Nonexempt Employee Status and Overtime

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The word "hourly" is often used interchangeably with "nonexempt" to describe an employee, but that's not entirely accurate. A nonexempt employee is one who is eligible to receive overtime pay, but not all hourly workers are nonexempt.

Since 2004, a number of changes regarding which employees are eligible to receive overtime pay have been proposed, implemented, and rejected under three presidential administrations. The 2004 rules remain in place after changes made by President Barack Obama's administration in 2016 were thrown out by a federal court. President Donald Trump proposed new changes in 2019 that have not yet gone into effect.

The 2004 Rule

Nonexempt employees are not determined solely by their job title, according to the U.S. Department of Labor's final rule, dated April 23, 2004. Instead, a combination of criteria, including their occupation (or industry), rate of pay, and job duties, are used.

The 2004 rule, which was written by George W. Bush's Labor Department, exempted from the 1938 Fair Labor Standards Act's overtime eligibility requirements certain workers employed as executives, administrators, professionals of various sorts, and outside salespeople. It also exempted workers in some computer-related jobs. To be exempt, all of those categories of workers have to earn at least $455 a week, which amounts to an annual salary of $23,660. If they make less than that, they're nonexempt, even if they're considered to be salaried, rather than hourly, employees.

The rule states that employers must comply with state or local laws, regulations, or ordinances that set a higher overtime rate or a shorter workweek for consideration of overtime pay. Employers may also choose to set a higher overtime rate or a shorter workweek, either on their own initiative or through a collective bargaining agreement with employees in a union.

Executive Exemption

For an executive to be considered exempt, their primary job must be managing a company or a department or subdivision of a company. They must oversee the work of at least two full-time employees or their equivalent (for example, four half-time employees) and be involved in a significant way in the hiring, firing, promotion, or demotion of these employees.

Administrator Exemption

For an administrative employee to be considered exempt, their primary job must be directly related to the management or general business operations of a company or its customers and they must exercise discretion and independent judgment regarding matters of significance to the company.

Professional Employee Exemption

There are two types of professional employee exemptions: learned and creative. For a learned professional employee to be considered exempt, their primary job must require advanced knowledge in a field of science or learning that they obtained through specialized intellectual instruction. They must also be engaged in intellectual work for which they must consistently exercise discretion and judgment. Examples of these jobs include lawyers, doctors, dentists, teachers, architects, clergy, registered nurses, accountants, engineers, actuaries, scientists, and pharmacists.

For a creative professional employee to be considered exempt, their primary work must require invention, imagination, originality, or talent in an artistic or another creative field. Examples of these jobs include actors, musicians, composers, writers, and cartoonists.

If an executive, administrative, or professional employee makes more than $100,000 in annual compensation, including at least $455 a week in salary or fees, they are considered to be exempt.

Computer Employee Exemption

For a computer-related worker to be exempt, their job must be in computer systems analysis, computer programming, software engineering, or a similar area.

Outside Sales Employee Exemption

For an outside sales employee to be exempt, their primary duty must be making sales and they must customarily work outside their employer's place of business.

Blue Collar and Public Safety Jobs

The exemptions do not apply to non-management employees in production, maintenance, construction, and similar jobs (often called blue-collar jobs) or to law enforcement and correctional officers, firefighters, paramedics, and similar jobs involved in public safety, no matter how highly paid they are.

Labor Criticism of Rule

The rule was criticized by labor groups for causing many lower-level managers without supervisory responsibility to lose overtime pay because of a change that affected team leaders and made them exempt as administrators. If an employee leads a team assigned to complete major projects for the employer (such as purchasing, selling, or closing all or part of the business; negotiating a real estate transaction or a collective bargaining agreement; or designing and implementing productivity improvements), they generally meet the duties requirements for the administrative exemption, regardless of whether they are direct supervisors of the team members, the rule stated.

Conversely, many executive assistants who had been classified as administrators became eligible for overtime pay if their duties weren't considered to be of great enough significance to the company.

The 2016 Rule

On May 18, 2016, the Obama administration published a final rule that would have required employees to be paid overtime if their weekly salary was less than $913, an amount that works out to $47,476 annually. The salary threshold would be adjusted every three years starting on Jan. 1, 2020.

Several states and business organizations filed lawsuits to prevent the changes from going into effect. They were consolidated into a single suit that was heard in the U.S. District Court for the Eastern District of Texas. Judge Amos Mazzant granted a preliminary injunction to halt implementation of the new rules on Nov. 22, 2016. The Department of Labor appealed the injunction.

While the appeal was underway, Judge Mazzant granted the plaintiffs' request for a summary judgment on Aug. 31, 2017, saying the department, which was then part of the Trump administration, had exceeded its authority by increasing the salary threshold by so much. On Sept. 7, 2017, the court approved the department's request to dismiss its appeal.

Proposed 2019 Rules

On March 7, 2019, the Department of Labor announced a proposed rule that would raise the salary threshold for overtime pay to $679 per week, or $35,308 a year. It would also increase the highly compensated salary level at which one automatically became an exempt employee to $147,414 a year. The Obama rule would have increased it to $134,000.

On March 28, 2019, the department announced another proposed rule to clarify whether certain perks given to an employee must be included in the employee's regular rate of pay that would, in turn, determine the usual overtime rate of time and a half. The department proposed that employers may exclude the following from an employee’s regular rate of pay:

  • the cost of providing wellness programs, onsite specialist treatment, gym access, and fitness classes, and employee discounts on retail goods and services
  • payments for unused paid leave
  • reimbursed expenses, even if not incurred entirely for the employer’s benefit
  • discretionary bonuses
  • benefit plans, including accident, unemployment, and legal services
  • tuition programs, such as reimbursement programs or repayment of educational debt

This second proposed rule also includes additional clarification about other forms of compensation, including payment for meal periods and callback pay, which is given when employees are asked to return to work outside normally scheduled hours.