Exempt Employee
These are workers who cannot receive overtime (more than 40 hours a week) pay and are paid on a salary basis
What Is an Exempt Employee?
Exempt employees are workers who cannot receive overtime (more than 40 hours a week) pay and are paid on a salary basis. Individuals will receive exempt status if they earn more than a certain threshold.
Since these employees are compensated with a salary instead of wages, they don’t work by the hour. They get a set amount of compensation, excluding any bonuses or whatnot, no matter how many hours they put in - obviously, they will lose their job if they put in the effort.
These employees are typically white-collar workers who conduct exempt job duties defined by the Fair Labor Standards Act (FLSA), including executive, administrative, and professional roles, outside sales positions, and some computer-related positions.
Examples of people who have exempt status would be:
- Business executives
- Department managers that supervise more than two full-time employees
- Lawyers
- Doctors
- Secretaries with decision-making powers
Key Takeaways
- Exempt employees are not eligible for overtime pay and are compensated on a salary basis, typically earning above a certain threshold.
- Exempt status is typically associated with white-collar roles outlined by the Fair Labor Standards Act (FLSA), including executive, administrative, and professional positions, outside sales roles, and certain computer-related jobs.
- Exempt employees may not be bound by a strict 40-hour workweek, but many still work long hours due to workload demands, especially if they hold managerial positions.
Understanding Exempt and Non-Exempt Employees
Non-exempt employees tend to work in jobs that require independent discretion. They typically are the direct supervisors who manage subordinates' workflow, tasks, and duties. In short, you have autonomy over your actions and the actions of others.
As you can see from the examples, all listed positions can and must make decisions. Intuitively, you will make more if your job requires more “brain labor.”
Although exempt employees aren’t required to work 40 hours a week, many businesses have mandates requiring a 40-hour workweek, and they’ll most likely be asked to work more. If you make more, your workload is more - especially when you’re not the boss.
In short, people with exempt status are employees at management, administrative or professional levels and are expected to use decision-making power to delegate tasks and routines of their employees.
Because of this, workers with exempt status are dominant in the tertiary and quaternary sectors, while non-exempt employees are in the primary and secondary sectors.
NOTE
The primary sector is the extraction of natural resources, the secondary sector is the production of finished goods and components, the tertiary sector is providing services to consumers and businesses, and the quaternary is information and communications technologies.
Even though employees with exempt status do not receive compensation for working more than 40 hours a week, they typically have the advantage of a steady income stream and earn more income than non-exempt or hourly employees.
Exempt Employee Qualifications
Under the FLSA, you must meet certain criteria to qualify and receive exempt status. The qualification mainly meets the income threshold and the type of job you work in.
To be qualified, you must:
- Be paid on a salaried basis rather than an hourly basis, at least minimum wage.
- Earn more than the annual salary threshold of about $35,568 per year ($684 per week).
- Undertake Working jobs considered exempt under the FLSA or jobs that limit self-supervision, such as executive, administrative, or professional duties.
This is the general qualification to have exempt status. Regulations and qualifications, such as minimum wage rates, may vary based on your state. If you are unsure of your employment status, talk with your human resources department.
Exempt Employee Example
Meredith Grey is a surgical intern at Seattle Grace. She is paid hourly and makes about $800 a week.
Patrick Bateman is an investment banking executive at Pierce & Pierce who makes an annual salary of $300,000. So, who’s exempt? They are both exempt!
Grey is an employee with exempt status in this situation because she earns more than the weekly threshold of $684. Therefore, even though she is paid an hourly wage, she earns above the threshold to count her as an employee with exempt status.
In addition, a surgical intern is counted as an exempt employee because she holds a medical degree and is engaged in an internship/residency program. Hence, her occupation is considered exempt under FLSA regulations.
Bateman is also an employee with exempt status because he earns more than the annual threshold of $35,568.
Another reason is that his job as an investment banking executive allows for job autonomy and the opportunity for independent judgment and decision-making (not to mention he can make reservations at Dorsia).
So, now you should know if you are qualified to be an employee with exempt status.
Misclassifying Your Employment Status
It’s not very likely that your employer will misclassify you as non-exempt because employers would be happy they don’t have to pay overtime fees. In addition, employers would pay as little as possible for human capital because it is in their financial interest.
If you think the description of being exempt doesn’t sound like you, you should reach out to your human resources representative.
If you do, get misclassified; you may sue your employer if they misclassify your employment status.
Misclassifying employees as exempt or non-exempt under the Fair Labor Standards Act (FLSA) violates the law, and employees who have been misclassified can take legal action against their employer.
In the United States, if you have been misclassified as exempt, you are entitled to compensation for working overtime. You can file a complaint with the U.S. Department of Labor or file a lawsuit in federal or state court to recover the unpaid overtime.
If you believe and confirm that you have been misclassified with exempt status, you should speak with a qualified employment law attorney to discuss your options.
NOTE
Remember that there are time limits for filing a complaint or lawsuit, so taking action as soon as possible is important if you believe you have been misclassified.
Advantages of Exempt Employee Status
Since you can be either an exempt or non-exempt employee, there will be advantages and disadvantages. Let’s talk about the advantages.
Here are the advantages of being an exempt employee:
1. Guaranteed salary
You receive a guaranteed paycheck regardless of the number of hours you work. This also saves you energy by calculating how much money you need to work or recording your work hours.
2. Potential for higher pay and promotions
You will most likely earn more than hourly wages if you have an exempt status. In addition, since the nature of being exempt comes with independent judgment and the ability to lead, you will have more opportunities to advance your career.
3. Professional status
Being exempt is often seen as having a higher education and experience, which results in being perceived to have a higher professional status.
4. Not prone to unpredictable circumstances
You are more likely to have options to adapt to unpredictable circumstances without the cost of your compensation or only losing some of your compensation. For example, many workers with an exempt status were allowed to work remotely during the pandemic.
5. Better benefits
You will access better and additional benefits, such as better retirement plans or pensions, bonuses, healthcare insurance, paid vacation time, and sick days.
Disadvantages of Exempt Employee Status
Now, let’s talk about the disadvantages of having an exempt status.
Here are the disadvantages of being a non-exempt employee:
1. No overtime pay
The obvious downside is that you don’t get compensated for working more than 40 hours a week.
2. Reduced job security
Since you don’t have as many protective and labor rights as nonexempt employees, you can easily lose your job. Take the recent tech layoffs as an example. More than 68,000 tech-sector employees around the world lost their jobs in 2023.
3. Lack of set work hours
Employers will probably ask you to work extra hours. For example, an investment banking analyst usually has 80-110 hour workweeks, especially in their first job year.
4. Possible terrible work-life balance
Working overtime means you won’t have as much time outside your workplace, so it’s hard to have a good work-life balance. This can make you very stressed and lead to bad mental health.
5. Possible overloaded work
You might be forced to work overtime because your employer gave you an overloaded project or task that you need to complete quickly.
Exempt Status in the Finance Industry
Since WSO is a finance community, let’s discuss how it would affect our finance monkeys.
The qualifications to be an exempt employee are the same: you have to earn above $684 a week and $35,568 a year and work in a job considered exempt under federal laws.
Although an important quality in the finance industry is leadership, there is a finite number of opportunities for everyone, so not everyone has the opportunity to be an employee with exempt status.
Exempt jobs in the finance industry include, but are not limited to
- Chief financial officer
- Accountants
- Human resources manager
- Project manager
- In-house legal consultant
- Data scientist
As you work your way up the hierarchy at a firm, if you are lucky and put in the effort, you can make it to an exempt employee, which means you will have more possibilities and make more money.
However, there is a phenomenon discovered in recent news where firms assign fake managerial titles to employees to get out of paying them overtime.
If you get a job with the title “director of customer happiness,” you’re probably just a customer care representative with the special treatment of getting zero overtime compensation.
More examples of these titles are
- Director of first impressions (front desk clerk)
- Manager of information transcription (taking notes)
- Brand evangelist (marketing associate)
- Information digitalization developer (making excel sheets)
- Manager of Idea Presentation (making PowerPoint slides)
Though, you should be aware that some businesses may give out “inflated managerial titles” to make you an exempt employee and have you work extra hours.
Yes, it’s nice to have a title, but having the title of “manager of customer happiness” is not a good enough title for you to do customer service work and work more than 40 hours without other benefits.
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