EXEMPT vs. NONEXEMPT and SALARIED vs. HOURLY Employees

Dear Rita:

I’ve recently started a new position in my nonprofit’s HR department. I’ve been instructed that my duties will involve classifying employees as exempt or nonexempt. In my experience in other HR departments, I always classified employees as either salaried or hourly. I’m not quite clear as to the distinctions between these two sets of terms, if any.

For example, I’m not sure whether an “exempt” employee can be “hourly” and whether a “salaried” employee be “nonexempt.” I don’t want to make any mistakes when I classify these employees, so could you educate me on what all this confusing terminology means?

Signed,

Confused by Classification

Dear Confused:

Your concerns about the proper classification of employees are warranted. One of the greatest risks that an employer faces is the misclassification of employees as exempt or nonexempt.

Let’s talk about terminology first. Under the and many state wage and hour laws, employees are classified as either “exempt” or “nonexempt.” However, many in the workforce instead use the terms “salaried” or “hourly” to refer to these classifications, as you appear to have been previously trained.

Stop doing that!

When referring to these legal classifications, adopt the legal terms “exempt” and “nonexempt.”

Why? Because these classifications are based on more than just how employees are paid. For an employee to be properly classified as exempt, there are two tests to apply:

The first test has to do with payment. An employee classified as exempt must be paid a salary in a predetermined minimum amount set either by state law or the FSLA. In 2020, for example, the FLSA requires an exempt employee to be paid at least $684 per week, which equals $35,568 a year. Some states set different, and usually higher, minimum amounts. California, for instance, requires employers to pay exempt employees a salary equal to twice the current minimum wage for “full time employment,” which, for an employer of 26 or more employees, currently means $54,080 annually.

This salary must be paid regardless of how much or how little the employee works. It cannot be prorated based on how many hours the employee works.

The second and more difficult test for classifying an employee as exempt is a “duties” test.

Under FLSA and most state laws, the exempt employee must perform work of an “exempt” nature more than 50% of their working time. This test can be difficult to analyze and resolve in the workplace, and a thorough discussion is beyond the scope of your question. For the present, let’s just say that most exemptions fall into the professional, administrative, or executive categories and, in general, that the hallmark of each is the need for the employee to be vested with independent discretion and judgment in performing their job duties and making decisions.

You may ask, why is proper classification so important? The simple answer is that when an employee is classified as exempt, the employer is released from the requirements of wage and hour laws: such an employee does not receive overtime pay, is not guaranteed meal and rest breaks, and does not have to track their time. Because the law is very protective of these employee rights, both the federal and state wage and hour authorities carefully scrutinize these decisions to ensure that there is no misclassification that results in an employee’s rights being improperly removed.

From the perspective of the employer, improper classification can result in serious exposure to claims of unpaid overtime, penalties for missed meal and rest breaks, and a number of other significant claims, such as attorney fees, if a lawsuit were brought.

Important points to take away:

The terms “salary” vs “hourly” describe methods of payment of compensation and are not interchangeable with the legal categories of “exempt” and “nonexempt.”

For example, while exempt employees must always be compensated by a predetermined salary, regardless of the hours they work, an employer could make the decision to pay a nonexempt employee a salary as well. The salary describes only the method of payment, not the classification of the employee.

Paying a nonexempt employee by salary does not then make that employee exempt. Remember that for an employee to be classified as exempt, that employee must pass the duties test as well. Nonexempt salaried employees are entitled to required breaks, receive overtime pay whenever working more than the time limits provided by the applicable law, keep track of hours worked, and must otherwise benefit from other wage and hour law protections.
A salary is required to be in an amount that is based on at least the applicable minimum wage per hour worked.

While classifying employees can be a difficult and confusing task, I hope this explanation sheds light on why the terms “hourly” and “salaried” can be misleading when referring to employees. Using the correct terminology is the best starting point to becoming familiar with the need for proper classification.

Maybe next time we can discuss the “duties” test in more detail… Stay tuned.

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About the Author

Mike Bishop

Mike Bishop is a member of the State Bar of California and has been admitted to practice in a number of federal district courts in both California and Ohio. During his legal career, Mike worked for 32 years with a Sacramento law firm, where he focused on employment litigation in both state and federal courts. During that time, he defended employers in litigation.

In 2016, he began his work as an Employment Risk Manager for the Nonprofits Insurance Alliance, assisting nonprofits in evaluating employment risks. Mike lives in Lakewood, Ohio, and is a graduate of the University of California, Davis, with a bachelor’s degree in political science, and a 1982 graduate of the University of the Pacific, McGeorge School of Law.

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