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 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 ’30s; 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 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.

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.