What Managers Need To Know About Employee Types

As a manager, you likely know that employees under your purview are entitled to minimum wage and that children under the age of 18 cannot work in same way as adults. These are several of the changes brought about by the Fair Labor Standards Act (FLSA) in 1938, in addition to the 40-hour work week and the eight-hour workday.

Exempt Versus Non-exempt Employees

One facet of the FLSA classifies workers as "exempt" or "non-exempt" from some or part of these rules based on particular job duties and salary levels. These are often referred to "salaried" employees or "hourly" employees. It's important to have a cohesive understanding of this distinction so that you can make the best hiring choices for your business - and ensure you're compliant with the associated labor laws.

The most notable difference between exempt and non-exempt employees is overtime pay. Workers who are non-exempt must be paid at one-and-a-half times their regular hourly rate if hours worked exceed 40 hours per week. Employees taking salaries are exempt from this rule (exempt vs. non-exempt).

That said, not all employees can qualify for exempt status. If you wish to hire an employee who is exempt from the FLSA, they must meet certain criteria:

• The employee must serve an executive, professional or administrative purpose.
• The employee earns at least $455 a week (increasing to $684 a week beginning January 1, 2020).
• The employee is paid a salary for any week they work.

While there are hard numbers attached to the salary requirements, the "purpose" criterion is somewhat vague.

Exceptions to the FLSA

• Executive exemption: Must manage at least two people and have demonstrable sway in hiring and firing.
• Administrative exemption: Must be a non-labor employee whose work requires independent thought and minimal supervision. This is an employee whose primary duty involves business operations in a non-labor setting, given that they are making discreet judgement calls in significant business matters. It's fairly easy to imagine the difference between a factory worker who simply follows directions and the computer drafter whose discretion directly impacts the factory's product mix, or a VP whose opinion determines overall business strategy.
• Professional exemption: Must be someone with specialized knowledge in an area that requires significant training to add business value beyond a lower skilled worker. Examples are engineers, scientists, teachers and high-level academics.

Rules for Non-exempt Employees

• Must make federal minimum wage of $7.25 per hour.
• Must be paid 1.5 times their normal rate after working 40 hours.

There are some exceptions to these rules, including tipped workers, movie theater employees and truck drivers.

Your state's specific rules for non-exempt employees may vary. The most common example and most enforced is minimum wage, non-compliance here can lead to six or even seven figure payouts in court cases. In the event that your state expands beyond the FLSA, your state's law always supersedes it. And states such as Washington or Arizona raise their minimum wage with inflation / the cost of living each year.

Another common exemption from federal minimum wage are employees who earn tips. These employees may be paid $2.13 per hour so long as their tips add up to federal minimum wage at the end of the month. To be a tipped employee, one must earn at least $30 per month from tips.

Additionally, some industries have their own sets of rules and regulations that make them exempt from the FLSA. While uncommon, hiring managers should note that truck drivers, railroad workers and movie theater employees may be exempt from overtime and be paid hourly. Child labor laws and the established minimum wage still cover these industries. Some states have passed laws that address this, so check with your local labor board.

In the case of movie theater employees, your business may be defined as a movie theater if more than 50% of your business comes from selling tickets to movies, so a combination eatery and theater may apply, but a business that operates a theater as a small element of their business operations would not.

Businesses dealing with special situations can call their local labor board, or speak with a professional at Inflection HR, which offers answers to complex employment questions.

Rules for Contractors

Managers may also want to hire contractors to supplement the work performed by exempt and non-exempt employees. Due to the growth of the rules regarding contractors are very important. Contractors should not earn their entire income from a contracting situation based on their economic reality in conjunction with factors like the permanency of the relationship, the contractor's investment into company materials and opportunity for profit and loss. Contracting may be a suitable option for these cases, and many contractors can become full time, non-exempt employees providing significant benefit to your organization.

There are many intricacies surrounding exempt and non-exempt employees, beyond the basic difference of earning a yearly salary versus an hourly rate plus overtime pay. By knowing the specific differences between exempt and non-exempt employees, you can choose the best possible model for your organization to increase employee retention, maximize productivity and grow your business while complying with local and federal laws. This is a space to watch as states like California implement new laws surrounding employment regulations.

Managing your business and working through the nuances of these issues can be difficult. Inflection HR offers labor law compliance support with both on-demand HR support and a comprehensive HR center that includes a self-audit, a full policy library and Q&A livestream to ensure your business is completely compliant.