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Takeaway
While the Fair Labor Standards Act (FLSA) doesn’t require employees to accrue paid time off (PTO), most competitive organizations offer time off to attract and retain talent. But when you have a mix of FLSA exempt and nonexempt workers, it can be tough to know which PTO policy would be the most effective. Read what you need to consider — including potential compliance concerns — as you build the ideal PTO strategy for your unique workforce.
Most businesses have a paid time off (PTO) policy. Even so, that doesn’t mean one approach exists for every industry or organization. In fact, requirements can vary based on a company’s culture and, more importantly, the specific laws and rules that regulate it.
Take the Fair Labor Standards Act (FLSA), for example. This law regulates rules around wages, overtime, recordkeeping and child labor for certain private sector employees and those who work for local, state or federal governments. It also can influence when and how nonexempt employees may take PTO.
Managing FLSA requirements can get tricky, especially if your company employs a mix of exempt and nonexempt workers. Luckily, a proper understanding of each can help simplify your compliance obligations.
Let’s explore the differences between these employees and what to keep in mind as you administer PTO for both categories.
What’s the difference between exempt and nonexempt employees?
FLSA ultimately defines exempt and nonexempt employees. Employers of nonexempt workers, for example, must strictly adhere to FLSA’s requirements. However, businesses may manage exempt personnel at their discretion, though another law may still regulate how they work and get paid.
A common scenario that helps frame this difference involves overtime. A nonexempt employee who works over 40 hours in a single workweek must receive overtime pay that’s calculated at 1.5 times their regular hourly rate for each additional hour worked. Meanwhile, exempt employees don’t qualify for overtime pay under FLSA.
Here’s a breakdown of exempt and nonexempt employees’ key distinctions:
| Exempt employees | Nonexempt employees |
| Earn a salary of at least $684 per week. (This threshold will rise to $844 on July 1 and again to $1,128 on Jan. 1, 2025.) | Earn at least the federal minimum hourly wage and are paid by the hour. |
| Typically a commissioned sales rep, computer professional or another salaried, non-sales employee in an executive or administrative role. | Usually directly supervised by a manager and can’t hold a bona fide executive, administrative, computer professional or outside sales position. |
| Employers can’t deduct pay from exempt employees if they didn’t technically work 40 hours a week. | Employers must compensate nonexempt employees for every hour worked. |
| May not qualify for overtime pay. | May qualify for overtime pay if they work more than 40 hours in a workweek. |
Keep in mind that FLSA doesn’t regulate how exempt and nonexempt employees are taxed. While exempt employees may typically fall into a higher income bracket, the IRS doesn’t distinguish between FLSA exempt and nonexempt employees for tax purposes.
PTO rules for exempt employees
When it comes to exempt employees, organizations generally have more flexibility when offering and paying out PTO. However, a local or state law could still influence how PTO is generated and administered. Always consult a licensed legal professional before assuming your time-off policy is compliant.
Keep these tips in mind as you craft PTO rules for your FLSA exempt employees.
Accruals
Before administering PTO, it’s important your exempt employees understand how they earn it. For certain companies, it may be easier to simply provide a fixed number of PTO days throughout the year. You could provide them all at once or allow them to accrue monthly or quarterly to help limit excessive use.
With nonexempt employees, it’s also easier to offer PTO as a bonus or incentive. An employer could use additional PTO to incentivize sales, strong results on key metrics or otherwise high performance. Regardless of what secures this award, it should be clear to employees and, at least in some consistent way, measurable.
Overtime
Excluding the requirements of a state or local law, exempt employees don’t have to earn additional PTO because they work over 40 hours a week.
Granted, employers of nonexempt workers could implement a policy that awards PTO to staff who consistently work over their regular hours. Doing so may help businesses counteract turnover and the implication employees will have to regularly work more than what was originally expected of them.
If your organization opts to standardize overtime pay, you should clearly define how that relates to PTO use. For example, one policy could exclude PTO hours from ever qualifying as overtime pay. In other words, exempt employees would only qualify for overtime for excess hours that they actually worked. This distinction could help avoid abuse of a company’s PTO and overtime policies.
PTO deductions
Employers of exempt workers should establish clear rules around how PTO is used and deducted from time-off balances. For example, it might be easier to require that salaried employees only use PTO in half- or full-day blocks. If an employee needs to leave for a shorter period — like for a doctor’s visit — it may be appropriate for them to work out an arrangement at their manager or employer’s discretion.
Conversely, simply deducting the exact hours an employee needs from their PTO balance may be the most straightforward route. This is especially true for exempt employees who receive a quarterly or annual lump sum of time off. Of course, this could apply to exempt workers who earn PTO per pay period, too.
Ultimately, the best approach to PTO deductions will depend on the needs of your workforce. Organizations should confirm if intermittent time off is detrimental to their operations. Similarly, HR should be explicit about how far in advance employees should request their time off. A two-week or more minimum notice could help avoid:
- understaffing
- scheduling issues
- last-minute absences
- and more
Legal compliance
Whatever your PTO policy for exempt employees is, you need to ensure it’s fully compliant with local and state laws. After all, just because FLSA doesn’t explicitly require PTO for exempt workers, that doesn’t mean another law in your area could override it. Ensure your compliance policy is comprehensive and doesn’t just focus on federal requirements.
Additionally, you may need to verify if a PTO payout law requires you to reimburse former employees for the time off they earned. Keep in mind that even if PTO isn’t required by law for exempt employees, paying out their PTO still could be. Always consult a licensed legal professional to verify the implications of your PTO policy.
PTO rules for nonexempt employees
Administering PTO for nonexempt employees might seem a bit trickier than their salaried colleagues. Remember that FLSA doesn’t require employers to pay for time their personnel doesn’t technically work. Still, even a voluntary PTO policy can be a powerful tool to attract and retain nonexempt workers.
Keep these factors in mind as you design and implement a PTO policy for nonexempt employees.
Accruals
Ensure you standardize the way in which nonexempt employees generate their PTO. Since these workers are most commonly salaried, attaching accruals to total hours they work could help you establish a clear and equitable policy.
For example, you may allow nonexempt employees to accrue one hour of PTO for every 20 hours worked. This will ensure every worker can earn time off while limiting extensive use to full-time staff. In fact, it may be best to only allow those who work full-time to earn PTO at all. The best approach will depend on the unique needs of your business.
Overtime
True, FLSA requires employers to provide overtime pay to nonexempt employees. It doesn’t, however, mean these workers earn 1.5 times PTO just for working overtime. Unless a local or state law specifies otherwise, how overtime influences PTO depends on your organization’s needs.
If your company wants to encourage overtime during a busy period, for example, awarding extra PTO for excess hours could be an effective incentive. One approach could allow employees to earn two hours of PTO for every 20 hours of overtime worked. As a retailer, you could give employees who opt to work long shifts during Black Friday a full day of PTO.
Again, FLSA only requires that nonexempt employees receive the equivalent pay of their time and half for any hours worked beyond 40 in a single week. As far as that law is concerned, awarding additional PTO to nonexempt staff who work overtime is entirely up to a covered employer.
PTO deductions
Since PTO isn’t required by FLSA, how this time is deducted from nonexempt employees’ balances is also at their employer’s discretion. (Remember a local or state law could create an exception.) Even so, if your nonexempt employees do earn PTO, you should make it clear how this impacts their time-off accruals.
For example, you may give nonexempt employees the option to take PTO in hourly increments. This might make more sense than half- or full-day blocks that you might require of exempt workers. This approach could encourage nonexempt staff to shorten their shifts or simply wait until their balances are high enough to cover an entire shift.
At the same time, you probably shouldn’t give nonexempt employees free rein to use their PTO whenever they want. Workers should request time off well in advance, and the method to do so should be clear and accessible. You may also want to implement blackout or special periods that either limit when PTO can be taken or prevent it from being used outright based on your company’s needs.
Legal compliance
FLSA doesn’t require PTO for exempt or nonexempt employees. However, employers must pay nonexempt workers overtime for any hours they work in excess of 40 per week. At the same time, this doesn’t mean a nonexempt employee can receive overtime pay for PTO, even if the PTO they take would put them over 40 total hours for the applicable week.
Businesses should make it clear to their workforce how overtime relates to PTO. At the same time, you should ensure a local or state law doesn’t require your business to administer additional PTO or allow it to accrue at a different rate for overtime. Remember, always consult a licensed legal professional before implementing any PTO policy for nonexempt employees.
PTO policies for exempt and nonexempt employees: FAQ
How do I set up a PTO request policy for exempt and nonexempt employees?
Since PTO isn’t required under FLSA, your policy for requesting time off should be based on the specific needs of your business. For example, if understaffing is a potential concern, it may be best to require employees to submit time-off requests a month or more in advance. If your business doesn’t involve high-volume or time-sensitive work, however, a more lax policy could be more enticing to employees.
How does PTO work for salaried employees?
Salaried or not, exempt or nonexempt employees aren’t required to earn PTO under FLSA. How PTO generates is at the discretion of an employer. Certain businesses may find it easier to award time off in a lump sum annually or quarterly. However, others may allow salaried employees to accrue PTO per pay period or even as a bonus for high performance.
Can exempt employees take unpaid time off?
Yes. Exempt employees may take unpaid time off if their employer authorizes it.
Are exempt employees required to work overtime?
While exempt employees aren’t required to work overtime, FLSA doesn’t require them to earn more for doing so. In other words, their employer can require them to work more than 40 hours per week without paying them beyond their regular salary. However, a local or state law may require overtime pay, even when FLSA doesn’t require it.
Are nonexempt employees eligible for overtime?
Yes, FLSA requires nonexempt employees to earn overtime pay at a rate of 1.5 times their hourly rate for every hour they work beyond 40 per week.
Explore Paycom’s resources to learn more about time-off policies, compliance and more.
