Exempt Employee

Definition

The term exempt employee refers to individuals that are not entitled to overtime pay as guaranteed by the Fair Labor Standards Act.  Generally, exempt employees fall into six classes: executive, administrative, professional, computer, outside sales, and highly compensated.

Explanation

If an employee is classified as an exempt employee, they are not entitled to overtime pay as mandated under the Fair Labor Standards Act (FLSA).  This means they are not entitled to a minimum of 1.5 times their hourly rate when they work in excess of 40 hours in a single workweek.  While employers still have the right to pay these employees overtime, it's not a requirement.  Generally, exempt employees are those individuals that play executive, administrative, professional (learned and creative), computer, and outside sales roles in the company, or are designated as highly compensated employees.

While there are a number of complex tests used to determine if an employee is exempt, the easiest place to start is with the definition of highly compensated:

  • A highly compensated employee includes anyone performing office or non-manual, work that is paid $100,000 or more annually.

If an individual is paid less than $100,000 per year, they must also pass all of the following tests to be classified as an exempt employee:

  • They must be compensated on a salary basis (not hourly) and the rate of compensation must be at least $455 per week.
  • If an employee's primary duty is managing an enterprise or subdivision; and they direct two or more full time employees; and they have the authority to hire or fire other employees, then they qualify for an executive exception.
  • If an employee's primary duty is performed in an office, or involves non-manual work directly related to managing a business operation; and they are asked to exercise discretion and independent judgment in significant matters, then they qualify for an administrative exemption.
  • If an employee's primary duty is making sales or obtaining contracts for services; and the employee is customarily or regularly away from their employer's place of business, then they qualify for the outside sales employee exemption.
  • If an employee's primary duty involves application systems analysis to determine hardware or software specifications; or involves the design, development, analysis, creation, documentation, and testing or modifying computer systems; or involves the design, development, documentation, and testing or modifying computer systems, then they qualify for the computer employee exemption.
  • If an employee's primary duty involves performing work requiring invention, imagination, originality or a talent in a recognized field of artistic or creative endeavor, then they qualify for the creative professional employee exemption.
  • Finally, if an employee's primary duty involves work that requires advanced knowledge, and the advanced knowledge is in a field of science or learning, and that knowledge is typically acquired through prolonged intellectual instruction, then they qualify for the learned professional employee exemption.

The above test should be considered general guidelines, the rules for exemptions are quite complex and will oftentimes require the help of an attorney to make an exact determination.

Related Terms

applicant poolC-level position, blue collar worker, non-exempt employee, green collar worker,  salaried employee, hourly employee