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The key difference between exempt and non-exempt employees is that non-exempt workers are entitled to certain protections under the Fair Labor Standards Act, a federal law that sets minimum wage and overtime requirements. And although the FLSA has evolved since its passage in 1938, one thing remains the same – employers must classify their employees correctly or risk costly compliance violations. Being compliant also means abiding by state and local laws, which may provide greater benefits than the FLSA, such as overtime pay for working in excess of eight hours in a day.
What is an exempt employee?
Employees exempt from the FLSA typically must be paid a salary above a certain level and work in an administrative, professional, executive, computer or outside sales role. The Department of Labor (DOL) has a duties test that can help employers determine who meets this exemption criteria.
What does exempt mean?
Employers are not required to pay overtime to employees who are properly classified as exempt. They may, however, choose to compensate such individuals for extra hours worked through benefits packages.
What is a non-exempt employee?
Non-exempt employees are usually paid an hourly wage or earn a salary that’s less than a minimum amount determined by the DOL.
What does non-exempt mean?
If employees are non-exempt, it means they are entitled to minimum wage and overtime pay when they work more than 40 hours per week.
Wage and hour laws
The FLSA governs federal minimum wage, overtime, recordkeeping and youth employment for individuals working in both the private and public sectors. Some state and local jurisdictions, however, have their own wage and hour laws. In these cases, the DOL says that employers must apply the minimum wage or overtime rate that is most favorable to the employee.
FLSA overtime rule
According to the FLSA, employers must pay non-exempt employees no less than time and one half their regular pay rate for each hour over 40 in a workweek. If a non-exempt employee isn’t paid by the hour, the hourly rate can be calculated by dividing the total compensation earned by the total hours worked. Vacation, holidays or sick days should not be included when performing these calculations unless the employee worked on those days.
Exempt employee overtime
The DOL has established guidelines to determine who is eligible for overtime pay. Employees may be considered exempt if they are paid a salary that cannot be reduced because of the quality or quantity of their work, earn less than the minimum salary requirement, and primarily perform executive, administrative or professional duties (“duties” test). Highly compensated employees (HCE) who make less than the minimum HCE compensation requirement and regularly perform at least one of the administrative, executive or professional duties are also not eligible for overtime.
Salary vs. hourly pay
Pay alone doesn’t determine whether an individual is exempt or non-exempt, but it may dictate workplace policies. For instance, employers who have hourly workers must track time and attendance to ensure payroll accuracy. Timekeeping usually isn’t as important with salaried employees unless incentives are offered to those who put in extra hours.
Salaried non-exempt employees
Employers should not automatically assume that employees can properly be considered exempt under the FLSA just because they earn a salary. Workers who don’t pass the duties test or earn a fixed salary, and make less than the minimum required may be eligible for overtime pay.
Hourly exempt employees
Some industries may have hourly employees who are exempt from overtime pay. The more notable examples include the agriculture, movie theater and railroad businesses
Employee classification
Failure to properly distinguish exempt from non-exempt employees, sometimes referred to as misclassification, can adversely affect businesses. Misclassification may result in:
- Regulatory enforcement action
- Fines and penalties
- Employee lawsuits for unpaid overtime
- Costs to remedy misclassification
Sometimes reclassification is necessary, but this too comes with risks. For example, a non-exempt employee who is reclassified as exempt may resent no longer receiving overtime wages, while an exempt employee who is reclassified as non-exempt may perceive the change as a reduction in prestige. Before reclassifying employees, employers should explain the law to them and stress that they didn’t do anything wrong. This type of open communication can help prevent reduced morale.
Frequently asked questions about exempt and non-exempt employee
Can you require exempt employees to work certain hours?
Employers are free to create work schedules for exempt employees however they see fit as long as they comply with any state and local regulations that govern meals and breaks.
What is the duties test for exempt employees?
Exempt employees are required to meet certain DOL job criteria known as the duties test. For example, someone who qualifies for the executive exemption must participate in the hiring and management of other employees. Job titles alone are not enough to grant exempt status.
Does an exempt employee have to work 40 hours a week?
No, however, many businesses have company policies mandating a 40-hour workweek for exempt employees. Employers may take disciplinary action, including termination, against anyone who doesn’t fulfill that requirement, but they usually can’t deduct pay. Doing so might result in the employee no longer qualifying for the exemption.
How do you classify exempt and non-exempt employees?
To classify an employee as exempt, employers generally must apply the following three-pronged test. Anyone who doesn’t meet these criteria and earns an hourly wage is considered non-exempt:
- Salary level
Compensation is less than the minimum required under the FLSA. - Salary basis
Payment is provided regularly and at a fixed rate proportionate to the annual salary regardless of the total hours worked or the quantity or quality of work. - Duties
The employee is assigned tasks consistent with those performed in the administrative, professional, executive, computer or outside sales fields.
This guide is intended to be used as a starting point in analyzing an employer’s obligations and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
