Hourly Wage vs. Salary, Exempt vs. Non-Exempt

Most people in the US work force have the heard the terms “exempt” and “non-exempt,” but what do they mean? While many web sites such as Mac's Money Blog talk about pay rate, there is not a whole lot of explanation regarding exempt and non-exempt status.

While I am not a lawyer, or even an HR specialist, I am an employee, and also hopelessly curious about all things related to pay and employment. The basic law is that employers are required by the Fair Labor Standards Act (FLSA) to classify their employees as either exempt or non-exempt.

The more I read about the meaning of "exempt" vs. "non-exempt", the more a lyric of the Paul Simon song "Train in the Distance" goes through my head, "...with disagreements about the meaning of a marriage contract, conversations hard and wild." Like a marriage, in the US an employee/employer relationship is governed by a little law, and a lot of social convention. Since much is not written down, misunderstandings are common.

Before we delve into the details, why not check out where your salary fits into all of this controversy?  Find out with our ever-handy salary calculator.

Definition of Non-Exempt

If your job is classified as non-exempt, this means your employment is subject to the rules laid out in the FLSA. Like all laws, there are are many exceptions and details, according to the Department of Labor's web site. However, the basics are

• Non-exempt employees must be paid at least the federal minimum wage
• Non-exempt employees must be paid overtime pay, if you work over 40 hours a week
• Non-exempt employees must be paid at least 1 and 1/2 times base pay for overtime

Simple enough. Note there is much more to FLSA. For example, it specifies the work week for child labor (people under 16) as well. The law was written in the 30's; reading it gives a flavor of the employment strife and hardship that was common at the beginning of the last century in America.

What does it mean if your job is "exempt"? That is simple too: Your employment contract is not subject to the 40 hour work week, minimum wage, and overtime rules. Basically, the job is "exempt" from the protections of the FLSA. Hmm... for the employee, being "exempt" from a law that promotes "fair labor standards" doesn't sound like a good thing. Perhaps that is why these positions are described as "salaried" instead of as "exempt".

What jobs are exempt? Executive, administrative, professional, outside sales and some computer positions are considered exempt positions. Recently, the lines between exempt and non-exempt have blurred, causing much controversy. According to the Department of Labor's Wage and Hour Division, companies such as Starbucks, Pacific Bell, Radio Shack, United Parcel Service and Rite Aide have been sued by exempt employees who believe they should have been classified as non-exempt and eligible for overtime pay.

Exempt Employees and Time Clocks

The original intent of FLSA was to protect nearly all workers. "Exempt" jobs were not common, limited to positions like lawyers, senior managers, and the like. As of 1940 census, only 24.5% of people over 25 had a high school diploma, and only 4.6% had a college degree. Administrative and outside sales were likely the only job areas where 95% of the population could get a job that was exempt.

What are the guidelines for an exempt worker? A key phrase for exempt positions is that the job must require "discretion and independent judgment." In addition to this soft requirement, there are rules that act as a guideline for employers.

An employee must be paid an annual salary, i.e., exempt employees cannot be paid an hourly wage (the blogging boss at beatyourowndrum.com asks a good question, is it better to be paid hourly or by salary?). The employee's weekly income can be no less than $455 per week. Keep in mind though, just because an employee is paid an annual salary that doesn’t automatically make him or her exempt.

Problems for Starbucks

You would think that defining an "executive" would be easy. The rules say an exempt “executive” regularly supervises two or more other employees, is in charge of a unit, sub-unit, department or shift when on duty. However, there can be a problem when retailers require exempt employees (manager and assistant manager) to multi-task and perform tasks normally performed by non-exempt employees.

This problem occurred when Radio Shack managers claimed they spent most of their time making sales, vacuuming the store and cleaning the bathrooms. Likewise, 1,400 Starbucks managers and assistant managers claimed in a class action lawsuit that they spent more than half their time running cash registers, cleaning cappuccino machines, cleaning floors and other menial tasks. In two class action lawsuits against Longs Drug store, store managers who had been classified as California overtime exempt employees - according to bizjournals.com - said they had spent more than half their time ringing sales and stocking shelves.

Are Insurance Claims Adjusters Exempt Employees?

Similar problems come in defining "administrative" employees. An exempt “administrative” employee performs non-manual or office work which "supports" the overall business operations of the employer. This involves exercising independent judgment and discretion on important matters, but is not engaged in production or sales. A good example is a buyer for a department store whose individual judgment could have major implications. He or she would be classified exempt via his or her duties, and the fact that they draw an employee salary. (Speaking of employee salary, blogger Nobscot poses an interesting question on his blog, should we judge the value of an employee solely by their salary?)

Seems clear enough, but the exempt administrative classification can also be misapplied. In 2001, the Farmers Insurance Group of Companies was hit with a massive $90 million verdict for not paying overtime to 2,400 insurance claims adjusters who had been classified as exempt administrators, but were actually performing non-exempt “production” jobs (i.e. taking care of claims).

There is a pattern here: it is clearly to an employer's advantage to have as many positions as possible defined as exempt, since they then do not have to pay overtime. Where there is such a strong financial incentive, there is likely to be abuse.

Tips on Being a Good Supervisor

Another example of disagreement over the definition of exempt was the case of district supervisors who were in charge of delivering the Riverside Press-Enterprise newspapers (in California).  They accused the owner – the Belo Corporation - of misclassifying them as exempt administrative employees. According SignonSanDiego.com, the supervisors made an annual salary, but didn’t manage actual employees; they actually managed independent contractors (newspaper carriers).

Also, when the newspaper carriers missed work, it was up to the supervisors to physically complete the route and deliver the news papers. This was performing non-exempt work while drawing an employee salary. Like the previously mentioned examples, the supervisors also received a settlement.

Some Company History of IBM

With the explosion of college degrees (as of 2000, 25% of Americans over 25 had a 4 year college degree, and 50% of 20 year-olds were pursuing one), the "professional" categorization has been an area of contention. A “professional” employee includes professions such as doctors, lawyers and teachers. Professionally exempt job duties imply that an employee uses a large amount of individual judgment while performing work.

Computer professionals were also added to this group, though there is not a rigorous requirement for college or higher education. To be exempt, the employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker performing professional job duties. However, employees who perform computer installation or troubleshooting are not usually professionally exempt.

A good example of conflict in this area was when IBM employees sued the tech giant for failing to pay overtime. The employees said that their primary job duty was to maintain, install and support computer software and hardware for IBM and its customers, but that they were misclassified as exempt employees and ineligible for overtime.

In their class action suit against IBM, the employees also claimed that they lacked discretion and independent judgment (the key feature of an "exempt" employee), but rather followed established company procedures and specific instructions. Based on that, the workers stated they should have been classified as non-exempt and eligible for overtime pay. Eventually IBM agreed to pay $65 million to settle the overtime pay claims.

Which is better, exempt or non-exempt?

Usually, exempt employees earn more than non-exempt employees do, though not necessarily more per hour. Exempt employees are expected to complete tasks regardless of the amount of hours required to do so. If staying late or coming in early is needed, exempt employees are usually expected to do it. Non-exempt employees usually only work a set number of hours, but with overtime, can do well.

Exempt employees have less protection by Federal law against employer abuse. If an exempt employee is given tasks that take 70 hours/week to complete, they can either do the work, or quit. There is no overtime.

When my wife was a medical intern, she was scheduled to work 114 hours/week some months. Because she had an MD, she was exempt as a "professional". The current pay for this position is about $40,000/year. With her work year of over 5000 hours, she earned a wage of about $8/hour. Working the counter at a McDonald's in Seattle pays better.

How does your salary measure up to the exempt and non-exempt? Add up the numbers with our salary calculator.

• Hourly or Salary, which is better? - BeatYourOwnDrum.com
• Top Five Employer Mistakes Under the FLSA - Workforce.com

Cheers,

Dr. Al Lee

• Curious about salaries? Email Dr. Salary
• Compare your salary: Get a free Salary Report

Comments

[anthony Tartaglia]

What do you know about the labor laws for hours spent training employees? When are we required to pay or not pay for hours spent at training?

[Matt Stahl]

Can you explain the "salary non-exempt" designation? How does it differ from straight salary and from hourly non-exempt status? Your knowledge would be very useful.

[Dr. Al Lee, PhD]

Anthony and Matt,

I created a post to answer your questions: http://blogs.payscale.com/ask_dr_salary/2007/05/reader_question.html

I hope this helps.

Cheers,

Al Lee (Dr. Salary)

[laurel johnson]

I am an LPN in North Carolina and I work at an assisted living facility along with 4 other LPNs. We all are classified as exempt employees. We are all classified as shift supervisors. Each one of us work different hours or shifts to keep the facility covered with one nurse there at all times. I was hired with the title of clinic nurse but I spend most of my time doing other nursing duties such as doing nursing assessments, contacting MDs, receiving, transcribing, and carrying out doctors orders, draw blood, give injections, clarify medication orders, sometimes pass out meds., etc. We all are responsible for making sure the CNAs and Med. Techs are doing what is expected of them, but mostly we are doing nursing duties. How can we be classified as exempt employees? Also, we all get paid an hourly rate. Could you please help me out with this because I really can't figure this out. Thank you.

[Dr. Al Lee, PhD]

Dear Laurel,

I am not a lawyer. If you believe your employer is in violation of the FLSA, you should contact a labor lawyer in your area. Your local bar association can help you find one.

Note that being paid an "hourly rate" is not necessarily a violation of the "salary" requirement.

Being paid a salary is defined as follows by the government:

"Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Subject to exceptions listed below, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked."

See http://www.dol.gov/esa/regs/compliance/whd/fairpay/fs17g_salary.htm for all the details.

The exemptions mentioned above let the employer pay for only a day at a time, rather than the whole week mentioned above, if they have a "bona fide" sick leave and/or vacation program.

The way I read the law, if you show up for work for even 5 minutes, you must be paid for the whole day, or be fired. Paying exempt employees hour by hour is not allowed.

Cheers,

Al

ps. I've put in in my five minutes at work; time to go home :-)

[laurel johnson]

Thanks Al. Your response helps to confirm I am being screwed. I appreciate your help. I have learned that because of my job duties, I should not be classified as exempt. If I performed only supervisory duties, I could understand being an exempt employee. I have also had hourly pay deducted when I have left early and when I have arrived late, where I should have received a full day's pay. Please correct me if you think I am wrong with these conclusions. All I want is to be treated fairly. Thanks again.
Laurel

[Dr. Al Lee, PhD]

Dear Laurel,

The Department of Labor (http://www.dol.gov) can also help, if you believe your employer is not following the FLSA.

See http://www.dol.gov/esa/regs/compliance/whd/whd_fs.pdf for a quick overview of how the DoL can help with "compliance" (having employers follow the law).

See http://www.dol.gov/esa/whd/flsa/ for much more, including the "eLaws FLSA Coverage and Employment Status Advisor", which will ask questions to determine which parts of the FLSA apply to you.

Your employer may not be deliberately violating the FLSA. The rules are complex enough that they may just have misunderstood. The DoL would be happy to help explain the law to them.

Cheers,

Al Lee (Dr. Salary)

[Kory Reeves]

My wife is a dental assistant that works for an office of about 6 local offices owned by a dentist in the area. She believes she is an "hourly" employee paid an hourly rate. However, she typically is required to work up to an hour longer than her scheduled 10 hour workday (she works 4 10 hour days), and is never paid for it. Her managers tell her that she can also never leave early from the office, which her dentist sometimes used to let them do since they put in unpaid overtime. I do not believe that she would be exempt from protection by the FLSA but do not know. Please help.

[Rob]

What is the maximum hrs per week or pay-period and exempt employee can work? When does a company get "dinged" by law?

[Jimmy]

Does an employer have the right to establish a specific minimum number of hours per day that exempt employees must work? For example, my employer expects a minimum of 10 hours a day, 5 days a week for exempt managers. They also dictate the specific hours (7 am to 5 pm with an hour lunch). The only exception is if you have an occassional, special need to work less on a given day. These events are expected to be rare. The type of work is wide-ranging, and involves supervising as well as some routine tasks.

[LMH]

I am still confused about a person who receives a salary. I have 3 salaried employees. I am not sure whether they are emempt or non-exempt. I think they should be non-exempt because if they are gone 1/2 day we plan to charge their sick or vacation hours. One of the employees says we can't do that. I talked to the Dept of Labor in our state and he says they can be either one, based on what we choose. My next question would be whether you can classify some as exempt (if they meet the criteria for exempt) and some as non exempt or is this discrimination. In other words is it all or nothing? This has caused a huge rift at work but the person it upsets is the one who is "abusing" the salary status by working less hours than is expected.

Input would be great here. we are a small business with about 50 employees but a 'stand alone' - no other facilities to compare with.

[lmh]

Something else I forgot to mention is one of the employee clocks in (per her choice) but another doesn't. Can you require a salaried person (exempt or otherwise) clock in and out to see what they actually worK?

[Rodney]

I worked for a retail chain that required us to work 47 hours per week. Any hours over that we were not compensated. I dont know if we were considered exempt or non-exempt. There were times that I had to work 14 hours per day with no lunch break. The company is Dollar General. I really feel like I was mistreated while at the company. Any suggestions?

[russell baker]

I am a delivery supervisor for a wine company. I run routes when the drivers are on vacation/or out sick. I work between 60-75 hrs a week to cover the driver's schedule. Recently they made all warehouse supervisors (non-exempt), when I ask to go (non-exempt) over 5 weeks ago, and they are still haven't made a decision. The month of Nov/Dec is the busiest time of at least 70 hrs a week until after Christmas. What are my options?

[Madeline Stark]

I work in California and confused whether or not my employer is taking advantage of my "exempt" status. I was hired as salaried and exempt employee, however, I just got a raise and make $15.67 as a marketing assistant. I am a subordinate, however, I can use my own judgement on making certain decisions, but, ultimately it is my boss who gives the final ok. My problem is that I many times have to put in an extra 3-4 hours after my 8 hour day and work all day Saturdays when I work special events. I don't get paid overtime nor am I given comp time. I do not manage anyone and not considered management. Is this legal? Can an employer just determine I have to work 50 hours+ sometimes when I make so little per hour as it is?

[Judy]

My boss has just switched me from a part-time, hourly employee to full-time, salaried. I will be working 40% more time at a 25% pay cut (with the salary he is going to be paying me). I am in California. Is this legal for him to do? I do not have a contract.

[Jon Willis]

I am a salaried employee living in Oregon. I travel for business and am away from home weeks at a time. My job is high tech in which I perform many tasks including planning and leading technical situations, migrating older storage systems to new ones (including the data), delivering presentations to customers for training and "proof of concepts" in hopes to persuade the customer that our products are a fit for their business and will purchase our products (I am not a sales person). Starting 2/1/08 (due to a class action suit) I will be a non-exempt employee and my pay is cut 15%. My questions is - Since I am required to be away from home at weeks at a time as a non-exempt am I eligible for hourly pay for every hour I am away? A stretch I know but I am curious:-)

[Cmasaki]

It has become my understanding that under this law, if the job you are applying for requires a degree, that your degree has to be in line with the job or they would have to pay you hourly. IS this true? Has anyone heard of this. It just seems weird since most Americans don't work in their field of study.

[Theresa]

My Husband was told he was getting a paycut (we suspect co's not doing well) not sure exactly why??? It is $3.00 per hour less. He was told this on Thursday. Gets paid for the week before on Friday. Can the Company short him for the week before that, that he already worked and didn't know this was coming? Needless to say he is looking for other employment, but we have to play along for now!

[Steve]

When I started my salaried job (beverage salesman), I was told m-f 10 hours a day.

I have been working 12-14 hours a day, and now my employer wants to start making us work rotating weekends. We will now work 12 days, then two days off. also I have used my 4 allowed sick days this year and was told any additional sick time will be unpaid. So, despite the fact I'm working 60-70 hours a week, and now another 20 on every other weekend, are they allowed to doc my pay? and is there a limited to how many hours I can be worked?

I have had a couple 18 hours days and am starting to feel like i'm being abused just because I'm salaried employee.

[Cate]

I work as a Writer for a local production company here in NC, and also pull the position of Production Manager. I was hired on as an independent contractor. I took the job because it was what I wanted to do. Not because they pay well. In fact, they pay every single employee in their office $7.00 per hour. They also have everyone on staff as Independent Contractors, rather than employees. They pay us hourly, and hardly anything at all.

I am expected to be at work from 9 am until 5 pm, and I work many hours over my scheduled time. When this happens, they make me take a day off to assure that they will not have to pay me time and a half. They also clock out everyone for a 1 hour long lunch break, and have just recently adjusted the time clock to punch us all in at 9 and out at 5...so they will not have to pay us for any early time or late work. Is all of this legal???

[kate]

My son is working as a non-paid intern. He is currently working 72 hours per week. He has been asked to work longer.

He is doing a lot of heavy lifting at the job and now has a ruptured disc in his back. The outside company cleaning crew has quit, since they had not been paid, so the interns have been told they must stay longer and do the cleaning as well. Is this legal?

[Jen]

I am a nurse manager at a large hospital over a unit and I work 12-14 hour days M-F, sometimes longer.

Sometimes during my days, I am required to provide patient care when the unit is short-staffed. Also, I am on call 24x7 for my unit and sometimes hospital supervisors (they are above the director level) call me to come in and do patient care at night and on the weekends when short-staffed.

I am classified obviously as exempt due to being a manager. I feel like my role has changed now that I am being required to do patient care and I should be classified as non-exempt and be paid for all these additional hours. It feels like I doing two jobs now. I feel like the supervisors call me to come in after I have already worked a 65 hour week because they do not have to pay me overtime.

What are your thoughts on this? Should I talk to HR about reclassification of my job since I am doing so much patient care now?

[Debbie Allen]

I am a salaried Banquet Manager at a Hotel and lately have been asked to work about 80 hours a week. Partly to save Labor and do the job that my hourly employees would normaly do in order to not scheule them to save labor costs. Is it legel to do this and what are my rights in this matter

[Edgar]

My wife is a LPN with over 20 years experience. She is a shift supervisor at a private nursing home.
She is 60 years old. She is suppose to be salaried,but if she works less than 40 hours She is paid hourly but no extra for over 40 hours. In over 3 months She has not worked Her proper shift because She has to cover regular nurse's that call out sick and now is being told She is not doing Her job properly!!
Is this fair or legal