Exempt vs Non-Exempt Employees - Overtime Rules

Department of Labor Regulations for Overtime for All Employees

Overtime Rules for Exempt and Non-exempt Employees
Overtime Rules for Exempt and Non-exempt Employees. Hero Images/Getty Images

UPDATE: New overtime rules suspended. 

In November 2016, a federal judge suspended the Department of Labor's new overtime rules. The regulations, which were scheduled to take effect December 1, 2016, would have raised the salary limit below which workers automatically would qualify for overtime, even if the workers were exempt. 

The Department of Labor is appealing the suspension, but it's not clear what will happen.

This suspension is an injunction not a cancellation. 

If you have already made changes to your company's policies and pay practices, keep going with those. If you haven't, you might just sit back and wait, or you can always be more generous and institute the policy even if it's not law. The Payroll Department suggests that you hold on to your plans to implement at a future date."


What are the New Overtime Rules for Exempt Employees?

It used to be that the terms "exempt" and "non-exempt" were clearly defined. Now, not so much. The new rules set by the Department of Labor, when they go into effect, will mean that more employees who have been classified as exempt from overtime will now be eligible for overtime. 

In this article I'll explain the terms "exempt and "non-exempt" and the differences between these two categories of employees when it comes to overtime. And I will sort out the new regulations to help you make decisions for your business.


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 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. 

When Must Exempt Employees Receive Overtime? 

Under regulations already in place through the Department of Labor, employees whose salary is equal to $455 a week ($23,660 annually)  must receive overtime, even if they are classified as exempt. The new regulations, effective December 1, 2016, require that the minimum salary will be  $913 a week ($47,476).  The total annual compensation requirement for highly compensated employees will increase to $134,004 per year, up from $100,000 per year.

Can I Use Comp Time Instead?  

 Many employers pay employees "comp time" or compensatory time off, for extra time worked or travel time.

For example, if an employee must work a trade show over the weekend, the employer would give time off instead of paying overtime. But the DOL says that private (non-government) employers cannot use compensatory time off to avoid having to pay overtime. 

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 measure 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. 

How Must Time Be Tracked 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 regulations don't require that exempt employees work a specific schedule every week, and it doesn't prohibit them from working from home. Here's how the DOL suggests you do this: 

The employer must keep an accurate record of the number of daily hours worked by the employee. By the end of each pay period, the employee provides her employer with the total number of hours she worked each day, including the number of her overtime hours.

How Does This Regulation Affect Non-exempt Employees?

It has little effect on non-exempt employees, because they are already paid overtime if they work at least 40 hours per week. 

Does this Regulation Apply to Small Businesses? 

While the regulation specifically discusses larger businesses that are required to abide by the regulations, all businesses engaged in "interstate commerce" are under this regulation. Unless you can prove that you do business only within your state (and that includes buying from vendors and banking relationships), it's almost impossible to prove that these regulations don't apply to your business.