Exempt Employees Vs Non-Exempt Employees: What’s The Difference?
Meet Joe. He makes $30 an hour as a computer programmer and works 20 hours a week. Can you tell if he’s exempt or non-exempt from minimum wage and overtime protections? Making that determination isn’t unique to Joe. So what are the best practices for navigating employee classifications?
Generally speaking, non-exempt employees are paid on an hourly basis and exempt employees are paid on a salary basis. However, employees are often classified incorrectly. And when that happens, repeated or willful violations of minimum wage and overtime rules can result in a penalty of $2,014 per violation.
Our certified HR professionals at Complete Payroll Solutions help thousands of businesses navigate employment laws to make sure they’re compliant with the rules and requirements. And a common concern among our clients is correctly classifying their workers.
In this article, we’ll explain the differences between exempt and non-exempt employees so you can avoid costly penalties.
What is an Exempt Employee?
If you have exempt employees, the Fair Labor Standards Act (FLSA) minimum wage or overtime pay provisions don’t apply to them. That means, for example, that if an exempt employee works 55 hours a week, their compensation doesn’t increase based on their hours. In turn, if an exempt employee works 37 hours, you shouldn’t deduct the hours from their pay. As we’ll discuss later, there are certain tests that you’ll need to use to make sure your employees qualify for an exemption.
What is a Non-exempt Employee?
If your workers are non-exempt, that means you’re required, under the FLSA, to pay them at least the federal minimum wage for the hours they work, which is currently $7.25 per hour. Keep in mind that many states also have minimum wage laws that provide greater employee protections. In fact, there are 29 states plus the District of Columbia that have a higher minimum wage. In these cases, the higher wage prevails.
You’ll also have to pay non-exempt employees overtime pay, which must be at least 1.5 times their regular rate of pay.
What are the Guidelines for Classification of Exempt Vs Non-exempt Employees?
The DOL has tests to use for different positions to determine if employees qualify for exempt status. They all involve a review of both the workers’ duties and salaries. Employees must meet all the criteria to be considered exempt.
- The employee must be paid on a salary or fee basis at a rate of not less than $684 per week
- The employee’s primary duty must be managing the enterprise or managing a customarily recognized department or subdivision of the enterprise
- The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent
- The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight
- The employee must be compensated on a salary or fee basis of at least $684 a week
- The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers
- The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance
- The employee must be paid on a salary or fee basis at least $684 a week
- Their work must require advanced knowledge in a field of science or learning that’s acquired by specialized instruction and involve the exercise of discretion and judgment
- The employee must be paid on a salary or fee basis at least $684 a week
- Their primary duty must require invention, imagination, originality, or talent in an artistic or creative endeavor
Computer Employee Exemption
- The employee must be paid on a salary or fee basis at least $684 a week or, if paid hourly, at a rate of at least $27.63/hour
- Their role must be a computer systems analyst, programmer, software engineer, or similar title with primary duties involving the determination of functional specifications, developing or testing computer systems or programs or programs related to machine operating systems
Outside Sales Exemption
- The employee’s primary duty must be making sales or obtaining orders or contracts
- They must regularly work away from their employer’s place of business
Highly Compensated Employee Exemption
- The employee must be paid at least $107,432 annually and perform at least one of the duties of an exempt executive, administrative or professional employee
What About State Law Governing Exempt Vs Non-Exempt Workers?
In addition to the FLSA tests, some states also have additional guidelines for classifying workers as exempt or non-exempt. You can find a list of the state labor offices to contact on the DOL site so you can find out what the laws are in your area.
Your state rules may be different from the FLSA both in terms of the salary thresholds and the duties that qualify an employee for an exemption. If your employee meets the federal requirements for an exemption, but not the state, then you’ll need to comply with the state’s minimum wage and overtime protections. For example, in California, exempt employees must generally earn a minimum monthly salary of at least two times the state minimum wage for full-time employment. In these cases, you need to follow the more stringent rule.
What Happens if I Incorrectly Classify Workers?
If you misclassify workers as exempt but they’re actually non-exempt, you can be responsible for paying lost wages (paying back for any overtime), fines, and even possibly damages. Employee claims of misclassification often make news headlines, which could also harm your business’ reputation.
As a best practice, it’s a good idea to start with the presumption that a worker is non-exempt then see if they meet the salary and duties tests required for an exemption. You should also review their duties every year to make sure your classifications continue to be correct. And check the job descriptions annually as well. Remember that a title alone isn’t determinative so just because they have “manager” in their title doesn’t necessarily mean they’ll be exempt.
Are Exempt Vs Non-Exempt Workers Better for My Business?
Both types of workers have their pros and cons. Here are some things to consider when you’re hiring workers.
Exempt employees can make processing payroll easier. Offering positions with exempt status may also help you recruit workers because they may be able to work more flexible hours, an increasingly common request. And, if they work more than 40 hours, you don’t have to worry about paying them overtime. Conversely, you have to trust that they’re not abusing their status and are working enough hours since you typically can’t deduct hours from their pay.
With non-exempt workers, it’s essential to pay non-exempt employees for each hour that they work. So you’ll need to closely track their hours, which can be more challenging for your administrative team. Also, if the role requires a lot of overtime, those hours can add up and it may not be cost-effective. However, you have the option to make non-exempt employees part-time. That means you can choose to limit their hours and save on benefits with these hourly workers.
For more assistance with understanding the difference between exempt and non-exempt workers, see practical examples.