What is the Difference Between Exempt and Non-Exempt Employees Under California Labor Laws?

Exempt employees are a category of workers who, according to California law:

• typically have a white-collar job,
• earn an annual salary instead of an hourly wage, and
• are not entitled to overtime pay.

There are five types of exempt employees in California. These include:

1. Professional employees
2. Administrative employees
3. Executive employees
4. Outside sales employees
5. Inside sales employees

Non-exempt employees, on the other hand, are entitled to certain rights under California wage and hour laws. These include:

• meal and rest breaks as well as
• overtime pay.

For an employee to be classified as exempt, they must perform specific duties as set out in the California Labor Code. Thus, California employers cannot afford exempt status to their employees simply by:

• paying an employee on a salary basis rather than an hourly wage, or
• having an employee sign a contract stating that they agree to be an exempt employee.

Below, we discuss the differences between exempt and non-exempt employees in California, the five categories of exempt employees, the consequences of employee misclassification, and how it can be avoided.

What is an ‘Exempt Employee’?

Under California law, an exempt employee is not subject to minimum salary requirements, overtime wages, meal and rest breaks, and several other legal protections afforded to non-exempt employees.

Therefore, one of the most critical decisions that California employers must make before offering a job to an individual is whether they should be classified as exempt or non-exempt.

Unfortunately, employee classification can be tricky and it is possible for employers to make a mistake. When this happens, they become vulnerable to lawsuits from employees who are misclassified as exempt, who may sue them for unpaid wages and various statutory penalties. In this case, the employer is responsible for the cost of defending and settling the lawsuit, which can amount to a large bill in the end.

The California Industrial Welfare Commission Wage Orders

The California Industrial Welfare Commission (IWC) Wage Orders govern the wages, hours, and working conditions of California employees. There are 17 Wage Orders in total and each one applies to a different occupation and industry. This means that employers must comply with the IWC Wage Order and California labor laws that apply to their business.

The Wage Orders also list the categories of employees who are classified as exempt under wage and hour laws. In other words, those workers to whom overtime wages and other wage/hour laws do not apply.

There are five categories of exempt employees under the California Labor Code. Each exemption lays out specific job duties that the employee must perform to be considered exempt, as well as other factors like minimum salary requirements and whether the employee can regularly exercise their discretion and independent judgment as a requirement of their job.

It should also be noted that the Wage Orders’ exemptions are both quantitative and qualitative. In other words, how often is the employee engaged in the alleged exempt work and what is the nature or quality of it? These are questions that an employer must ask when it comes to classifying their employees since doing so correctly ensures an affirmative defense in a wage and hour lawsuit.

The Five Exemptions

The five primary categories of exempt employees in California, as outlined in the Wage Orders, include:

1. The Professional Exemption;
2. The Administrative Exemption;
3. The Executive Exemption;
4. The Outside Salesperson Exemption; and
5. The Inside Salesperson Exemption;

1. The Professional Exemption

To be exempt from wage/hour laws under this category, the employee must be engaged in one of eight specific professions that are not subject to the first 12 sections of the California Labor Code. These include accounting, teaching, engineering, architecture, optometry, dentistry, medicine, and law. Software coders, pharmacists, and registered nurses may also qualify for Professional Exemption in some cases.

In brief, qualifying for this category of exemption requires the worker to pass two tests. The first test pertains to the employee’s earnings and requires them to be paid a monthly salary as opposed to hourly rates. Their salary must also be equivalent to at least two times the state minimum wage for full-time employment to satisfy this requirement. The second test requires that specific work duties are completed in relation to a ‘learned’ or ‘artistic’ profession.

A ‘learned’ profession requires the employee to have advanced knowledge in a field of science. In other words, the employee needs to have received specialized intellectual instruction over a prolonged period to satisfy the ‘learned profession’ requirement. Note that this is not the same as receiving a general academic degree or even an advanced degree.

An ‘artistic’ profession refers to an occupation in a recognized field of artistic and creative endeavor, where the work is the result of the employee’s talent, imagination, or invention. Note that artistic professions do not include skilled trades or the mechanical arts.

Also, note that the employee must regularly exercise discretion and independent judgment under all professions in this test.

2. The Administrative Exemption

Sometimes referred to as the ‘White-Collar Exemption’, the Administrative Exemption applies to workers in fairly high-level positions that relate to general business operations. In other words, if an employee devotes more than half of their work time to low-level production activities with a few administrative tasks thrown in, they are unlikely to qualify for Administrative Exemption.

This category of exemption has long been a point of contention among courts and government agencies. However, what is certain is that the result of any suit over the application of the Administrative Exemption involves a thorough examination of the facts i.e., an analysis of the actual work performed by the employee juxtaposed against what the employer reasonably expected the employee to do.

3. The Executive Exemption

California employees who are subject to Executive Exemption must have primary duties pertaining to business management, supervise a minimum of two employees, have a say in employment-related decisions such as recruitment, and regularly exercise their discretion and independent judgment. This generally means that at least 50% of their work time must be devoted to these activities to meet the test of the exemption. In addition, the employee must earn a monthly salary that is equivalent to at least twice the state minimum wage for full-time employment.

Essentially, the Executive Exemption requires employers to carefully evaluate the work the employee performs daily instead of basing their classification on job title. It should also be pointed out that an employee’s Executive Exemption status is subject to change (as with all of the exemptions). For example, if an employee’s team of two subordinates is reduced to one on a long-term basis, s/he may no longer qualify for the exemption since it requires the supervision of at least two workers.

4. The Outside Sales Exemption

An outside salesperson refers to any employee, 18 years of age or older, who regularly spends more than half of their working time away from their employer’s place of business selling items or procuring contracts for products or services.

Under California labor law, the Outside Sales Exemption exempts an organization’s outside salespeople from certain wage and hour laws. In other words, these workers are not entitled to minimum wages, meal periods, rest periods, or overtime wages when they meet the conditions of the above description.

5. The Inside Sales Exemption

An inside salesperson refers to an employee who is primarily engaged in selling their organization’s products or services via online channels, such as phone and email. There are two requirements for this type of employee to be exempt from overtime. Firstly, the employee’s earnings must exceed one-and-a-half times the minimum wage. Secondly, more than half of the employee’s wages must be earned through sales commissions each work week. If these two requirements are met, the worker is exempt from overtime pay. However, if either one (or both) of the requirements are not met during a work week, then the worker no longer qualifies for exemption.

Put simply, an inside salesperson’s exempt status can change weekly, which can catch employers off guard. Another scenario that employers need to watch out for when it comes to classifying inside salespersons is when sales take a long time to move from proposal to contract. In a case like this, it is possible that an employee will not earn any commissions at all while the deal is being completed, and that they might work many overtime hours in the meantime. When this happens, the employer may be required to pay the employee overtime wages on all the overtime hours worked during those weeks when the employee’s earnings comprised less than half of sales commissions.

What are the Consequences of Employee Misclassification?

If an employer makes an error in determining employee exemption, and the error results in the worker not receiving overtime pay, they can file a wage and hour lawsuit against their employer. Misclassified employees can also demand compensation for meal and rest breaks in their wage and hour lawsuit. If this is the case, they may receive up to an hour’s pay for each missed meal and rest break.

It should also be noted that, in addition to paying the employee’s unpaid overtime, employers are responsible for covering the costs of a misclassification lawsuit. This can easily amount to hundreds of thousands of dollars in attorneys’ fees and settlement costs in a single plaintiff misclassification case, while a multiple-plaintiff or class action case can multiply that number.

So, unless they can prove that the employee was correctly classified as exempt under one of the five exemptions, employers will be faced with hefty penalties in the event of an employee misclassification.

The Bottom Line

Before we conclude, it should be pointed out that the majority of employee misclassification cases are resolved through a confidential settlement due to the nature of the risks involved for employers.

In addition, making the wrong decision when it comes to classifying an employee as exempt or non-exempt is avoidable through careful analysis of the actual work that the employee performs as opposed to relying on their job title or description.

Performing regular re-evaluations of an employee’s exemption status is another way to ensure that a company’s decision remains the right one in the long run, especially since an employee’s exemption status is subject to change.