Exempt vs Non-Exempt Employees - Overtime Rules
New DOL Rules for Paying Overtime to Exempt Employees
The Department of Labor (DOL) sets rules for when employers must pay overtime to employees. The DOL assumes every work must receive overtime if they work over 40 hours in a week, at a rate equal to one and a half times their hourly rate (at a minimum). But some employees, because of the nature of their work, are considered to be "exempt" from overtime.
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.
Change in Overtime for Exempt Employees - Effective January 1, 2020
The U.S. Department of Labor has issued new regulations for pay for exempt employees that will make more employees eligible for overtime. Under the new rule, employees who make less than $684 a week ($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.
For more information on the new overtime rules, see this DOL article "Highlights of the Final Rule on Overtime Eligibility for White Collar Employees."
What Makes an Employee Exempt or Non-Exempt? Exempt from What?
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 a 1 and a half 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 a certain minimum salary are considered exempt from receiving overtime.
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 salary AND
- Being in a "white collar" position, AND
- Being 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), effective January 1, 2020 ($455 a week prior to January 1, 2020) must receive overtime, even if they are classified as exempt.
Exempt employees must be paid for any week in which they do any work; they don't have to be paid for a week in which they didn't work.
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 has a total annual compensation of $107,432, including at least $684 a week (effective January 1, 2020), paid on a salary or fee basis;
- The employee's primary duty includes performing office or non-manual work; and
- The 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, mployees whose annual pay is less than this amount must receive overtime.
Employers can use commissions, nondiscretionary bonuses and other nondiscretionary compensation to make up the HCE designation.
Can I Use Comp Time Instead?
Many employers give exempt employees "comp time" or compensatory 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.
Non-exempt employees can't receive comp time because, under FLSA regulations, they must be paid at least minimum wage for all hours worked.
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.
Can I Use 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 percent of the standard salary requirement. To qualify as non-discretionary, the bonuses must be tied to some measures like productivity or 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 I 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/week), you might want to have those employees complete a timesheet.
How Does This Regulation Affect Non-exempt Employees?
It has little effect on non-exempt (hourly) employees because they are already paid overtime if they work at least 40 hours per week.
U.S. Department of Labor. "Fact Sheet: Final Rule to Update the Regulations Defining and Delimiting the Exemptions for Executive, Administrative, and Professional Employees." Accessed Nov. 8, 2019.
U.S. Department of Labor. "Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act (FLSA)." Accessed Nov. 8, 2019.
U.S. Department of Labor. "Fact Sheet #17H: Highly Compensated Employees and the Part 541 Exemptions Under the Fair Labor Standards Act (FLSA)." Accessed Nov. 8, 2019.
U.S. Department of Labor. "Fact Sheet #7: State and Local Governments Under the Fair Labor Standards Act (FLSA)." Accessed Nov. 8, 2019.
U.S. Department of Labor. "Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA)." Accessed Nov 8, 2019.