Exempt Employee Status: It’s NOT Just Salary vs. Hourly

Pay transparency

If you pay an employee a salary, rather than paying them hourly, that means you don’t have to track their hours or pay overtime if they work over 40 hours per week (or 8 per day in California), right?


Per the Fair Labor Standards Act (FLSA), there are very specific rules that determine when an employee can be considered “exempt” from overtime. Unfortunately, the way you pay the employee (salary vs. hourly) is not enough: the employee has to pass three “tests” to be legally classified as exempt.

And since exempt vs. non-exempt employee classifications (or more aptly, MISclassifications) are at the center of many IRS and Department of Labor audits, they need to be the focus of your attention as well.

This topic is so big and so confusing that in addition to covering the basic rules in this month’s trainer, we will give you a link to a self-audit page featuring further instructions and guidance.

Ready? Here are the basics.

What is the Fair Labor Standards Act?

The Fair Labor Standards Act (FLSA) is a federal labor law that governs overtime, minimum wage, child labor protections, and the Equal Pay Act. Under the FLSA, employees are either considered “non-exempt” or “exempt.” Non-exempt employees are entitled to overtime pay. Exempt employees are not.

The FLSA broadly defines several categories of “white collar” jobs, such as doctors, executives, and high-level managers, as exempt from overtime requirements. However, whether a specific position at your practice is exempt or not can be a complex analysis.

Exempt vs. Non-Exempt Employees

Remember, regardless of whether the employee is paid on a salary or hourly basis, they can still be either

  1. Exempt (NOT subject to overtime requirements, minimum wage, or break/rest periods); or
  2. Non-Exempt (ARE subject to overtime pay requirements, minimum wage, and breaks/rest periods).

So, if paying them a salary doesn’t automatically make them exempt, how can you figure out if an employee is exempt or non-exempt?

Answer: It depends on (a) how much they are paid, (b) how they are paid, and (c) what kind of work they do.

With few exceptions, in order to be classified properly as exempt from federal overtime rules, the employee must pass all 3 of these tests:

  1. Salary Level: The position must earn a minimum of $684/week ($35,568/year).  Employers in California, Washington, Colorado, and New York have higher salary limits than that set by the national standard. Licensed physicians in California must receive at least $84.79 per hour. Call CEDR for specific guidance at (866) 414-6056.
  2. Salary Basis: Employee must be paid a predetermined amount each pay period (a fixed salary), without reduction for the quantity or quality of work performed. (Deductions may be made in very limited circumstances.) Note that this test does not apply to doctors, who may be paid on a commission or fee basis and still be exempt.
  3. Job Duties: Employees must meet the duty requirements for one of three categories of exemption: Administrative, Executive, or Professional. This is the tricky part! See our Exempt vs. Non Exempt Guide.

Conclusion: Employees must meet the standards of ALL THREE “tests” to be considered exempt.

Typical Positions That Are Considered Exempt

In a typical medical or dental practice, the only employees that may qualify as exempt are your associate doctors and office managers (if your OMs manage at least TWO (2) employees, not including themselves, for more than 50% of their time). If you’re a dentist, please note that the Department of Labor has repeatedly advised that most hygienists DO NOT meet the requisite levels to be considered exempt. Call CEDR at 866-414-6056 if you need assistance determining whether your hygienists are exempt or not.

If you do a self-audit, there’s no need to announce that you are reviewing job descriptions for exemption status; just do it as a normal part of your HR review process. WAlso, remember that employee classification rules may vary from state to state, so contact the CEDR Solution Center for specific guidance, at 866-414-6056.

Although the specifics can be tricky, if you have taken the time to self-audit and document your efforts, the result of any outside audit you may face will likely be FAR less onerous, even if you got your self-audit wrong. Your documentation will serve as evidence of your attempts to comply with the law.

Moving Your Practice Forward

This overview should have given you a rough idea of the FLSA guidelines for exempt employees. However, as you can already see, there are no “one size fits all” answers. For information tailored to the unique needs of your practice, call CEDR Solutions at (866) 414-6056 or email us at info@cedrsolutions.com.

Now, go have a productive, harmonious, and lawsuit free day!

Updated August 31, 2020; originally published May 27, 2015.

Aug 31, 2020

Friendly Disclaimer: This information is general in nature and is not intended to provide legal advice or replace individual guidance about a specific issue with an attorney or HR expert. The information on this page is general human resources guidance based on applicable local, state and/or federal U.S. employment law that is believed to be current as of the date of publication. Note that CEDR is not a law firm, and as the law is always changing, you should consult with a qualified attorney or HR expert who is familiar with all of the facts of your situation before making a decision about any human resources or employment law matter.

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