Exempt vs Non-Exempt Employee: What is the Difference?
Employee overtime seems like a clear enough concept, but figuring out who qualifies to receive overtime pay (and who doesn't) can be a head-scratcher.
In this matter, as an employer, you need to make sure you correctly classify your employees as exempt or non-exempt. The distinction impacts how you handle overtime pay, and also minimum wage requirements and record keeping. Plus, misclassifying employees can lead to large fines and back wages owed.
In this article, we’ll present the key differences between an exempt employee and a non-exempt employee, so you can make sure your team gets paid fairly while you stay on the right side of the law.
What Are Exempt and Non-Exempt Employees Under the FLSA?
The Fair Labor Standards Act (FLSA) sets the foundation for minimum wage on hourly basis and overtime pay in the US. It also sets up categories for employees based on how their compensation and work hours are tracked.
Understanding these classifications is required for proper payroll management and employee satisfaction. That's why we’ll provide a clear and clean breakdown of what each category means.
Exempt Employee
An exempt employee is someone whose job is not governed by the FLSA's minimum hourly wage and overtime pay requirements. These employees are typically paid a regular salary and are not entitled to overtime pay. Also, to qualify as exempt, an employee must meet specific criteria set by the FLSA, including a minimum wage threshold and job duties that fit into certain categories such as executive, administrative, or outside sales roles.
In short, exempt employees:
- Are not entitled to overtime pay under the FLSA.
- Are typically salaried employees (though some exceptions exist). They earn on a salary basis.
- Often hold positions requiring independent judgment and expertise (e.g., managers, executives).
- Must meet a minimum wage threshold set by the Department of Labor (DOL) — currently $684 per week or $35,568 per year (rising to $844 per week or $43,888 per year on July 1, 2024).
Examples: Marketing manager, paralegal working in a law firm, software engineer (if salary meets threshold).
Non-Exempt Employee
Non-exempt employees, on the other hand, are entitled to minimum wage and overtime pay as stipulated by the FLSA. These employees are typically paid hourly and are eligible for overtime pay. If they work more than 40 hours in a workweek, they are paid at least one and a half times the amount of their regular pay for each additional hour. These employees typically perform more manual or technical duties when compared to exempt employees.
In short, a non-exempt employee:
- Earns overtime pay (at least time and a half) for hours worked over 40 in a workweek.
- Is typically paid hourly (though some exceptions exist with salaries below the DOL threshold).
- Often performs tasks with more specific guidelines or supervision (e.g., administrative assistants, cashiers, construction workers).
- The federal minimum wage for non-exempt employees is $7.25 per hour. Many states also have minimum wage laws—if an employee is subject to both state and federal minimum wage laws, they are entitled to the higher one.
Examples: Cashier, stock clerk, retail sales associates.
Exempt vs Non-Exempt Employee: Key Differences
In this section, we’ll take a closer look into the subtle differences between each type of employees—a particularly important move to take for avoiding costly misclassification mistakes.
Here are the key distinctions between exempt employees and non-exempt employees:
Salary vs Hourly Pay
- Exempt employees: Typically receive a fixed salary each pay period, regardless of hours worked.
- Non-exempt employees: Usually paid wages, by the hour, but some exceptions exist for salaries below the DOL threshold.
Overtime Eligibility
- Exempt employees: Don't qualify for overtime pay under the FLSA.
- Non-exempt employees: Earn overtime pay (at least time and a half) for hours worked over 40 in a workweek.
Job Duties
- Exempt employees: Often hold white-collar positions that are not trades, are not unionized, and with which working overtime is considered part of a workplace culture.
- Non-exempt employees: Very typically, they work in the service industry, for example, in restaurants, grocery stores, hotels, or casinos.
Benefits and Protections
There's a common misconception that exempt employees receive better benefits. Actually, benefits are typically determined by company policy, not status. For example, unless a company says so, there’s no mandatory PTO in the US (of course, the market has made it that most companies are compelled to offer it to make their offer more competitive). Maybe needless to say, both exempt and non-exempt employees are entitled to certain workplace protections under federal and state laws (e.g., anti-discrimination laws, family leave).
Other Misconceptions To Avoid
- Job title doesn't equal exempt status: Don't rely solely on job titles! An “assistant” could be exempt in a pharma business but non-exempt in a retail company.
- Salary doesn't always mean exempt: While most exempt employees are salaried employees, some exceptions exist. Focus on the duties and salary level set by the DOL.
How to Classify Exempt vs Non-Exempt Employees
Accurately classifying your employees as exempt or non-exempt is necessary if you want to avoid fines, back wages owed, and damaged employee morale. Here's how to deal with the process according to the DOL:
The “Big Three” Tests
The DOL uses three main tests to determine exempt status:
- Salary basis: Does the employee receive a predetermined and fixed salary each week, regardless of hours worked? There are some very limited exceptions, but generally, a salary points towards exempt status.
- Salary level: Does the employee's salary meet the minimum threshold set by the DOL? Currently, it's $684 per week ($35,568 annual salary), but this is rising
- to $844 per week ($43,888 annual salary) on July 1, 2024. Remember, some states have even higher minimums!
- Job duties: Are the employee's primary professional duties exempt under the FLSA? These typically involve independent judgment and decision-making, advanced knowledge or skill, and management or executive functions.
Avoiding Misclassification
Mistakes happen, but they can be costly. The burden of proof for an employee's status falls on the employer. Here's what's at stake:
- Legal action: Misclassified employees can sue for unpaid overtime wages and other benefits. The DOL can also impose fines.
- Reputational damage: Public lawsuits can hurt your company's image and make it hard to recruit and keep your retention metrics stable.
- Financial penalties: You could face fines from the Department of Labor for back pay owed to employees.
- Employee morale: Unhappy employees who feel they're not being compensated fairly vs other, highly compensated employees can lead to decreased productivity and higher turnover—teams with more engaged employees are 23% more profitable and see 59% less employee turnover.
Need Help?
Classifying employees can be complex, especially with state variations. But, there’s a resource that can make the task easier: the FLSA exemption questionnaire. This DOL tool can help you figure out if there are any exemptions for certain job duties.
Keeping Organized With HR Software
Managing employees effectively and staying compliant with legal regulations, like the ones regarding FLSA exemption, requires staying neatly organized. HR software can be a game-changer in this matter, since it automates tasks and makes sure you have all the employee information you need to track at your fingertips.
TalentHR is an all-in-one HRIS platform that offers a suite of features to simplify HR processes, including:
- Applicant tracking
- Onboarding
- Time off tracking
- Performance management
- Employee management
- People analytics
- Integrations with other popular business apps
- Customizable design that can be adapted to your company and that can feature custom fields on employee profiles, including workplace qualifications
- Mobile app
Consider implementing this software solution to easily keep track of your employee’s profiles and comply with DOL regulations. You can register now for free.
The Importance of Accurate Employee Classification
Understanding the difference between exempt and non-exempt employees isn't just about following the law, it's about building a fair and ethical workplace.
As we’ve been saying, misclassifying employees can lead to several problems:
- Legal action
- Damaged reputation
- Financial penalties
- Low employee morale
By taking the time to classify your employees accurately, you can avoid these pitfalls and set up a smooth-running, compliant workplace. Remember, the Department of Labor's resources and tools, along with implementing a software solution like TalentHR to keep track of your employee data, can significantly make employee classification just another item of your talent management strategy.
