Minimum Wage, Overtime & Exempt vs. Nonexempt Laws

What Is a Minimum Wage?

There is a minimum wage law in most developed and developing countries. In the United States, a federal minimum wage serves as a baseline minimum for the entire country. In addition, a number of state governments have imposed higher minimum wages.

There are exceptions to this law. One is the tip credit, which allows an employer to claim a partial credit for qualifying tipped employees against the minimum wage. There are quite a few rules and regulations governing the payment and handling of tips for tipped employees, so if you have tipped employees go to government websites and look up the appropriate regulations.

Do I Have to Pay Overtime?

In the United States, overtime pay is mandated at a minimum of 1.5 times regular pay for all hours worked beyond 40 in a single week. This rule applies only to nonexempt employees. You do not have to pay overtime to exempt employees.

How Do You Determine Exempt/Nonexempt?

While there are some specific job classifications that the U.S. government classifies as exempt or nonexempt (inside sales is classified as nonexempt while outside sales is exempt), for most jobs employees must satisfy all three of the following tests to be considered exempt from the overtime pay requirement law. What follows is a simplified version of the law:

1. Salary-Level Exempt Test

If an employee is paid less than $47,476 a year ($913 a week), he or she is automatically nonexempt. If an employee is paid more than $134,004 a year, he or she is most likely exempt. These levels will update automatically every three years, beginning on January 1, 2020.

2. Salary Basis Test

The employee must meet the government’s definition of being paid on a salary basis. This doesn’t necessarily mean that he is paid a salary. It basically means that the employee can count on receiving a minimum amount of work each week whether he is paid on an hourly or a salary basis.

3. Job Duties Test

The employee’s work must fall into one of the following three categories:

  1. Executive
  2. Professional
  3. Administrative

Each of these categories is tightly defined by the government, and the government’s definition of these terms is quite a bit different (and more restrictive) than common usage.

Executive, Definition for Being Exempt

To be defined as an executive, the employee’s work must be primarily managerial in nature; the executive must supervise at least two full-time staff (or the equivalent in part-time staff); and the executive must have significant authority over the workers, such as input regarding hiring, firing, and promoting.

Professional, Definition for Being Exempt

Professional workers are defined as having work that is primarily intellectual, typically requiring specialized education (usually post-college level), and includes independent decision making. Professional workers may also be considered exempt if they are in the creative professions, such as art or theater.

Administrative, Definition for Being Exempt

Administrative workers defined as exempt are high-level professional employees whose positions include independent decision making in support functions. An example would the director of human resources. On the other hand, a clerk or an administrative assistant in HR would not be considered exempt. Similarly, the director of plant operations would not qualify under this definition because he or she is in an operational, rather than a support, position. (However, the director of plant operations might qualify under the “executive” definition.)

Note that just calling someone a manager or just paying him a salary does not make him an exempt employee and exclude him from the overtime pay laws.

Also bear in mind that I am giving a simplified definition here. Not only are the full definitions, exceptions, and special rules highly complex, but also the interpretation can change with court decisions—laws for employers are not designed to be simple or straightforward or to make life easy for small business owners!

Do I Need to Hang Informational Posters about the Minimum Wage?

Even if you only employ one person, you need to place certain posters in a highly visible area regularly accessible to your employees—at the entrance to the work area or in a break room, for instance. These posters include U.S. Department of Labor disseminated materials that make public information on the minimum wage, overtime pay, equal pay, child labor, age discrimination, equal opportunity, handicapped workers, employee polygraph protection, and family and medical leave laws. The Occupational Safety and Health Administration (OSHA) department distributes information regarding worker health and safety that is required posting as well. Some states also issue mandated signage.

Poster requirements change from time to time. As a starting point, contact your nearest Wage and Hour Division of the U.S. Department of Labor for currently applicable posters. In addition, you may be required to post information required by your state or even your city government.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.