Exempt vs. Non-Exempt Employees: What Are the Differences?

One topic that can generate ongoing confusion for business owners is employee classification: what is an exempt employee, and what is a non-exempt employee? This can be compounded by the fact that failure to comply with the Fair Labor Standards Act (FLSA) and applicable state and local regulations related to employee classification may result in substantial costs to employers.

"As an HR consultant, I usually work on employee classification with new clients. The reason is actually very simple. The biggest misconception many employers have regarding exempt vs. non-exempt is that the method of compensation alone determines this classification," says Robert Sanders, Paychex client HR business partner.

Exempt vs. Non-Exempt: What Does It Mean?

What does it mean to be an exempt employee, and what does it mean to be a non-exempt employee? Before addressing some of the most common misconceptions, make sure you understand key differences between these employee classifications.

What Does It Mean To Be a Non-Exempt Employee?

As an employer, you should understand what the U.S. Department of Labor (DOL) regulations that apply to the FLSA require when an employee is non-exempt.

Why is this classification so important? The FLSA requires employers to pay all non-exempt employees at least the federal minimum wage for hours worked, plus overtime pay at one and one-half times the regular rate of pay for hours worked over 40 hours during a workweek.

What Are Some Examples of Positions Held by Non-Exempt Employees

Non-exempt employees are generally paid on an hourly basis. Often, non-exempt employees work in jobs where the main duties center around repetitive or routine tasks. Proper classification of non-exempt employees is essential because they are entitled to overtime pay and, depending on company policy or state or local law, may have rights in other areas, such as breaks. Some examples may include:

• Electricians, carpenters, and construction or maintenance workers in non-management positions
• Sales employees in a retail environment
• Clerical or secretarial employees with little autonomous decision-making, such as receptionists, accounting clerks, bookkeepers, and personnel clerks
• General inspectors or quality assurance workers following preset guidelines that need no specialized skills or knowledge to interpret
• Licensed practical nurses (LPNs)

What Does It Mean To Be an Exempt Employee?

The FLSA provides an exemption from both minimum wage and overtime pay for employees who meet three tests: a salary level test, a salary basis test, and a job duties test. To be exempt from FLSA provisions, an employee must earn a minimum base salary as provided in the regulations, and must also be paid on a salary basis, the same amount each week, regardless of quantity or quality or work.

Employees must also meet the DOL's job duties test to be classified as exempt from the overtime and minimum wage provisions of the FLSA. Exempt employees tend to work in roles that require little direct supervision and require special skill or knowledge. They may supervise other employees. Exempt employees also typically have the authority to make suggestions or recommendations about their work, although a higher level of management might make a final decision.

What Are Some Examples of Positions Held by Exempt Employees?

Exempt positions typically require the routine exercise of independent discretion and fit into a professional category defined by the DOL. Examples may include the following:

• Business executives
• Accountants, compliance, and marketing professionals
• Managers that supervise two or more full-time employees or the part-time equivalent
• Executive assistants given authority to make significant decisions on behalf of business owners or senior executives
• Doctors
• Lawyers
• Teachers

The following professions may also be considered exempt, depending on compensation and job duties:

• Outside salesperson
• Certain computer employees
• Registered nurses may be classified as exempt in some states

What Is the Difference Between Exempt and Non-Exempt Employees?

The difference between exempt and non-exempt employees depends on their primary duties, how they are paid, and possibly how much they're paid. To ensure proper classification, employers should fully understand what skills are required to perform a job and ensure that each employee is paid in accordance with the FLSA and applicable state laws.

Exempt vs. Non-Exempt Compensation

One of the chief differences between exempt vs. non-exempt workers is how they are compensated. Exempt employees are generally "exempt" from the FLSA regulations governing minimum wage and overtime pay.

Exempt employees are paid on a salary or fee basis which means that they typically must receive their predetermined salary each workweek regardless of the quality or quantity of work performed. Subject to limited exceptions (e.g., first and last week of work, unpaid FMLA leave, etc.) an exempt employee must receive their full salary for any week in which they perform any work regardless of the number of hours or days worked.

Alternatively, non-exempt employees may be paid on an hourly, piece, salary, commission, or other basis provided the employee is paid at least the federal minimum wage for each hour worked and for overtime at a rate not less than time and one-half the employee’s regular rate of pay.

States differ in regard to overtime laws, but federal regulations use a 40-hour workweek as the threshold. An employer is not obligated to pay overtime wages when an exempt employee works more than 40 hours in a workweek. For employers, this classification removes their obligation to pay overtime and certain recordkeeping requirements under the FLSA.

Exempt vs. Non-Exempt Job Function

Keep in mind that simply relying on job titles is not a proper method of determining exempt status. An employee may have an executive, professional, or administrative title; however, that does not necessarily mean that the employee is automatically eligible for an exempt classification. Rather, a salary level, salary basis and primary duties analysis should be performed. An employee's classification as exempt or non-exempt may also affect how their compensable time is measured for certain job-related activities such as travel, being on-call, or work-related training.

"FLSA status is driven by what you do in terms of job function, not how you are compensated," Sanders explains. "Although it does follow that most of the time, non-exempt employees will be paid on an hourly basis and exempt employees will be paid a salary, it's not always the case ... The key is understanding that status is not determined only by the method of compensation."

Consequences of Exempt vs. Non-Exempt Misclassification

Incorrectly classifying an employee can result in fines and penalties, which may include payment for back wages. Make sure you adhere to the following best practices to avoid the expensive consequences of misclassification:

1. Review and understand the rules and regulations outlined by the FLSA regarding exempt vs. non-exempt classifications.
2. Next, turn your attention to your state, as several states have their own regulations around this subject.
3. Consistently review, update, and use job descriptions to ensure employees performing similar duties are classified consistently. "The key functions and responsibilities of a given employee will dictate whether that position can qualify for one of the limited 'white-collar' exemptions that would allow an employer to exempt the employee from overtime," Sanders says.
4. Don't leave best practices to chance. Avoid missing key actions by having a process in place for correctly classifying your employees.

Classifying employees correctly and adhering to the applicable federal, state, and local laws and regulations can feel overwhelming and frustrating. But employee misclassification can be a common mistake that many business owners make. Putting the right process in place may help you avoid time-consuming and costly penalties.

Exempt vs. Non-Exempt Employee FAQs

What Is the Minimum Salary for Exempt Employees?

The U.S. DOL has set a $684 minimum salary per week for exempt employees. Individual states may have different thresholds.

What Are the White Collar Exemptions?

Generally, exempt employees fit into one of the following categories:

• Administrative: Employees performing office, or other non-manual work, with primary work responsibilities related to the administration of management or general business operations of the employer or employer's customers; employees primary duties involve the exercise of discretion and independent judgment to make decisions of significance.
• Executive: Employees with the primary duty to manage a company or one of its departments, or divisions. They must also regularly direct the work of, and have the authority to hire and fire or recommend such action for, two or more full-time employees or their equivalent (e.g. 2 part-time employees working 20 hours each equals one full-time employee).
• Learned professionals: Employees with primary duties that require advanced knowledge in a field of science or learning typically evidenced by the appropriate academic degree. Some examples are doctors, registered nurses, executive chefs, teachers.
• Creative professionals: Employees with primary duties involving invention, imagination, creativity, or talent in a recognized area for creative endeavors such as music, journalism, or writing.
• Outside sales: Employees working customarily and regularly away from the company location with a primary focus of making sales, as defined by the FLSA.
• Computer: Skilled workers in the computer field such as programmers or engineers with responsibilities to design or analyze systems; may be compensated on a salary basis of at least $684 per week or an hourly basis or not less than $27.63 per hour.
• Highly compensated: Employees making at least $107,432 on an annual basis, including at least $684 per week on a salary or fee basis, who regularly perform at least one of the stipulated duties of an exempt professional, administrative, or executive employee.

Can Non-Exempt Employees Be Salaried?

Although non-exempt employees are generally paid on an hourly basis, they may be paid on a salary, commission, or piece rate basis. However, regardless of basis of pay, all non-exempt employees must be paid the appropriate overtime rate for hours worked over 40 in a workweek. Thus, the non-exempt employee's hours must still be tracked each week to determine when they are eligible for overtime payments.

What Makes an Employee Exempt vs. Non-Exempt?

Classification of an employee is generally determined by pay amount, how an employee is paid for work, and the individual's primary job duties. Exempt employees often require advanced knowledge or special skills to perform their primary duties, while non-exempt employees are focused on more routine work.

How Do You Determine Exempt vs. Non-Exempt?

Employers should spend time obtaining a thorough understanding of the FLSA requirements for employee classification. To be classified as exempt, employees must be paid on a salary basis at or above the required salary threshold, regardless of hours worked each workweek, and carry out job duties that fall into one of the DOL's exempt categories. Additionally, the employee would have to satisfy any state-specific requirements for exemption.

Are Independent Contractors Exempt or Non-Exempt?

Independent contractors are not considered employees and therefore do not fall under the FLSA guidance on this topic. However, you should be aware of the tax laws and other regulations affecting independent contractors in your workplace.

How Could a Business Closure Impact Exempt and Non-Exempt Employees?

If your business is temporarily closed due to a natural disaster or public health pandemic — such as the closures caused due to COVID-19 — and you have non-exempt employees (those who are entitled to minimum wage and overtime), you typically aren't obligated to pay them as long as they have not performed work. Employers must compensate non-exempt employees who are working remotely and those employees should accurately record all time worked, including overtime.

Exempt employees typically must receive their full salary in any workweek in which they perform work, regardless of the total number of hours actually worked. If your company closes, you must generally pay an exempt employee their full salary if the employee worked any part of the workweek.

Ensure You’re Classifying Your Employees Correctly

Determining an employee's exempt or non-exempt status may not always be cut-and-dry. Additionally, there may be state or local regulations to follow when it comes to overtime or minimum wage requirements. Failure to pay overtime to incorrectly classified workers can leave you open to litigation and/or penalties. If you don't have a classification process in place, Paychex HR Services can offer their support and guidance in this complex area of employment regulation. Additionally, you may want to closely review the 2022 proposed changes to the federal overtime rule.