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decoding overtime's trickiest rules
It’s one of the most misunderstood sets of rules in all of HR compliance; and per some estimates, between 70 to 90 percent of employers get it wrong. The Fair Labor Standards Act (FLSA)’s rules governing overtime pay have challenged employers for decades, in large part due to what’s referred to as the “duties test.”
On its face, it’s a simple concept: an employee’s day-to-day responsibilities and role within the broader organization should determine his or her overtime eligibility. But the FLSA was first drafted in 1938, and even subsequent revisions in the 40s, 70s, and early 2000s have failed to clarify key parts of the rules.
The end result? The duties test is nuanced, and interpreting it has become something of an artform. This helpful guide will clarify the rules and empower you to conquer the duties test.
Ready to dive in? Duty calls.
A Tale of Two Tests
While this guide covers the duties test, remember that overtime eligibility is dependent on other factors, too. When classifying employees, HR managers need to make two considerations: wages and job responsibilities. These two must be considered in tandem—fulfilling just one of these tests doesn’t automatically lead to an employee’s classification as exempt or nonexempt.
NAMELY REMINDER:
If an employee is “nonexempt,” they must be eligible for overtime pay. If an employee is “exempt,” they do not have to be eligible for overtime.
The Wages Test
The wages test sets a minimum pay threshold for overtime exemption. Over that threshold, employees may be exempted from overtime in certain circumstances. Under it, an employee must be eligible for overtime pay regardless of their rank or job duties (unless they’re an outside sales employee, as you’ll learn in this guide).
Since 2004, the minimum salary for exemption has been $23,660, or $455 per week. That minimum had nearly increased last year, but as of this guide’s publishing it remains the same.
Overtime status is determined by two factors: wages and job duties. The latter is the hardest part to get right.
The Duties Test
The duties test is where things start to get complicated. If an employee earns more than $23,660 per year, his or her overtime eligibility is determined by looking at job responsibilities.
As provided by the FLSA, the Department of Labor (DOL) enforces seven classes of potentially exempt workers:
Executive Employees
Administrative Employees
Learned Professionals
Creative Professionals
Computer Employees
Outside Sales Employees
Highly Compensated Employees
Within each of these classes, an employee’s responsibilities and role within the broader organization are considered. Each has its own specific set of rules, exceptions, and pitfalls, all of which we’ll explore in this guide.
Let’s get started. Read on or head straight to a specific exemption class by using the navigation panel on the left.
Exemption Classes
Executive Exemptions
To qualify as exempt from overtime under this exemption, an employee must:
Earn more than $455 per week, or $23,660 annually
Must have a primary duty of managing the enterprise, or “managing work customarily recognized as a department” of the enterprise
Must manage the work of at least two other full-time employees
Have the authority to hire, promote, or fire others—or have his or her suggestions be given “particular weight” in those decisions
All of the above conditions must be fulfilled for the employee to be considered exempt.
Don’t be fooled by the “executive” moniker. The FLSA’s definition of an executive employee closely aligns with what is popularly considered a manager. If an employee manages two or more full-time employees, can influence who gets hired and fired, and earns over $23,660 a year, they likely qualify for the executive exemption.
Part of the reason why employers struggle with the duties test is its unclear language. “Management of the enterprise” simply refers to activities such as interviewing job candidates, setting pay schedules, handling grievances, and apportioning work to employees. A full list of examples responsibilities is provided in the text of the FLSA.
If the above activities account for the majority of the manager’s day-to-day tasks, he or she should be considered exempt. While the law does not define a specific methodology for determining what an employee’s “primary duties” are, the DOL seems to prefer the 50 percent or more model.
Note that job titles have no bearing on whether an employee is exempt from overtime. An individual with “manager” in their title isn’t necessarily exempt. Their day-to-day responsibilities must align with the criteria set by the DOL above.
POTENTIAL EXAMPLES
EXEMPT
Sarah earns a salary of $54,000 as a customer service manager and oversees a team of three support associates. Her team is in a recruiting push, and she has been asked to hire two new employees by the end of the year.
Why: Sarah earns more than the minimum salary for exemption and oversees the work of two employees. Most of her time is spent performing managerial duties, including interviewing and hiring.
NONEXEMPT
Jim earns about $31,000 as an assistant manager at a local restaurant. While he oversees and sometimes coaches other restaurant employees, he spends the vast majority of his time working the register and in the kitchen.
Why: While Jim technically manages employees and earns more than $23,660, most of his time is spent on the floor performing nonexempt duties.
Administrative Exemptions
To qualify as exempt from overtime under this exemption, an employee must:
Earn more than $455 per week, or $23,660 annually
Perform office or non-manual work related to “the management or general business operations” of your company
Be empowered to exercise their “discretion and independent judgement”
All of the above conditions must be fulfilled for the employee to be considered exempt.
The administrative exemption is the least specialized of all the exemptions, and it likely plays into a majority of classification decisions. Appropriately, this versatility also means that it's the most misunderstood and misapplied exemption.
Employees qualifying for the administrative exemption do not need to manage others. That being said, they should be empowered to make decisions that can be directly tied to the performance of the business, or per the FLSA’s language, “matters of significance.”
The administrative exemption accounts for most OT decisions. Conveniently, it's also the most complex.
Importantly, the potential for an employee blunder to financially impact the company does not play into the so-called significance test. For example, if an otherwise nonexempt worker can potentially break an expensive piece of machinery, costing the business thousands, that alone doesn’t mean the employee would qualify.
This criteria is easily the most puzzling part of the administrative exemption, and the DOL has offered little guidance on what constitutes matters of significance. It is for this reason that employers are best served erring on the side of caution when making classification decisions for grey-area employees.
While job titles are not always good indicators for exemption status, here are some company departments where you might find a high concentration of employees who qualify for the administrative exemption:
Human Resources
Finance
Payroll
Marketing
Public Relations
IT/Tech Support
Be sure to note that a qualifying employee’s duties don’t have to exclusively impact their own company’s operations. If the employee’s decisions impact a client’s business, that too can qualify him or her under the exemption. A financial consultant, for example, would likely qualify for exemption under these rules.
POTENTIAL EXAMPLES
EXEMPT
John is an insurance claims analyst, earns a salary of $70,000, and has no direct reports. Some of his duties include interviewing insured clients, reviewing damage reports, preparing estimates, and helping determine eligibility for coverage.
Why: John’s employer has given him say over matters of significance, and his decisions have a direct impact on the company and clients’ financial well being.
NONEXEMPT
Jenny is a city building inspector who earns $72,000 per year. She reports directly to the building commissioner and has one direct report, an administrative assistant. Her primary responsibility is surveying commercial properties and determining whether they’re structurally stable and sanitary.
Why: While Jenny is granted some leeway to make her own decisions, her work is highly regulated and must abide by building code. This reliance on pre-established rules makes her a weak candidate for overtime exemption.
Learned Professional Exemptions
To qualify as exempt from overtime under this exemption, an employee must:
Earn more than $455 per week, or $23,660 annually
Primarily perform work that requires “advanced knowledge,” or work that is intellectual in nature
The employee’s area of expertise must be related to a field of science or learning, and come from a prolonged course of study
All of the above conditions must be fulfilled for the employee to be considered exempt.
Compared to the administrative exemption, which is often applied broadly, the learned professional exemption is highly specialized. Under this rule, employees whose work requires prolonged study can be considered overtime exempt. It is most commonly applied to legal, medical, and teaching professionals.
Despite having to go through a period of apprenticeship, skilled “blue collar” tradesmen, like carpenters and plumbers, are not covered by the exemption.
Below are some professional fields that commonly qualify for the learned professional exemption:
Law
Medicine
Theology
Accounting
Engineering
Architecture
Education
Chemistry
Pharmacy
POTENTIAL EXAMPLES
EXEMPT
Michael, a certified public accountant (CPA) is an audit associate for a major accounting firm. As part of his job responsibilities, he provides tax and advisory services to client companies.
Why: Michael’s job, which requires “advanced knowledge,” in the form of CPA certification, is a strong candidate for overtime exemption. His decisions’ impact on client operations help substantiate his case under the administrative exemption, too.
NONEXEMPT
After graduating from college with a major in education, Gillian accepted a job as a teacher’s aide at a local elementary school. Her primary responsibilities include helping teachers prepare for their lessons, printing classroom assignments, and recordkeeping.
Why: Though Gillian has some education in her field, her undergraduate degree is unlikely to meet the DOL’s interpretation of “prolonged study.” Additionally, she largely carries out tasks assigned by another teacher—meaning her independent discretion on day-to-day affairs is limited.
Creative Professional Exemptions
To qualify as exempt from overtime under this exemption, an employee must:
Earn more than $455 per week, or $23,660 annually
Perform work that requires “invention, imagination, originality, or talent” in the arts or a creative field
All of the above conditions must be fulfilled for the employee to be considered exempt.
The creative professionals exemption is a specialized but generally straightforward rule. It applies to the fields of music, writing, acting, or visual arts, and requires that qualifying employees are granted creative license in their work.
What constitutes “creative license” is subjective, and not all roles offer it to the same degree. Under the rules of this exemption, a professional should be allowed to incorporate some element of individuality into their work.
Consider this example: a company employs two graphic designers and assigns the same task to both. If the end results are nearly identical because of preexisting limitations put in place by the employer, the designers may not qualify for the exemption.
Just because it's called the creative exemption doesn't mean you can get "creative" with your OT decisions.
Depending on the nature of their work, journalists may or may not be exempt under this rule. Writers who rewrite press releases or “write standard recounts of public information,” as phrased by the DOL, do not qualify. Those who engage in investigative journalism, write editorials or commentary, or are otherwise granted some creative license in their work, can be made exempt. Because their work can be construed as “performance,” TV and radio journalists may also be made exempt in certain cases.
Below are some of the professions that usually qualify, as defined by the DOL:
Actors
Musicians
Composers
Soloists
Painters
Writers
Novelists
Cartoonists
Graphic designers
POTENTIAL EXAMPLES
EXEMPT
Kelsey is a graphic designer at small technology company. Her primary duties include planning and designing concepts for advertising and other marketing initiatives. As assigned, she also handles the design of sales and internal collateral.
Why: Kelsey’s involvement from the inception of an idea to its execution makes her a likely candidate for exemption. While she likely performs nonexempt work from time-to-time (e.g., the redesign of presentation materials based on pre-existing brand guidelines), these tasks only account for a small part of her day.
NONEXEMPT
Brie-Ann is an inker and letterer, contracted by a major newspaper. Her job responsibilities include re-tracing the paper’s cartoons and formatting the text that goes into the cartoons’ “speech bubbles.”
Why: While she likely holds an arts degree, Brie-Ann’s output is controlled by both the original cartoonists and the newspaper’s chief editors. She prepares the cartoons for publication, but is not directly involved in their inception.
Computer Professional Exemptions
To qualify as exempt from overtime under this exemption, an employee must:
Earn more than $455 per week, or $23,660 annually
Be employed as a computer systems analyst, programmer, software engineer, or “similarly skilled” position
Hold primary duties that consist of systems analysis, including consulting with users, or the design or development of computer systems or programs
All of the above conditions must be fulfilled for the employee to be considered exempt.
This rule, like the learned professional exemption, is highly specialized. It applies to programmers and engineers specifically, and is one of the rare instances where specific job titles are listed in the legislation.
While most of your engineers likely hold degrees, note that education does not explicitly factor into the computer professionals exemption.
Just putting "computer" in an employee's job title doesn't qualify them for exemption.
Importantly, this exemption does not apply to computer manufacturing or repair positions. An employee whose work is dependent on the use of computer programs (e.g., a structural engineer using drafting software) does not qualify, either.
Additionally, don’t assume your IT department is automatically exempt just because this exemption has “computer” in its name. An employee that maintains company software or troubleshoots internal issues doesn’t qualify, even with their specialized knowledge.
POTENTIAL EXAMPLES
EXEMPT
Paulina is a systems engineer at a global aerospace and defense company. Her primary responsibilities include the development, testing, and management of missile guidance systems.
Why: Paulina is directly involved in the development of her company’s technology. Her job responsibilities and specialized knowledge makes her a probable candidate for exemption.
NONEXEMPT
Eugene is a help desk associate who earns an annual salary of $65,000. He installs and troubleshoots company software, manages the phone system, and helps keep the business’s data secure.
Why: Eugene is not a systems analyst, programmer, or software engineer, as defined by the FLSA. Additionally, he only manages existing hardware and software—he is not involved in its development or testing.
Outside Sales Exemptions
To qualify as exempt from overtime under this exemption, an employee must:
Primarily spend his or her working hours trying to make sales or secure contracts
Be regularly outside of the company’s offices as part of his or her work
All of the above conditions must be fulfilled for the employee to be considered exempt.
Unlike the other exemption categories, outside sales does not have a minimum salary requirement. This exemption only applies to salespeople who spend 50 percent or more of their working hours off-premises making sales. The employee does not have to strictly be at a prospect’s place of business to qualify; the employee can be at a fair or conference as well, as long as his or her attendance is for the sole purpose of attracting new clients.
Note that a sales employee working remotely from home does not qualify as “outside sales” under the rule. According to the exact text of rules:
“Any fixed site, whether home or office, used by a salesperson as a headquarters or for telephonic solicitation of sales is considered one of the employer’s places of business, even though the employer is not in any formal sense the owner or tenant of the property.”
POTENTIAL EXAMPLES
EXEMPT
Ashley is a sales representative for a local beverage distributor. She spends most of her time pitching her company’s products to hospitals and supermarkets, on location.
Why: Success in Ashley’s role requires that she spend most of her time away from the office, meeting and building relationships with prospective buyers. Because this meets the DOL’s interpretation of “outside sales,” she can be exempted from overtime.
NONEXEMPT
Mary is a sales development representative who spends most of her day making cold calls to prospective buyers. While an hourly employee, she receives a commission for every client that ends up purchasing her company’s services.
Why: Though Mary is in sales, she does not meet the FLSA definition of “outside sales”—she does not spend most of her working time off company premises or at a prospective buyer’s place of business.
Highly Compensated Employees
To qualify as exempt from overtime under this exemption, an employee must:
Earn $100,000 or more annually
Primarily perform office or non-manual work
Regularly perform at least one duty that classifies under the other exemptions
All of the above conditions must be fulfilled for the employee to be considered exempt.
This exemption is the most straightforward of them all: if an individual earns over $100,000 per year, he or she will generally be considered a “highly compensated employee” (HCE) and exempted from overtime. Some exceptions do apply, depending on the work done (it must be non-manual), but these are few and far between.
Bonuses and commission can count towards the annual $100,000 requirement. The only stipulation is that neither expense reimbursements nor medical insurance can be counted in that calculation.
In all likelihood, any employees who qualify under this rule can already be made exempt under the executive exemption. In the rare instance that you have an HCE that does not manage any employees, you can reference this exemption.
State Variations
While the FLSA sets a national baseline for overtime rules, note that some states go even further as it pertains to the duties test. Nineteen states, to be exact, have drafted their own overtime rules.
One unique example is California, a state known in the HR community for going its own way. For example, in order to qualify for a learned professional exemption, in most cases an employee would need to hold a state-recognized license or certification. The computer professional exemption category has also been altered; the minimum salary for an engineer or programmer to even be considered for exemption is $87,154 per year.
And what of the highly compensated employee exemption? California doesn’t recognize it as a legitimate excuse for exemption, so don’t count on that.
Familiarize yourself with local overtime rules, adjusting your employee handbook wherever necessary. Be sure that managers and nonexempt employees are trained on how to log and manage hours, and understand what constitutes overtime pay in the state and city that employees are working in.
Conclusion
Determining an employee’s eligibility for overtime is rarely a straightforward process. The cost of getting classification wrong could be significant, so strongly consider bringing in an employment attorney who specializes in the FLSA. Legal counsel can help you cut through the uncertainty and safely navigate your state and city’s overtime rules, too.
When in doubt, keep this tip in mind: paying an employee overtime is always allowed. The FLSA’s overtime rules set a minimum, not absolute requirement. For those roles that sit squarely in the grey area between exempt and nonexempt, defaulting to the latter is the most prudent course of action.
With your classifications set, you’ll be ready for the next big hurdle in overtime compliance: managing employee hours. Getting managers and employees on board with FLSA rules and timekeeping rules can be even more challenging than determining exemption status.
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