage, hours worked, record keeping and youth employment standards for employees.
Overtime Defined
Overtime is work time of more than 40 hours a week, not including time off for vacation or a leave of absence. Regarding overtime, employees are divided into two groups:
- Exempt: Also referred to as salaried, these are employees primarily performing work that is not subject to overtime provisions of the FLSA.
- Non-exempt: Also referred to as hourly, these are employees primarily performing work that is subject to the overtime provisions of the FLSA.
The Exemption Test
To determine if a job is exempt (not subject to overtime) or non-exempt (required to be paid overtime at time and a half), the FLSA uses five primary exemption tests:
- Executive test
- Administrative test
- Professional test
- Outside sales test
- Computer test
FLSA Exemption Test Summaries
According to current FLSA law, employees must earn at least $684 a week ($35,568 a year) to be exempt from overtime rules under all tests. Employees can also be exempt if they make over $107,432 a year (at least $684 a week as a salary) and regularly meet the criteria in one of the other exemption tests. Here are the exemption tests and their criteria:
Executive Test
Along with (1) passing the salary threshold, positions qualifying for exemption under this test must have a (2) primary duty of “managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise,” (3) “customarily and regularly direct the work of at least two or more other full-time employees or their equivalent,” and (4) must have the authority to hire or fire employees, or recommendations are given particular weight. A separate qualification for exemption under this test is for business owners who own at least 20% of the organization and are actively engaged in the management.
Administrative Test
Along with (1) passing the salary threshold, positions qualifying for exemption under this test must have a primary duty of (2) “performing office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers,” and the primary duty includes (3) “the exercise of discretion and independent judgment with respect to matters of significance.”
Professional Test
Along with (1) passing the salary threshold, positions qualifying for exemption under this test must have a primary duty of (2) “performing work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the exercise of discretion and judgment,” which requires advanced knowledge in a field of science or learning that can be “customarily acquired by a prolonged course of specialized intellectual instruction.” In law or medicine, employees can also be exempt by holding a valid license to practice law or medicine and by being engaged in a practice or an internship or resident program. Creative professionals may be exempt if their primary duty is “performing work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.”
Outside Sales Test
To pass this test, employees must be “regularly engaged away from the employer’s place or places of business,” and the primary duty must be making sales and obtaining orders or contracts for services, which will be paid for by the customer.
Computer Test
Along with (1) passing the salary threshold, positions qualifying for exemption under this test must be employed as (2) “computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field” performing these types of responsibilities:
- The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications
- The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications
- The design, documentation, testing, creation, or modification of computer programs related to machine operating systems
- A combination of these duties that require the same skills
Some employees, especially those in traditional white collar jobs, get upset when told their position is “non-exempt”. Being classified as non-exempt in no way diminishes the value of the job to a business and this should be explained to the employee.
As a rule of thumb, if you are uncertain as to whether a job is exempt or non-exempt, make it non-exempt. This way, should you get involved in a wage and hour dispute, you won’t be on the hook for unpaid overtime should it be deemed the job was non-exempt all along.
The Biden administration has the FLSA high on its list of priorities. There is already talk of making changes to the exemption status qualification.
The Federal and New Jersey DOLs are hiring more auditors to ensure businesses are in compliance with wage and hour laws.
Marzano Human Resources Consulting works with businesses in thoroughly reviewing every aspect of a job to ensure it is classified correctly under the FLSA. Get in touch with us for a no charge initial discussion.