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James Chen, CMT is an expert trader, investment adviser, and global market strategist.
Updated January 23, 2023 Part of the Series Guide to Employment LawAgencies and Entities
Employment and Pay
Health and Safety
Unions and Right to Work
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 and do not qualify for minimum wage. This is based on the type of work they perform. When an employee is exempt, it primarily means that they are exempt from receiving overtime pay. Exempt employees stand in contrast to nonexempt 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 vary by state, but the FLSA classifies exempt employees as any job that falls into these categories:
These classifications are quite broad, which they are intended to be. That's because they encompass a variety of jobs in different industries. As of Jan. 1, 2022, 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. In 2022, 26 U.S. states increased the minimum wage, which means this threshold changed in certain regions.
In addition to the main categories of exempt employees, other categories of employees may possibly be considered exempt from receiving overtime pay. These include farm workers, motion picture theater employees, certain employees of nonmetropolitan broadcast stations, taxi drivers, and employees of railroads, motor carriers, and American vessels. Commissioned sales employees of retail or service entities also fall into this list.
Employees who fall in the computer-related categories may be paid an hourly salary. In order to be considered exempt, hourly employees must be paid no less than $27.63 per hour.
The exempt employee category was created by the FLSA, which was passed in 1938. The watershed labor law protects workers against unfair pay practices and work regulations. The law changed greatly over the last 85 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 that an employer has to pay for overtime. The act marks overtime as any hours that exceed 40 hours in a seven-day workweek.
The FLSA's exemptions only apply to white-collar employees who meet the salary and job requirement tests. As such, the exemption does not apply to blue-collar workers or those who "perform work involving repetitive operations with their hands, physical skill and energy." The FLSA also excludes police officers, firefighters, paramedics, and other first responders from the list of exempt employees.
The pros of being an exempt employee start with the security of knowing that you have a steady paycheck. Exempt employees tend to earn more than hourly workers. They may also generally have access to such extras as retirement benefits, including:
The downside comes largely in not being eligible for overtime pay. 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.
Companies are often pressured to achieve better financial results, and the first area they look at is payroll. They hire less headcount, so exempt employees end up doing the work of more than one employee. This makes overtime work the norm. Hence, many exempt employees have made the choice to leave and become self-employed as freelancers paid by the hour. This solution has worked for some people moving from employment to what is called the gig economy.
The 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. 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. Keep in mind that this may vary by state as 26 U.S. states increased their minimum wages in 2022.
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 extras such as retirement benefits, including individual retirement accounts, 401(k) plans, and pensions; bonuses; employer-sponsored healthcare plans; and paid vacation time and sick days.
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.
Exempt employees have the advantage of a steady income stream and generally earn more than nonexempt, or hourly, employees. Full-time and many part-time exempt employees also typically have access to retirement benefits like 401(k) plans, bonuses, and employee-sponsored healthcare plans, as well as paid time off in the form of vacation and sick days.
The main downside of being an exempt employee is not being eligible for overtime pay. However, for most employees, the benefits of exempt status likely outweigh that potential negative.
