Salary exempt vs. non-exempt

As a business owner, you have probably heard the words "exempt" and "non-exempt" when talking about your employees or hiring. These groups are described in the Fair Labor Standards Act (FLSA). This law was passed in 1938. It sets rules for minimum wage, overtime pay, youth employment, and record keeping for both private and public businesses. The FLSA mainly explains how work hours are tracked and how employees should be paid. Even though the FLSA has changed over the years, it still controls how the workforce is managed today, including child care centers and small businesses.

Understanding labor laws and overtime rules can be confusing. However, employers must put their employees in the right groups or they could face expensive penalties. The term "non-exempt" means workers who are covered by the FLSA rules. In other words, they are not exempt from the law. The term "exempt" means workers who do not have to follow the law. A common mistake is thinking that employees who are paid a "salary" are exempt from overtime and other rules. But the law is more complicated than that. You need to figure out the employee's status under the U.S. Department of Labor Fair Labor Standards Act. By looking at your employees' jobs, you can better understand what you need to do as an employer.

To understand how an employee should be classified, there are two criteria: a salary amount threshold, and the kind of work they perform. Employees exempt from the FLSA must be paid a salary above a certain level and must have specific duties. See below for Department of Labor details to help determine which of your employees might meet the exemption criteria.  

The main difference between these worker classifications is that employers are not required to pay overtime to properly classified exempt workers. They must receive their full salary regardless of the number of days or hours worked. Since they are not paid according to the hours worked, if salary-exempt employees work more than 40 hours, there is no requirement to pay overtime. Exempt employees are also excluded from other FLSA protections afforded to those who are non-exempt. 

As stated in the FSLA, in most instances, an employee that has a salary basis of no less than $684 per week or $35,568 annually is classified as exempt. However, for teachers, that threshold is lower, $455 a week or $23,660 a year. While overtime pay is not required for these workers, they can be given additional compensation in the form of bonuses or stipends.  

In addition to their salary level, there are also certain exempt professions, such as administrative, executive, outside sales, etc. If an employee performs the duties related to these types of positions, they may also be classified as exempt. (More on those specific positions and duties below.)  

On the other hand, employees who are classified as non-exempt are required under the FLSA to receive overtime for any hours worked over 40. These employees are usually paid an hourly wage or earn a salary that’s less than the minimum amount required. Since they are not exempt from the FSLA, non-exempt employees who work more than 40 hours in a week must be paid an overtime rate of one-and-a-half times their regular pay.   

Most non-exempt must be paid at least the federal minimum wage, but many states or jurisdictions with higher costs of living have set minimum wages above the federal base. If a non-exempt employee isn’t paid by the hour, but is entitled to overtime pay, their hourly rate is calculated by dividing the total compensation earned by the total hours worked – not including vacation, holidays, or sick days used.  

In 1972, the FSLA was amended specifically to extend the coverage of the law to preschools and child care centers. This is true for both public and private institutions, and those operated on both for-profit and non-profit models. (All public school system staff, including those in child care, are considered exempt.)  

The government outlines covered early education “enterprises” as ones that provide “custodial, educational, or developmental services to preschool-age children to prepare them to enter elementary school grades.” Family child care providers, or home-based providers, are not considered covered under this amendment unless they have employees.  

If a child care business’s employees are not otherwise exempt due to their salary level or assigned duties, the employer is required to meet FSLA guidelines. This includes establishing a set workweek for pay purposes, maintaining payroll records, paying at least the federal minimum wage, and paying the required overtime rate for more than 40 hours worked.  

In addition, independent contractors, or those paid via 1099 are not covered by the FSLA, so they are not entitled to the wage and overtime pay benefits outlined in the law. 

As noted, two criteria help determine whether your employee will be exempt from FSLA. In addition to the set salary threshold, there are also standards related to the position they hold, the type of jobs and duties they perform, and their level of authority or autonomy to make decisions. Exempted positions and duties may include: 

An Executive/Administrator who:  

• Supervises more than two employees 
• Management is the primary duty of the position 
• Has genuine input on the job status of others (hiring, firing, etc.)  

Or, a “Learned” Professional who:  

• is in a field of “science or learning” with advanced knowledge acquired with prolonged study and education  

Let’s look at certain exemptions as they relate to child care businesses.  

The “executive” or “management exemption” and child care 

According to labor laws, an exempt executive job is one where a person manages a unit or department and regularly directs the work of at least two employees. To be considered exempt, at least half of this employee's work must be in this area. Management tasks like interviewing, directing work, evaluating performance, or starting disciplinary actions count as exempt activities. However, routine office tasks like billing, filing, and bookkeeping do not.

In a larger child care center, this likely means that the Director is exempt. Most of their duties are executive or managerial compared to the rest of the staff. An Assistant Director probably falls somewhere in between. They may spend more than half their time in classrooms doing the same things as other staff members. The important thing to remember is that just having a management title does not automatically make a person exempt.

The exemption criteria that is the most vague and commonly misapplied has to do with an employee that performs “administrative duties.” An exempt administrative employee:  

1. Regularly exercises discretion and independent judgment 
2. Devotes more than half their time to performing specialized or technical work that requires special training, experience, or knowledge 
3. Earns at least $250 a week on a salary basis  

Overall, the exempt administrative employee’s discretion and independent judgment must relate to business operations or policies that involve substantial “matters of consequence” to the business, customers, or other employees. Again, because job titles are not a reliable way to determine exemption, this is a place where employees are often misclassified. 

The “learned professional exemption” and child care  

Sometimes, an employee who works as a teacher might be exempt from FSLA rules. This is because there is an exception for "learned professionals." For a teacher to be considered a "professional," their main job must be to teach, tutor, or lecture children. If their main job is to take care of the children and meet their physical and emotional needs, they will not be exempt.

Under FSLA, an exempt employee must do administrative or professional tasks at least 50% of the time. It is hard for child care teachers, especially those who work with very young children, to meet that requirement.

A child care teacher will qualify as an exempt employee under the “learned professional” exception to the FLSA if three requirements are met:  

1. The teacher must be paid on a salary basis not less than $455 a week or $23,660 a year. 
2. The teacher’s primary duties must be lesson instruction or work that imparts knowledge to the children in their care rather than activities that meet their physical or emotional well-being. 
3. The job performed by the teacher must require “advanced knowledge in the field of science or learning” which is “customarily acquired by a prolonged course of specialized intellectual instruction.”  

 This last rule means that the teaching job must require at least a four-year degree from a good college or university. The degree should be in early childhood education, elementary education, or a related field. If a center has teachers who meet this education requirement and teachers who do not, it might need to create two different job titles and descriptions. This would help keep the more educated teachers in exempt status. 

The “teacher exemption” and child care 

Besides the "Learned Professional Exemption" to the FLSA, there is also a "Teachers Exemption." This one has much easier education rules than the first one. In fact, according to a Department of Labor letter from October 2005, there are no minimum education requirements for real teaching professionals in educational places. Also, unlike the "Learned Professional Exemption," the "Teacher Exemption" does not have a minimum salary requirement.

Unfortunately, this sounds like a perfect FSLA exception for child care teachers. However, the "teachers' exemption" has one extra rule that makes it not useful for most child care providers. To qualify for the exemption, the teacher must work in an "educational establishment." This means that unless a child care business is certified by their State Department of Education as a preschool or kindergarten, the "teacher exemption" does not apply to their employees.

As we’ve outlined, the FSLA defines “mandatory overtime” as work time above and beyond a 40-hour, pre-scheduled workweek. A non-exempt employee who works over 40 hours in that week must receive overtime compensation or pay calculated at one-and-a-half times their normal wage.   

For the purposes of FSLA, employers that authorize short breaks or rest periods must count them as hours worked. Short rest periods, usually around 20 minutes, are common and customarily paid as work time. Meal periods of 30 minutes or more are generally not compensated, as long as the employee is completely relieved from job duties for that entire time. If an employee watches over napping children while they eat lunch, for example, they are not considered “relieved.”  

Similarly, attendance at trainings, meetings, or professional development must be counted as work time unless all of the following criteria are met:  

• (a) it occurs outside normally scheduled hours of work; 
• (b) it is completely voluntary. 
• (c) it is not job-related (unless the employee attends an independent school or college on his/her own initiative outside work hours); and, 
• (d) no other work is performed during the period.   

Time spent at a training that is required by the state for licensing purposes is work time that employees must be compensated for.  

Example overtime scenarios 

1. Andrew’s mother arrived 1 hour late to pick them up and the teacher, Ms. Alicia, has already reached her 40 hours for the week. Since Ms. Alicia was required to stay until the parent arrived, one hour of overtime could be paid in this situation. 
2. Lori, the director of the program, has scheduled meetings with parents at 5:30 on Monday, Tuesday, and Wednesday of this week. The center closes at 5:00 p.m. but this is the only time these parents are available. This will go beyond 40 hours for her. If Ms. Lori is a salary exempt employee, she will not be paid extra for this time. 
3. All staff members are required to complete mandatory CPR training on Saturday for Uptown University Child Care Center. All the staff have met their 40-hour work week, so the additional time is counted as overtime.  

People who study work laws have found some common problems with how child care workers are treated. The main one is that employers do not always count all the hours worked. For example, workers might be on a meal break but still have to watch kids, talk to parents, or do a work task. If a worker is doing job tasks, they should write down that time for the week.

Also, employers are watched if they make workers stay late, come in early, or go to training without pay or for a set amount instead of their normal pay. Other things that could break the law are taking money out of paychecks wrongly, paying a set amount for overtime, or only paying the right overtime after 80 hours in two weeks, instead of after 40 hours in one week.

Child care owners should put the job type (exempt or not) on the job description or in the employee handbook. Workers should sign a copy to keep in their files.

Finally, all employers should know that the rules about who is exempt and the work laws are tricky. They often depend on the details of your business and the jobs your workers do. It can help to talk to a pay expert or a work law lawyer to get clear answers about job types, pay, or worker issues.

Disclaimer 

The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.