Exempt employees and non-exempt employees are the two primary kinds of employees in any company/business. The real question, however, is, what is the difference between these workers and the jobs they do? In plain terms, exempt vs non-exempt employees.
Well, for starters, the remuneration for overtime work is the most important difference. The phrase “exempt” refers to someone who is not entitled to overtime pay. To a large extent, there are rules that regulate whether or not an employee is eligible for overtime compensation.
Meanwhile, that’s just a fraction of what you should know about exempt vs non-exempt employees; let’s dive into the real deal.
Exempt vs Non Exempt Employees
The ensuing paragraphs cover what it means to be an exempt employee vs a non-exempt employee.
Exempt Employees
The Fair Labor Standards Act does not provide overtime pay to some types of employees, often referred to as exempt employees. In simple terms, these are employees that are paid a regular salary, which is a predetermined sum of money distributed at regular intervals throughout the year. These workers are not eligible for minimum wage or overtime compensation. “Exempt” indicates that the employee is not entitled to overtime pay. The FLSA specifies which employees are exempt from overtime pay and which are not.
In addition to the FLSA, most states have their own wage and hourly-rate statutes, which have even more obligations.
But then, unless an employee falls into an exception category, the FLSA requires employers to pay at least minimum wage for up to 40 hours in a workweek and overtime pay for any additional time.
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In other words, although several states, in addition to the Federal Act, have their own set of wage regulations and restrictions, firms must comply with both federal and state legislation to be compliant.
Employers are not required to provide overtime pay to exempt employees (as opposed to non-exempt employees). It is up to the employer to decide whether or not to pay for overtime hours performed. In lieu of overtime pay, some firms may design an employee benefits package with additional incentives. You may be able to negotiate a raise if you are routinely asked to work overtime.
To be classified as an “exempt” employee, you must be paid on a salary basis (rather than hourly) and perform executive, administrative, or professional duties.
Non-Exempt Employees
Employees who are not excluded from the minimum wage and overtime compensation computed at 1.5 times their hourly rate of pay are classified as nonexempt. They’re frequently paid hourly for the exact amount of time they put in throughout a pay period. Non-exempt employees, as well as those who are eligible for overtime pay, are subject to federal and state regulations.
The Fair Labor Standards Act provides overtime pay for non-exempt employees.
When employees work more than 40 hours in a pay week, employers must pay them time and a half their regular rate of pay.
Most employees must be paid at least the federal minimum wage ($7.25 in 2023), plus time and a half for any hours worked beyond the standard 40.5.
Types of Exempt Employees
Exempt workers are recognized by the Fair Labor Standards Act in the following categories:
- Executive
- Professional
- Administrative
- Computer
- Outside Sales
These categories are intentionally broad in order to cover a wide range of occupations.
Exempt vs. non-exempt employment status is determined by the tasks performed on the job, not by the job title alone.
Exempt vs Non Exempt Employees in terms of Overtime Compensation
Compensation is one of the most significant disparities between exempt and nonexempt positions. Employees with exempt status must earn at least $455 a week, according to Brian Cairns, CEO of ProStrategix Consulting, but overtime is not paid. Employees who are not exempt must be paid at least the minimum wage and are entitled to overtime compensation.
“When a nonexempt employee works more than 40 hours per week or on particular holidays, overtime is paid at time and a half,” Cairns explained. “The previous categorization of white-collar versus blue-collar workers was based on this.”
The FLSA establishes overtime pay guidelines. For every hour worked above 40 in a 168-hour continuous workweek, overtime is paid at 1.5 times the regular rate of pay.
Nonexempt employees started receiving bonuses on top of their normal pay from 2020. The U.S. Department of Labor’s website has complete overtime guidelines.
The key conclusion is that exempt employees are not eligible for overtime pay, whereas non-exempt employees are. Depending on where your business is located, specific guidelines are provided by the federal and state governments.
More on that later…
Employee Classification: Exempt vs Non Exempt Employees
There are three fundamental standards you might use to establish whether an employee should be classified as exempt or nonexempt under the FLSA:
- Salary level test: Exemption is possible (but not guaranteed) for employees earning more than $35,568 per year ($684 per week).
- Salary basis test: An employee who receives a guaranteed minimum wage regardless of the number of hours actually worked and qualifies (but is not guaranteed) as exempt.
- Duties test: An employee who passes tests one and two must also perform an exempt job obligation, which can be one or more of the following:
- Exempt executive responsibilities: As a regular part of their job, the person supervises two or more other employees.
- Exempt professional responsibilities: The employee engages in intellectual activities that necessitate specialized knowledge as well as the application of discretion and judgment.
- Administrative Exempt duties: The employee is responsible for supporting critical matters that demand discretion and judgment.
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In 2020, the US Department of Labor (DOL) revised the FLSA’s federal overtime requirements. The following are the new standards:
White-collar salary exemptions have increased from $455 to $684 per week.
- Bonuses, incentive compensation, and/or commissions can account for up to 10% of the base salary.
- The new salary requirement for highly compensated employees has raised from $100,000 to $107,432 per year.
- The FLSA states that you can evaluate whether an employee is exempt or nonexempt based on their income level, salary basis, and job duties.
Exempt Employees’ Benefits and Drawbacks
Although the “exempt” employee categorization may appear to be ideal for some firms, it is not for everyone. Hiring (and working as) an exempt employee has a number of advantages and disadvantages.
Employer’s Perspective
Because exempt employees are not eligible for overtime compensation, the key advantage of hiring an exempt employee, according to Joshua Gerlick, a doctoral student of nonprofit management and a Fowler Fellow at Case Western Reserve University, is the flexibility to expect a specific level of performance or production while staying within a set budget. However, exempt personnel often cost more than non-exempt employees, according to Gerlick, owing to the expectation that they will utilize discretion and judgment in carrying out their obligations.
For the Worker
The main advantages of exempt employees, according to Cairns, are payment consistency, eligibility for benefits, and conventional business hours. Exempt employees, on the other hand, have less flexibility in their work schedules than nonexempt employees, and they are not eligible for overtime pay, even if they work more than 40 hours per week.
Exempt personnel are not entitled to overtime compensation, which helps businesses stick to their budget. Benefits are also available to exempt employees. They do, however, have less scheduling freedom and may work more than 40 hours per week without additional pay.
Nonexempt Employees’ Benefits and Drawbacks
Employing nonexempt employees has its own set of advantages and disadvantages for both firms and employees.
Employer’s Perspective
Employers have more flexibility when hiring non-exempt employees because there is no minimum requirement for the number of hours they must work every week. Nonexempt employees might be paid an hourly rate (minimum wage or greater) and scheduled according to your company’s needs.
Nonexempt employees have a few disadvantages, the most significant of which is overtime pay for employees who work more than 40 hours per week. To guarantee that employees fairly get compensation for their time, you’ll need to carefully monitor and track their hours.
For the Worker
Although the freedom to work overtime and earn fair compensation for every hour worked is the most obvious perk for nonexempt employees, Cairns said there are some disadvantages that nonexempt employees should be aware of. Nonexempt employees may not have a secure or continuous paycheck, their work hours may not adhere to standard business hours, and they may not be entitled to paid vacation or sick time in some jurisdictions since their hours vary week to week.
The bottom line is that nonexempt employees give businesses more flexibility in terms of hours worked, but those who work more than 40 hours per week are owed overtime. Employees are paid accurately for real hours worked, however, their paychecks may fluctuate from week to week due to the fact that hours worked can vary.
When Should You Hire Exempt or Nonexempt Workers?
First off, an employer would need to consider which category (exempt or nonexempt) will benefit your company the most when creating job titles and descriptions for your employees. Examine the tasks you’ll need to do and the payment method you’d like to use (salary or hourly).
Some jobs, according to Cairns, are legally obligated to be exempt and can only be hired as such. However, when it comes to positions that can be adjusted to fit into one of these categories or the other, Gerlick says business owners must choose between flexibility and competence.
“Hiring a nonexempt hourly employee offers owners the flexibility to change working hours based on demand – for example, scheduling 15 hours one week and 35 hours the next,” said Gerlick. “Despite the additional expense, hiring a salaried employee with exempt duties fixes the labor cost regardless of the amount of time required for the employee to complete a certain task.”
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Furthermore, exempt personnel are better suited for long-term roles with executive, administrative, or professional responsibilities, whereas non-exempt employees are better suited to hourly, temporary, or seasonal labor. It’s critical to distinguish these positions based on their actual responsibilities, and then hold your staff accountable for following the rules.
However, a common mistake made by business owners, according to Gerlick, is developing an exempt job but not allowing the employee to apply the judgment and discretion required by the job description. This oversight could cost any company a lot of money: if that employee decides to sue you, they can utilize the FLSA to back up their allegations.
“If an employer is unfamiliar with the specifics of the FLSA, they should hire professional human resources counsel to evaluate job descriptions and audit work activities on a regular basis to confirm the applicability of current classifications,” Gerlick said. “It is critical to be proactive. Typically, problems do not develop until a disgruntled employee files a lawsuit.”
So, consider the job description, the length of the work (temporary, short-term, or permanent), whether the role is part-time or full-time, and the kind of individual you want to hire when deciding whether to hire an exempt or nonexempt employee.
Guidelines for Exemption from Overtime Pay Requirements
Administrative, executive, and professional staff, as well as salespeople and STEM (Science, Technology, Engineering, and Math) employees, have been designated as exempt and thus be ineligible for overtime pay since January 1, 2020, if they match the following criteria:
- Employees are paid a salary rather than being paid by the hour.
- Employees now make at least $684 per week, or $35,568 per year (up from $455 per week, or $23,660 per year).
- Furthermore, employees are given a weekly pay regardless of how many weeks they work.
Employees must also meet certain employment requirements about their job duties and responsibilities in order to qualify for overtime exemption.
Basically, to be classified as exempt, an employee must meet the following broad requirements:
- Employees who qualify for the executive exemption must have a primary responsibility for managing the company or a department or subdivision of the company; must regularly and customarily direct the work of at least two employees; and must have the authority to hire or fire, or their suggestions and recommendations for hiring, firing, or changing the status of other employees must be given special consideration.
- Employees must have a primary duty of performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers to qualify for the administrative exemption, and their primary duty must include the exercise of discretion and independent judgment in significant matters.
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- Employees must have a primary duty of work requiring advanced knowledge in a field of science or learning typically acquired through prolonged, specialized, intellectual instruction and study, or specialize in one of a few other similarly specialized fields, such as teaching, computer analytics, or engineering, to qualify for a professional exemption.9
- Staff who conduct office or non-manual labor and earn a yearly income of $107,432 or more may qualify for exemption. They must fulfill at least one of the responsibilities of an exempt executive, administrative, or professional employee to qualify. 10
- Employees employed as a computer systems analyst, computer programmer, software engineer, or other similarly trained person in the computer area with job duties that match the criteria for exemption are eligible for the computer exemption.
- Employees must have a primary task of making sales or acquiring orders or contracts to qualify for the outside sales exemption. Work must be done away from an employer’s office or company locations.
Other Recent Overtime Rules Chang-es
As of January 1, 2020, the following modifications were in effect:
- The minimum yearly remuneration for “highly compensated personnel” has been raised from $100,000 to $107,432 per year.
- Employers can satisfy up to 10% of the standard wage level with non-discretionary bonuses and incentive payments (including commissions) paid at least once a year, in acknowledgment of changing pay patterns.
Overtime Requirements Exceptions
There are other personnel who may be excluded from overtime pay rules in addition to the primary categories of exempt employees (administrative, executive, professional, computer, and outside sales).
- Certain commissioned employees of retail or service establishments like auto, truck, trailer, farm implement, boat, or aircraft salespersons; or parts clerks and mechanics servicing autos, trucks, or farm implements, who are employed by non-manufacturing establishments primarily engaged in selling these items to final purchasers.
- Personnel of railroads and airlines, taxi drivers, certain motor carrier employees, seamen on American ships, and local delivery workers are all paid according to approved trip rate schemes.
- Some non-metropolitan broadcasting stations’ announcers, news editors, and chief engineers
- Domestic service employees that live in the employer’s home
- Employees who work in movie theaters
- Farmworkers
State Requirements for Exempt Employee Classification and Overtime Pay
Exempt employees are subject to different rules in different states. In California, for example, companies must pay an employee at least twice the prevailing minimum wage to qualify them for overtime exemption. All other employees, regardless of job responsibilities, would be eligible for overtime.
- Workers who earn more than the income level must nevertheless meet the other criteria for exempt status in order to be classified as such.
- Non-exempt employees must also be paid overtime wages of at least 1.5 times the California minimum wage, or $19.50 per hour (for firms with more than 26 employees).
- The state’s minimum pay threshold for executive and administrative personnel in New York has been gradually increased, with the actual rate varying depending on geographic location and firm size. For example, the barrier for administrative staff in New York City is $58,500 (annualized) as of December 31, 2019. The threshold is $50,700 in Nassau, Suffolk, and Westchester counties, and $46,020 in the rest of the state.
What Is the Difference Between Non-exempt and Exempt?
The main distinction between exempt and non-exempt employees is whether or not they are eligible for overtime. The Fair Labor Standards Act determines this status under federal law (FLSA). Employees who are exempt from overtime are not liable to it, but non-exempt employees are.
Are Salaried Employees Considered Exempt or Nonexempt?
Non-exempt employees must be paid at least the minimum wage and overtime if they work longer than the regular 40-hour workweek. Exempt employees are those who fit under one of the above categories, are salaried, and earn at least $684 per week or $35,568 per year.
How Many Hours a Day Does an Exempt Employee Have to Work?
Employees who are classified as exempt may not be entitled to overtime or breaks. Exempt employees, on the other hand, must be paid double the minimum hourly wage for a 40-hour workweek. An employer could ask an exempt employee to work more than 40 hours per week without paying overtime.
Is It Better to Be Exempt or Non Exempt?
Exempt employees are typically paid more than nonexempt employees since they are expected to accomplish their duties regardless of the number of hours necessary. Exempt personnel are routinely requested to remain late or arrive early if doing so is necessary to perform their duties.
Why Is It Called Exempt?
These salaried employees are commonly referred to as “salaried,” although “exempt” is the correct and legal term. They are referred to as exempt because they are exempt from the above-mentioned FLSA requirements for hourly compensation and federal minimum wages.
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