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In 2004, the Department of Labor (DOL) set the standard requirements determining whether an employee is exempt or non-exempt from receiving overtime pay. Any employee who doesn’t pass the three primary “tests” outlined by the DOL must earn overtime pay at one-and-a-half times their normal wage for any hours worked above 40 hours in a workweek.
Salary Exemption Test
The first qualifications for overtime exemption are the salary tests. There are two tests under the salary umbrella which are that the employee must be
- Paid on a salary basis, meaning they receive a guaranteed minimum salary each year and
- Their salary must be at least $23,660 annually ($455 per week)
This salary level was designed to exclude the bottom 20% of salaried employees in the lowest wage census area from overtime exemption, which at the time was in the South and retail industry. The salary level was going to be changed by the Obama administration in 2016; however, their proposed ruling never took effect after it was disputed and reversed by a Texas District Court. In 2017, the process of amending the rule began again with proposals for increasing the salary threshold expected in 2019.
Exempt Duties Test
If an employee meets the salary requirements, they must also pass the duties test to be exempt from overtime. These duties must be part of what an employee actually does every day in their job as their primary or most important main duties. Job titles have very little to do with whether an employee passes these duties tests.
There are three primary categories for the duties tests. Mixing and matching the duties from the different categories don’t count toward making them exempt. For example, if they are an executive or general manager they must meet all the exemption duties under only the Executive tests, not two duties from the Executive list and one from the Administrative.
- Executive Duties
- Supervise and direct the work of two or more full-time employees, or the equivalent more than 80% of their hours working as the supervisor
- Primary duty is the management of the business (meaning they interview, train, set pay rates and schedules, maintain production and sales, determine work techniques and budgets, monitor work for legal compliance, etc.)
- Have authority over the job status of other employees (hiring, firing, promoting, etc.)
- Administrative Duties
- Performs office or non-manual work that directly relates to managing or general business operations
- Primary duties call for the exercise of discretion and judgment. The exercise of discretion and judgment is more than just performing skills with a predetermined set of techniques. Examples of administrative exempt duties are influencing (change or create) policies, carry out major assignments, negotiate on behalf of the company, advise and provide consultation for management, represent the company in handling issues and complaints, etc.)
- Professional Duties
- Primary duty involves work requiring advanced training (often advanced degrees, certifications, and licenses) and independent discretion and judgment in matters of significance like a doctor, lawyer, dentist, teacher, architect, accountant (not bookkeeper), contracted engineer, etc.
Exempt or Non-exempt?
Below are a few scenarios to show how you may be able to determine whether an employee would be exempt from overtime pay. Please keep in mind that each employee’s situation and duties are different in each company and these are meant to be simplified examples. Whether any of your employees are in fact exempt from overtime pay must be carefully determined on a case-by-case basis.
- Secretary at a health clinic
- $30,000 annual salary
- Checks in patients, keeps and updates patient records, and answers incoming phone calls
- This employee would be non-exempt. They do pass the salary test and perform non-manual office work that directly relates to general business operations; however, their job does not require them to make decisions involving the exercise of discretion and judgment that may influence how the health clinic grows and changes, what policies are in place, etc.
- General Manager of a small business with 10 employees
- $48,000 annual salary
- Trains, manages, and recruits employees. Plans budgets and allocates resources for the company and coordinates efforts between the marketing, sales, and development departments.
- This employee would be exempt. They are earning more than the minimum salary threshold and meet all the duties listed under the Executive exemption test which include supervising 2+ full-time employees, their primary duty is management of the resources in the company (budgets, resources, department coordination, etc.), and they have authority in the job status of their employees (hiring, firing, training, promotion, etc.).
- Accountant
- $75,000 annual salary
- Keeps financial records and prepares asset, liability, and capital account entries by compiling and analyzing account information. They audit documents and reconcile any financial discrepancies. This accountant researches, interprets, and creates accounting procedures, policies, and regulations through studying existing and new legislation. They have very technical knowledge gained through a formal degree and continue learning by study and workshops.
- This employee would be exempt under the Professional duties test. Their salary is well above the minimum salary threshold and they are primarily doing advanced technical work requiring advanced knowledge for managing the finances of the company. Their job includes interpreting data and making decisions about significant matters such as accounting policies and procedures.
Do I need to track salaried employee time if my salaried employee is non-exempt?
Yes. A non-exempt status means that the employee must be paid their overtime rate of one-and-a-half times their normal pay rate for any hours worked above 40 hours in the week. The normal pay rate may be determined by finding the weekly salary amount paid to this employee. Then divide the weekly salary by the normal number of hours the employee has agreed to work each week to receive the salary.
So you will need to track employee time to know when the employee passes 40 hours in a workweek and exactly how many hours will need to be paid at time-and-a-half. The best way to track this time accurately is to use a reliable time clock software for employees to clock in and out.
Do I need to track exempt employee time with a time clock?
Whether you need to track exempt employee time depends on a few different things. You are not legally required to track exempt employee times. However, there are still benefits to tracking employee time despite their exempt status. Some benefits include employee accountability, accrued time tracking, and project tracking which is explained further in this article.
There is also the possibility of your currently exempt employees becoming non-exempt within the next year or two depending on their salary level. Some of your salaried employees may be making between the $23,660 annual salary threshold and $40,000. Currently, there is a new proposal in debate regarding the FLSA salary threshold. It may be raised to anywhere between $30,000 and $40,000 meaning any employee currently making less than either of these salary levels could potentially become non-exempt and you will need to begin tracking their hours and overtime. TimeClick software is an easy solution for tracking employee time, both salary and hourly, along with tracking paid time off such as vacation, sick, and PTO. To get a free trial and consultation click here.