Exempt vs. Non-Exempt Employees

What are the differences between exempt and non-exempt employees?

It’s important to know if you’ve been incorrectly classified because it can significantly affect what you’re owed in terms of wages and benefits. The most common difference is if an employer is obligated to pay overtime and provide meal and rest breaks or not.

California and Federal labor laws provide basic rights to employees such as minimum wage, overtime pay, and rest and meal breaks. However, these basic rights are not guaranteed to employees who are classified as “exempt.”

The general approach is to apply two tests: “Minimum Salary test” and “Duties Test”

First, to be considered an “exempt” employee, you must be paid a salary that is guaranteed and in a predetermined amount (not an hourly rate) – This is the “Minimum Salary Test ”

Salary Requirements: you must be paid a salary that is “guaranteed and in a predetermined amount. These amounts are the following:

In California, if there are 26 or more employees at a company, a worker will need to earn at least $54,080.00 to be considered an exempt employee. If there are fewer than 26 employees, the salary must be at least $49,920.00

In 2020 California adopted new laws affecting computer professionals and physicians. In California, computer professionals must earn at least $96,968.33 annually ($8,080.71 monthly) or $46.55 for every hour worked for them to be considered exempt and not paid overtime. For licensed physicians, the new hourly requirement is $84.79.

Second you must perform executive, administrative or professional duties. It is important to understand that it is the type of duties/work performed that determines whether you are an “exempt employee,” and not the job title alone.

Duties Test: To be considered an “exempt” employee though, you must occupy a position or carry out work duties that are consistent with that classification.

The duties you carry out at work must be either administrative, professional, or executive. California specifies the following as falling within these exemptions:

California and Federal laws provide different requirements. The following is a summary of the California exemptions:

1. Executive/Managerial Exemption:
   The employee must meet all of the following requirements:
   • Employee’s duties and responsibilities involve the management of the enterprise in which he/she is employed or of a customarily recognized department or subdivision of the enterprise;
   • The employee customarily and regularly directs the work of two or more other employees;
   • The employee has the authority to hire or fire other employees, or employee’s suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status of other employees will be given particular weight;
   • The employee customarily and regularly exercises discretion and independent judgment in performing her/his duties;
   • The employee must spend more than 50% of their work time on exempt duties; and
   • The employee must earn a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment. (Full-time employment is 40 hours per week). (As of 1/1/18, for employers with 25 or less employees, the monthly salary must be no less than $3,640; and for employers with 26 or more employees the monthly salary must be no less than $3,813.33).
2. Administrative Exemption:
   The employee must meet all of the following requirements:
   • An employee spends more than one-half of their work time performing office or non-manual work directly related to management policies or general business operations for the employer or the employer’s customers;
   • Employee “customarily and regularly” exercises discretion and independent judgment in carrying out job duties as to matters significant to the employer’s business;
   • Employee performs his or her job only under general supervision and works along specialized or technical lines requiring special training, experience, or knowledge; and
   • The employee must earn a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment. (As of 1/1/18, the monthly salary must be no less than $3,640 for employers with 25 or less employees and no less than $3,813.33 for employers with 26 or more employees.)
3. Note: Some examples include tax preparers, accountants; quality control, finance; legal and regulatory compliance, and advertising.
4. Professionals Exemption:
   The employee must meet all of the following requirements:
   • Be licensed or certified by the State of California and primarily engaged in one of the following:
     • the practice of or more of the following professions: medicine, dentistry, law, engineering, optometry, architecture, accounting, teaching; OR
     • an occupation commonly recognized as a learned or artistic profession;
   • The employee customarily and regularly exercises discretion and independent judgment in the performance of her/his duties; and
   • The employee must earn a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment. (As of 1/1/18, the monthly salary must be no less than $3,640 for employers with 25 or less employees and no less than $3,813.33 for employers with 26 or more employees.
5. Commissioned Inside Sales Exemption
   For this exemption, the employee’s earnings must exceed one and one-half times the California minimum wage (In 2018, for employers with 25 or fewer employees, the monthly salary must be no less than $2,730; for employers with 26 or more employees the monthly salary must be no less than $2,860); and more than half of the employee’s compensation must be commissions. Note: This exemption is only for the minimum wage and overtime pay requirements, other wage and hour requirements such as meal and rest breaks, and time recording requirements must still be met by the employer.
   
6. Outside Salesperson Exemption
   • The employee must meet all of the following requirements:
   • Be at least 18 years old;
   • Must customarily and regularly work more than 50% their work time away from the employer’s place of business; and
   • Must be engaged in selling tangible items or obtaining orders or contracts for products, services, or use of facilities.
7. Computer Professional Exemption
   For this exemption to apply, all of the following requirements must be met:
   • The employee must spend more than 50% of her/his work time engaged in work that is intellectual or creative and requires the exercise of discretion and independent judgment;
   • The employee must spend more than 50% of her/his work-time performing duties that consist 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 documentation, testing, creation, or modification of computer programs is related to the design of software or hardware for computer operating systems;
   • The employee is highly skilled and is proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, and software engineering; and
   • The employee’s hourly rate of pay, or annual salary if paid on a salaried basis, must meet a minimum amount set by California’s Department of Industrial Relations (DIR). As of January 1, 2018, the DIR set the amounts at $43.58 per hour (a monthly salary of no less than $7,565.85 or an annual salary of not less than $90,790.07 for full-time employment).
8. Note: There are certain computer-related duties that do not qualify for this exemption.

The tests to determine whether the exemptions apply can be complicated. The difference in being an exempt vs. a non-exempt employee can determine your eligibility for important rights such as overtime pay, minimum wage, and meal and rest breaks.

If you believe that you have been wrongly classified as exempt or if you have been deprived of your rights, it is important to consult with an Anaheim employment lawyer to determine your rights. Contact our office today at (562) 461-0995 for a confidential and free consultation.