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

The primary difference between exempt and non-exempt employees is that exempt employees are not eligible for overtime pay under the Fair Labor Standards Act (FLSA), while non-exempt employees are eligible for overtime pay for every hour they work over 40 in a workweek. This article will explain the FLSA and the differences between exempt and non-exempt employee classifications. 

Understanding the FLSA

The FLSA stands for the Fair Labor Standards Act. This federal law was enacted in 1938 and sets the standards for minimum wage, overtime pay, hours worked, recordkeeping and child labor in the United States. The FLSA applies to most employees in the private and public sectors, as well as in federal, state, and local governments.

Exempt Employee Status

Exempt employees are not required to adhere to certain provisions of the Fair Labor Standards Act (FLSA)/ They are not eligible for overtime pay and are also exempt from the minimum wage laws, timekeeping requirements, and meal and break periods that are mandated for hourly employees. Exempt employees are instead paid a fixed salary, regardless of how many hours they work in any given week. In order to qualify for exempt status, an employee must meet certain criteria related to their job duties and responsibilities, including:

• A Salary Basis Test - The employee must be paid a predetermined and fixed salary that is not subject to reduction based on the quantity or quality of work performed.
• A Salary Level Test - Employees' salaries must meet a minimum threshold. Currently, the Federal minimum salary level for exempt employees is $684 per week or $35,568 per year. However, some states may require a higher salary. For example, in California, exempt employees must earn a salary of at least twice the state’s minimum wage, which is now $1,240 per week.
• A Duties Test - The employee's primary job duties must involve executive, administrative or professional responsibilities. These duties must be the primary focus of the employee's job, and they must involve discretion and independent judgment.

Managers, executives, professionals, and certain administrative personnel are typically eligible for exempt status if they are paid a salary that meets the requirements of the FLSA, and the position’s job duties meet all of the additional criteria. Employers and employees both benefit from exempt status because of the potential for greater work flexibility and earning potential.

It's important to note that exempt employees may still be entitled to other benefits and protections under federal or state law, such as discrimination protections, workers' compensation, and family and medical leave. Additionally, some states have their own overtime laws that provide additional protections for employees beyond the federal FLSA, so it’s necessary to stay up to date regarding the rules, regulations and laws regarding exempt employees in your state.

Non-Exempt Employee Status

Non-exempt employees typically receive an hourly rate. The hourly rate must be at or above the Federal minimum wage or the minimum wage required by the state, whichever is higher. Non-exempt employees are eligible for overtime pay for any hours worked over 40 in any given workweek as well as breaks and rest periods. In order to stay compliant with this requirement, employers are required to keep accurate records of all hours worked for each non-exempt employee.

Employees can generally be classified as non-exempt if they meet certain criteria, including:

• Hourly Compensation - Non-exempt employees are typically paid on an hourly basis for each hour they work, and they are entitled to overtime pay if they work more than 40 hours in a workweek.
• Job Duties - Generally, employees who perform manual labor or blue-collar work, as well as some white-collar employees, are considered non-exempt. This may include employees who perform tasks such as operating machinery, assembling products, providing customer service or performing administrative tasks that do not involve independent discretion or decision-making.
• Independent Judgment – Non-exempt employees are directly managed, and those managers must control the workflow. In addition, non-exempt employees cannot be executives, administrative personnel or professionals in accordance with the guidelines laid out by the FLSA.

The primary benefit to being non-exempt is the ability to get paid for every hour worked, and if the employee works over 40 hours in a workweek, they are entitled to receive time and a half for every hour worked over 40 hours. Non-exempt employees are also entitled to receive rest and break periods.

How to Determine Employee Status

If you’re not sure if your employee is exempt or non-exempt, there is a three-step employee classification test you can apply.

1. What Are Your Employee’s Job Duties?

If you’re not sure if your employee is exempt or non-exempt, the FLSA provides several job duty tests, including the executive exemption, administrative exemption, professional exemption, computer employee exemption, outside sales exemption and the highly compensated employee exemption. It’s important to understand that each of these exemptions has highly specific criteria.

2. Does Your Employee Receive a Salary?

It’s important to understand that most employees who receive an hourly rate are considered non-exempt. Therefore, in order to be considered exempt, your employee must be paid a salary that meets or exceeds the current federal rate for salaried employees or the state-mandated rate if it is higher than the federal rate.

3. Are There Any Other Factors to Consider?

Employers should also consider other factors, such as whether the employee has the authority to hire or fire other employees, whether they have to exercise independent judgment and discretion in their work and whether their work is primarily intellectual or if it requires advanced knowledge or skills.

It’s important to understand that job titles alone do not indicate an employee’s exempt or non-exempt classification. Instead, the employer must take the time to thoroughly examine the employee’s actual job duties and responsibilities. If you are unsure about the employee classification for any employee, it’s important to review the FLSA’s employee classifications and possibly consult with a legal expert. Correctly classifying employees can help your business avoid any potential legal and financial risks associated with misclassification.

Stay Compliant With Exact Payroll

Understanding the difference between exempt and non-exempt employees is crucial for employers to ensure compliance with the Fair Labor Standards Act. With the help of Exact Payroll, employers can ensure their payroll processes comply with these regulations and that their employees receive the appropriate compensation and benefits they deserve.