What Is an Exempt Employee?

The term “exempt employee” refers to a category of employees set out in the Fair Labor Standards Act (FLSA). Exempt employees do not receive overtime pay, nor do they qualify for minimum wage. When an employee is exempt, it primarily means that they are exempt from receiving overtime pay. Exempt employees stand in contrast to nonexempt employees.

Key Takeaways

  • An exempt employee is an employee who does not receive overtime pay or qualify for minimum wage.
  • Exempt employees are paid a salary rather than by the hour, and their work is executive or professional in nature.
  • Exempt employees stand in contrast to nonexempt employees, who must be paid at least the minimum wage—and overtime when they work more than the standard 40-hour workweek.
  • The details and rules governing exempt and nonexempt employees are covered by the Fair Labor Standards Act (FLSA).
  • The FLSA includes these job categories as exempt: professional, administrative, executive, outside sales, and computer-related.
  • The details vary by state, but if an employee falls in the above categories, is salaried, and earns a minimum of $684 per week or $35,568 annually, then they are considered exempt.

Understanding Exempt Employees

In any workplace, there are two types of employees: exempt and nonexempt. Exempt employees are those who are exempt from minimum wage and overtime pay requirements. This is because exempt employees are paid a salary rather than an hourly wage, and they work in what are considered executive or professional jobs. Exempt employees often receive year-end bonuses to compensate for the type of work they do, as well as for any overtime work.

Requirements differ from state to state, but the FLSA classifies exempt employees as any job that falls into these categories:

  • Professional
  • Administrative
  • Executive
  • Outside sales
  • Computer-related

These classifications are quite broad—which they are intended to be, as they encompass a variety of jobs in many different industries. As of Jan. 1, 2020, the FLSA stipulates that employees in the above categories are exempt if they are paid by salary as opposed to hourly, and if they earn a minimum of $684 per week or $35,568 annually. This is an increase from $455 per week or $23,660 annually.

In addition to the main categories of exempt employees, other categories of employees may possibly be considered exempt from receiving overtime pay. These include farmworkers; motion picture theater employees; certain employees of nonmetropolitan broadcast stations; taxi drivers; employees of railroads, motor carriers, and American vessels; and commissioned sales employees of retail or service entities.

Exempt Employees, Nonexempt Employees, and the Fair Labor Standards Act

The exempt employee category was created by the FLSA, passed in 1938. The watershed labor law protects workers against unfair pay practices and work regulations. The law has been greatly changed over the last 80 years, but it is still one of the most important labor laws in the history of the United States, setting regulations for a wide array of employee- and employer-related issues.

The FLSA specifies the conditions when workers are to be paid and not expected to be paid. For instance, when working excess hours, an exempt employee does not receive overtime or time and a half. Time and a half is 1.5 times the hourly rate of the employee—the minimum an employer has to pay for overtime. The act marks overtime as any hours that exceed 40 hours in a seven-day workweek.

Pros and Cons of Exempt Employee Status

The pros of being an exempt employee start with the security of knowing that you have a steady paycheck. Also, exempt employees tend to earn more than hourly ones and have access to such extras as retirement benefits, including individual retirement accounts (IRAs), 401(k) plans, and pensions; bonuses; employer-sponsored healthcare plans; and paid vacation time and sick days.

The downside comes largely in not being eligible for overtime. Depending on the mindset of your employer, you could find yourself working long hours to fulfill an overloaded work portfolio without any recourse for additional reimbursement or reducing the stress brought on by the long hours. In short, you are at the mercy of your boss.

What Are the Requirements to Being an Exempt Employee?

Requirements differ from state to state, but the FLSA (Fair Labor Standards Act) classifies exempt employees as anyone doing jobs that fall into these categories: professional, administrative, executive, outside sales, STEM (Science, Technology, Engineering, and Math)-related, and computer-related. As of Jan. 1, 2020, the FLSA stipulates that employees in the above categories are exempt if they are paid by salary as opposed to hourly and if they earn a minimum of $684 per week or $35,568 annually. This is an increase from $455 per week or $23,660 annually.

What Are the Advantages of Being an Exempt Employee?

The advantages of being an exempt employee start with the security of knowing that you have a steady paycheck. Also, exempt employees tend to earn more than hourly ones and have access to such extras as retirement benefits, including individual retirement accounts (IRAs), 401(k) plans, and pensions; bonuses; employer-sponsored healthcare plans; and paid vacation time and sick days.

What Are the Disadvantages of Being an Exempt Employee?

The main disadvantages lie in not being eligible for overtime or qualifying for minimum wage. Depending on the mindset of your employer, you could find yourself working long hours to fulfill an overloaded work portfolio without any recourse for additional reimbursement or reducing the stress brought on by the long hours. In short, you are at the mercy of your boss.