This post was written by Emily Martin, Owner of Ally HR Partners LLC

Do you pay your employees hourly or salaried? Are you tracking each hour worked to determine when/if there is overtime payment eligibility? Or are you paying a flat salary per week regardless of time worked?

How you pay your staff isn’t a matter of arbitrary discretion. There are several layered rules and regulations at both the state and federal level that determine how your employees must be paid. These rules vary based on factors like how much you are paying the employee, your industry, and even what the responsibilities of the individual employees are.

One of the most overarching and misunderstood factors in determining how you can pay an employee, is whether the employee’s position is considered exempt or non-exempt.

The term “exempt” refers to a position’s exemption from needing to be paid a minimum hourly rate, as well as exemption from the requirement to pay overtime for hours worked over 40 in a workweek. This is why exempt positions are typically associated with paying employees a fixed salary, because there is no need to track hour for overtime or hourly rate purposes. If a position is “non-exempt”, or not exempt from the minimum hourly wage and overtime requirements, then those requirements still apply, which is why non-exempt employees are typically paid on an hourly basis (there is a need to track hours to determine overtime eligibility).

To help guide you in this decision making, we’ve provided a checklist below which outlines the most common categories available for a position to safely qualify as exempt.

Here are some other quick notes to keep in mind as you use this checklist and assess the roles within your organization:

• Note that each category has both a minimum salary amount component AND a “duties test” component. A position must check every box within each available category to qualify as exempt.
• It is always safest to default an employee to non-exempt status when you are unsure at all about exemption qualification (tracking and paying for hours worked, and paying OT). This is always considered most beneficial to the employee by the DOL, so this is always the safest route. Most employees fall under this status anyway.
• The minimum salary amount for exemption status (not unlike the minimum hourly wage), has been increasing annually for multiple years, and is likely to do so going into the future. Make sure to check this number at the end of each year and adjust accordingly (either the employee’s salary OR their status to non-exempt).
• For the duties test portion of the qualification, the employee’s position in real life (not just based job title or aspirational job descriptions), must meet the requirements. These means what they really do day-to-day.
• Different industries, states, and other qualifying factors may have stricter or looser requirements than what is indicated here based on other rules in place. To be certain about whether you’re correctly paying employees, we recommend reaching out to a professional for a review of this part of your payroll process.

What happens if your business is incorrectly classifying and paying employees?

This area of employment law compliance is highly sought after and targeted for audits and claims, and the DOL has signaled this will be increasingly the case in the coming years.

If you are found to be incorrectly classifying and paying employees, you could be subject to back pay for inadequate salary, “unpaid” and past due overtime, or other wages for up to 3 years, AND a significant fine on top of that amount. These numbers can add up extremely quickly, and the burden of proof to defend yourself is very high.

Moral of the story? You should be taking this very seriously, and if you have any doubt, we recommend a professional review.

The Official Exempt vs Non-Exempt Employee Checklist:

Executive Exemption

1. The employee is compensated on a salary basis at a rate not less than $51,480 (2022) annually, exclusive of board,
   lodging, or other facilities.
2. The employee’s primary duty is managing the enterprise, or managing a customarily recognized department or
   subdivision of the enterprise.
3. The employee customarily and regularly (at least weekly) directs the work of at least two or more other full-time
   employees or their equivalent.
4. The employee has the authority to hire or fire other employees, or the employee’s suggestions and
   recommendations as to the hiring, firing, advancement, promotion or any other change of status of other
   employees are given particular weight.

Executive Status Exemption Test met? ☐Yes ☐No

---

Administrative Exemption

1. The employee is compensated on a salary basis at a rate not less than $51,480 (2022) annually, exclusive of board,
   lodging, or other facilities.
2. The employee’s primary duty is the performance of office or non-manual work (work that does not involve
   repetitive operations with their hands, physical skill, and energy) directly related to the management or general
   business operations of the employer or the employer’s customers (generally this is work directly related to assisting
   with the running or servicing of the business (non-production or retail).
3. The employee’s primary duty includes the exercise of discretion and independent judgment with respect to
   matters of significance. Generally this involves the comparison and evaluation of possible courses of conduct and
   acting or making a decision after the various possibilities have been considered, and having the authority to make
   this decision independent from immediate direction or supervision. Decisions must be considered significant beyond
   the potential that they could causes significant financial loss to the employer.

Administrative Status Exemption Test met? ☐Yes ☐No

---

Outside Sales Exemption

1. The employee is compensated on a salary basis at a rate not less than $23,660 annually, exclusive of board,
   lodging, or other facilities.
2. The employee customarily and regularly is engaged away from the employer’s place or places of business.

Outside Sales Status Exemption Test met? ☐Yes ☐No

---

Computer Employee Exemption

1. The employee is compensated on a salary basis at a rate not less than $23,660 annually, exclusive of board,
   lodging, or other facilities.
2. The employee is a computer systems analyst, computer programmer, software engineer, or other similarly skilled
   worker in the computer field.
3. The employee’s primary duty consists of one or more of the following:
    The application of systems analysis techniques and procedures, including consulting with users, to
   determine hardware, software or system functional specifications;
    The design, development, documentation, analysis, creation, testing or modification of computer systems or
   programs, including prototypes, based on and related to user or system design specifications;
    The design, documentation, testing, creation or modification of computer programs related to machine
   operating systems

Computer Employee Status Exemption Test met? ☐Yes ☐No

---

Creative Professional Exemption

1. The employee is compensated on a salary basis at a rate not less than $23,660 annually, exclusive of board,
   lodging, or other facilities.
2. The employee’s primary duty is the performance of work requiring invention, imagination, originality, or talent in
   a recognized field of artistic or creative endeavor (typically actors, musicians, etc.).

Creative Professional Status Exemption Test met? ☐Yes ☐No

---

Learned Professional Exemption

1. The employee is compensated on a salary basis at a rate not less than $35,568 (as of 2020) annually, exclusive of
   board, lodging, or other facilities.
2. The employee’s primary duty is the performance of work requiring advanced knowledge. This is work which is
   predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and
   judgment.
3. The advanced knowledge is in a field of science or learning (requires a specialized degree).
4. The advanced knowledge is customarily acquired by a prolonged course of specialized intellectual instruction
   (usually refers to a degree, or extensive training/practice).

Learned Professional Status Exemption Test met? ☐Yes ☐No

---

As mentioned above, with developments at both the Federal and State levels that explicitly signal increased efforts to actively seek employer violations, there has been no greater time in history for businesses to ramp up compliance efforts. Wage and Hour violations can mean big, unexpected, payouts for employers, and that’s not even considering any penalties levied on top of what’s deemed “owed” to staff. We highly recommend reaching out about a complete review of your practices today if you think there is any question of total compliance.

---

This post was written by Emily Martin, Owner of Ally HR Partners LLC, a Buffalo-based HR consulting firm that helps small businesses identify and implement custom solutions to their people problems and opportunities. Often a business’ #1 expense, Ally HR Partners believes your people should be your #1 asset. Through an integrative partnership approach, Ally becomes your internal expert on all things HR including compliance assurance, performance management, and strategic HR initiatives designed to make the most out of your Human Capital. For more information about how Ally can work for you, visit AllyHRPartners.com