Hourly,. salary, exempt, non exempt. You hear these terms all the time, but what the heck do they mean?
When most people say someone is hourly they mean the person is paid by the hour vs. getting a flat weekly or annual amount: ($15.00 per hour vs. $60,000 a year). This is just the definition of HOW you are paying the person. But it’s important to understand that that HOW you pay someone, has to be determined by the WHAT of their classification.
Is their job classified as non exempt or exempt.
You are probably saying – WHAT?
Well, the people responsible for the regulations around employment (you know, the Dept of Labor, the IRS, your local state employment departments) consider everyone who works in the US as eligible for overtime.!
That is, unless your job is EXEMPT from the overtime rules. See, that’s how they get Exempt, meaning exempt from overtime rules, and Non Exempt, meaning NOT exempted from the overtime rules.
So, how do you know if your job is Exempt from the overtime rules. Well, the feds, and even some states, put together specific guidelines that a job has to meet, in order to qualify as exempt from overtime. Everybody gets in on setting the rules, because when you pay overtime, you also have to pay payroll taxes on top of the overtime amount. And, to put it mildly, the IRS want’s their payroll taxes.
There are 6 exempt categories – keep in mind, you have to see how the job stacks up against the exempt categories to figure out if the it qualifies as exempt (again, meaning not eligible for overtime) or non exempt (meaning eligible for overtime). They are:
I’ll give you a quick overview of each category, but keep two things in mind
#1 – I am absolutely certain that you have a much larger number of non exempt employees than you think you have (I know this, because it is almost always the case – this is the most common misclassification, classifying a job as exempt when it should be non-exempt)
#2 – I cannot impress upon you strongly enough that you need to be very careful before you classify a job as exempt. Don’t be shy about reaching out to your labor atty (and yes, you should have one) if you can’t figure it out. This is not a good calculation to get wrong – it can be very expensive.
Alright, back to the exemption categories:
“… Now, let me be clear, if you have a bookkeeping job, but the person you have in the job is a CPA, that DOES NOT mean the job meets the Professional exemption.“
First up – Executive – among other things, the person must direct the work of at least 2 or more other full time employees. So, that means having authority over them, giving them work, evaluating performance, recommending to hire or fire, or actually hiring or firing; and they have to be paid a minimum amount.
At the federal level that amount in 2020 is $684 a week, but remember when I said some states have their own guidelines? Well, California is one of those states, and the minimum salary level in California is twice the minimum wage, on a weekly basis.
In English – if the California minimum wage is $20 an hour (it’s not, but this will make my math easier), then the weekly amount would be $20 x 40 hours which equals $800. That means, in California you would have to pay an exempt level person at least twice that ($1600 a week).
Next – the Administrative category. NO this doesn’t mean Administrative Assistant.
The Administrative exemption is for jobs that involve management of your, or your customer’s, general business operations. It also has the minimum salary requirement we talked about earlier.
On top of all that, there is a special phrase the regulators use “includes the exercise of discretion and independent judgment with respect to matters of significance’. Everybody always asks me what that means, and it’s such a hazy statement, I have to refer them directly to the department of labor’s explanation:
In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.
There’s more, but you get the idea. I’ll put the link to the actual Dept of Labor overview in the description below.
Onward to the next category – Professional
This category also isn’t necessarily what it sounds like. Sure, we are all professionals, or at least we try to be. But this exemption category is for LEARNED professionals – so, among other things, the job must require advanced knowledge in a field of science or learning, kind of like a CPA. Now, let me be clear, if you have a bookkeeping job, but the person you have in the job is a CPA, that DOES NOT mean the job meets the Professional exemption.
All these exemption categories apply to the minimum requirements of the position, not the knowledge or experience of a person who may have the job right now. If it isn’t a requirement to hold a CPA, but it’s a nice to have – I’m afraid that job is still considered non exempt.
And again, the Professional exemption has the minimum salary requirement we talked about earlier.
By the way, there is also a sub category of Creative Professional – but this generally applies to performers and artists.
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Next up – Computer Professional
This one is closer to what you think it is, but with a twist – of course. It’s an analyst, computer programmer, engineer etc. It is not someone who manages and fixes workstations.
This category also has minimum salary guidelines, but they are a bit different than the other categories. At the federal level, there’s a weekly minimum and an hourly minimum. For California, there’s an annual and monthly minimum.
Surprisingly, the Outside Sales exemption is precisely what it sounds like. The job has to be sales done outside the employers place of business. So if you have someone doing cold calls from your office, that would not qualify.
And finally – the Highly Compensated position.
If the position pays (again as of 2020) $107,432 per year or more, it is considered exempt from overtime by the feds.
But – not by California. We don’t have a highly compensated exemption category. So that means, oddly – someone could, in theory, make $200,000 and still be eligible for overtime – if they didn’t meet one of the other exempt categories. Strange but true!
Circling back to our original question –you can see now that whether someone is paid hourly or salary is really determined by their classification of exempt or non exempt. And beyond the pay, there are other rules around dealing with exempt and non-exempt employees.
A few additional words –
And, don’t forget to reach out to your labor atty if you get stuck.