It used to be that the terms “exempt” and “non-exempt” were clearly defined. But the DOL has more rules to protect lower-paid exempt employees from falling below the minimum wage, by requiring that they must be paid overtime.
Overtime for Exempt Employees
In 2019, the U.S. Department of Labor issued new regulations around pay for exempt employees that make more employees eligible for overtime pay. Under the new rules that went into effect Jan. 1, 2020, employees who make less than $684 a week (or $35,568 a year) must receive overtime pay, even if they have been classified as “exempt.” In addition, highly compensated employees must be paid overtime if they are paid less than $107,432 a year. This rule has little effect on non-exempt (hourly) employees because they are already paid overtime if they work at least 40 hours per week.
What Makes an Employee Exempt or Non-Exempt?
The terms “exempt” and “non-exempt” refer to job classifications of employees and the exemption of certain job classifications from overtime pay and minimum wage requirements. The Fair Labor Standards Act, administered by the Wage and Hour Division of the U.S. Department of Labor, requires that all U.S. employees be paid at least minimum wage and receive overtime at 1.5 times the hourly rate for work performed in excess of 40 hours during a work week. Employees who have certain types of jobs and who are paid certain minimum salaries are considered exempt from receiving overtime pay.
What Types of Employees Are Exempt?
The Fair Labor Standards Act (FLSA) states that employees employed as “bona fide executive, administrative, professional and outside sales employees” and “certain computer employees” may be considered exempt from both minimum wage and overtime pay. These are sometimes called “white collar” exemptions. Being exempt from overtime includes:
Being paid a salaryBeing in a “white collar” positionBeing paid more than the minimum weekly salary, as explained below
The DOL also has specific types of employees who are considered to be exempt from both minimum wage requirements and overtime requirements and other types of employees who are exempt from overtime requirements only.
When Must Exempt Employees Receive Overtime?
The U.S. Department of Labor requires that employees whose salary is equal to or less than $684 a week ($35,568 annually) must receive overtime, even if they are classified as exempt. This went into effect on Jan. 1, 2020. Before that, the rate was $455 a week.
How Does Overtime Work for Highly Compensated Employees?
Employers don’t have to pay overtime to employees who are considered “highly compensated.” A highly compensated employee (HCE) is considered exempt by the Department of Labor if:
The employee earns at least $107,432 per year, including at least $684 a week, paid on a salary or fee basisThe employee’s primary duty includes performing office or non-manual workThe employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee
In other words, employees whose annual pay is less than this amount must receive overtime. Employers can use commissions, nondiscretionary bonuses, and other nondiscretionary compensation to make up for the HCE designation.
What About Comp Time Instead?
Many employers give exempt employees “comp time” or time off, in lieu of pay for extra time worked or travel time, For example, if an exempt employee must work a trade show over the weekend, the employer would give time off instead of paying overtime. Some state and local government employees may be eligible for comp time under certain conditions. You might also check with your state’s labor department to see if they have different comp time regulations.
Using Bonuses or Catch-up Payments To Get an Exempt Employee Above the Minimum
You can use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary requirement. To qualify as non-discretionary, the bonuses must be tied to some measures like productivity, sales, or profitability. The bonuses must also be paid at least quarterly, not just at the end of the year. You can also make catch-up payments toward the previous quarter’s salary.
Do You Need To Track Time for Exempt Employees?
No, you won’t have to set up time clocks for your executives, but you will have to keep records to make sure these employees are making more than the minimum. You can choose how to keep those records as long as they meet FLSA requirements. The DOL regulations don’t specifically state that records must be kept for exempt employees, but if you have exempt employees whose weekly pay is close to the overtime cutoff ($684 per week), you might want to have those employees complete a timesheet.
