This is an employment status that revolves around job duties,
NOT the method of being paid (Salaried/Hourly)
This issue is a continual problem and potential lawsuit.
Employees may be exempt from several laws and regulations based on a variety of different reasons but typically when people refer to exempt employees they are talking specifically about FLSA and the Wage Orders which exempt employees from overtime (and, in California, meal and rest breaks as well as some recordkeeping and other regulations).
The FLSA (Fair Labor Standards Act) covers employees at the federal level while the Wage Orders covers employees at the state level. You should have the appropriate Wage Order posted along with your posters for your employees. The Wage Orders are divided by industry and occupational classifications. The Wage Order is a critical document for your business as it specifies many of the workplace requirements.
So, which employees are exempt and which ones are non-exempt? Here are some basic definitions:
Nonexempt. Nonexempt employees are those who are covered by the provisions of the FLSA and the Wage Order. This is most of your workforce.
Nonexempt employees may be hourly or salaried or be paid according to a variety of other structures, as long as minimum wage standards and overtime regulations are met. These employees are typically paid on an hourly basis but may be paid a “salary” (however, overtime provisions still apply and must be calculated appropriately). Nonexempt employees may also be paid via flat rate or piece rate or a commission rate (with or without an hourly rate as well).
Exempt. Exempt employees must fall into one of the following: executive, administrative, outside sales, and professional employees or employees of federal, state, and local governments. Exempt employees are almost always salaried (except various computer professionals). These exempt employees must “customarily and regularly exercise discretion and independent judgment” and be doing exempt level work at least 51% of their time. The standard for the independent judgment is a difficult standard to meet – be very cautious on who you determine to be an exempt employee. Misclassification can lead to costly legal battles, class action lawsuits and potential misdemeanor charges.
For workers hired on a weekly, monthly, or annual basis, the rate of pay normally expressed in terms of dollars per week, month, or year, as opposed to payment for an hour of work. Salary cannot be altered as a result of a change in productivity or quality of work; shortened work week; or other short-term leaves, such as jury duty or witness leave. In California, exempt employees must be paid a monthly salary of at the equivalent of at least two times minimum wage.
(When minimum wage goes up on July 1st, you need to make sure that your exempt employees are still being paid at the appropriate rate — at least $3120/month.)
The “discretion and independent judgment” phrase this phrase means the comparison and evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The employee must have the authority or power to make an independent choice, free from immediate direction or supervision and with respect to matters of significance.