When hiring employees, it is essential to determine how to classify them for compensation purposes. Explore the primary details you need to know about exempt and non-exempt employee statuses in more detail.
Employers must classify employees as exempt or non-exempt to avoid legal and financial consequences and ensure workplace fairness. The below explanation of exempt versus non-exempt employees—and their respective advantages and disadvantages—can help you avoid running afoul of the Fair Labor Standards Act (FLSA) and compensate your people appropriately.
You’ll primarily see the differences between exempt and nonexempt employees in how you pay them, handle any leave of absence, and manage their overtime. The following comparison chart covers the basics.
Exempt Compensation | Non-Exempt Compensation |
---|---|
Employees typically work 40 hours but with freedom to fulfill responsibilities rather than meet an hourly requirement. | Employees paid hourly. |
No overtime compensation. | If employees exceed 40 hours of work, they receive overtime. |
Job duties typically require little supervision and demand special skills. | Non-exempt employees typically require supervision in their work. Job duties are often routine. |
May not need to record work time regularly. | Required to record time for compensation. |
Employees pay taxes based on income bracket, regardless of exempt vs. non-exempt. | Employees pay taxes based on income bracket, regardless of exempt vs. non-exempt. |
While this table focuses on compensation variations, you must also understand how salary and job roles can influence employee classification. Discover more about that in the following sections.
The term “exempt employee” refers to salaried employees, a designation that prevents them from receiving overtime pay for working more than 40 hours in a workweek. Other FLSA provisions, including minimum wage requirements, don’t apply to these employees.
Instead of focusing on the number of hours worked, you compensate exempt employees with the expectation they will get the job done without monitoring their hours.
Exempt employees offer many advantages to employers, including:
More experienced and knowledgeable employees
No need to pay overtime
Employees typically have more responsibility, which can promote efficiency
Being an exempt employee offers the individual worker advantages, too. These may include:
Earning higher, more consistent wages
Greater scheduling flexibility and increased access to remote work
More opportunities for professional development
For employers, a few disadvantages of exempt employee classification are worth considering. Typically, an exempt employee earns a higher minimum salary. Plus, as they perform greater responsibilities, employers could face more significant financial or legal consequences if something goes wrong.
Having an exempt employee classification can come with drawbacks for the individual worker, as well. For example, you may work outside your traditional schedule without compensation.
Some common positions commonly classified as exempt employees include CEOs, COOs, vice presidents, and directors who manage a business or a department within a business. In addition to these executive employees, you might encounter:
Administrative employees, such as human resources managers, financial analysts, and payroll administrators
Professional employees, such as doctors, lawyers, engineers, and creatives
Computer employees such as systems analysts, programmers, or software engineers
Non-exempt employees typically work hourly and receive overtime pay for hours above the standard 40. The federal minimum wage applies for all hours these employees work, including overtime.
Employers enjoy several benefits of hiring non-exempt employees, including:
Ability to choose how to structure non-exempt wages (can be hourly or salaried)
Employee motivation to work as their income reflects the work they put in
Greater flexibility in terms of where you can place non-exempt workers and their responsibilities
For employees, a non-exempt classification offers some advantages, too. These include:
Potential extra income from overtime pay
Security of strict guidelines ensuring fair pay for hourly workers
Convenience of clear guidelines regarding working hours, breaks, and overtime pay
Employers working with non-exempt employees may have less scheduling flexibility due to working hour and overtime guidelines. Additionally, paying overtime can increase costs.
The rules guiding non-exempt status can also mean less flexibility in the employee's schedules and working hours. An hourly employee may have fewer opportunities for professional development or advancement in their positions. Non-exempt employees can also suffer wage inconsistency when employers reduce their hours.
Employees in this classification can fill many roles in businesses. Electricians, carpenters, cashiers, and secretaries typically count as non-exempt employees. Other common examples include interns, contractors, and freelancers.
If you plan to work in HR or manage people, it’s important to learn about the differences between salaried and hourly employees, employee compensation, and related laws. This knowledge is crucial regardless of your exempt or non-exempt employee status.
Start by learning more about pay philosophy, salary structure, and more in Managing Employee Compensation with the University of Minnesota on Coursera. If you want to expand your management skills, consider the University of London’s The Manager's Toolkit: A Practical Guide to Managing People at Work, also on Coursera.
Many factors impact employee compensation classifications. These include how much an employer pays an employee, how the employer pays them, their job role and definition, their authority level, and their place of employment.
The FLSA has three tests to help you determine exempt status:
The salary basis test checks that exempt employees receive pay on a weekly basis rather than receiving an hourly wage.
The salary level test confirms that the employee has a minimum salary level of $684 per week 1.
The job duties test considers whether the employee has the authority/ability to make recommendations and manage others with little direct supervision.
Proper employee compensation classification helps you comply with regulations, account for employees appropriately, and show workplace fairness. Incorrect employee classifications can lead to increased costs, legal penalties, and employee lawsuits.
Employers can create work schedules for all employees, exempt or non-exempt. However, they must comply with any regulations governing breaks and overtime.
According to the US Department of Labor (DOL), you’ll apply the minimum wage or overtime rate that benefits the employee best.
The exempt or salary worker typically doesn’t have to record hours. However, the non-exempt or hourly worker generally reports time in 15-minute increments.
The DOL has rules for how to count work time as an exempt or non-exempt employee. The FLSA provides more detail on what counts as compensable time in Fact Sheet #22 Hours Worked Under the Fair Labor Standards Act (FLSA) [1].
US Department of Labor. “Fact Sheet #22: Hours Worked Under the Fair Labor Standards Act (FLSA), https://www.dol.gov/agencies/whd/fact-sheets/22-flsa-hours-worked.” Accessed October 21, 2024.
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