Exempt vs. non-exempt employees: knowing the difference

Summary

• Employees are exempt from FLSA requirements when they meet specific exemption criteria based on how much they earn and what their duties are.

• State and federal laws have multiple exceptions and differences depending on location, industry, and job, so HR needs to be vigilant in determining each new classification.

• Failure to classify employees properly can lead to DOL penalties and employee dissatisfaction.

Exemption in the context of employment classification refers to whether or not a worker is eligible for certain Fair Labor Standard Act protections regarding overtime and minimum wage. Exempt employees are non-eligible for these FLSA rights, while non-exempt employees are eligible.

The difference between exempt and non-exempt employees is often not fully understood. For instance, some people will incorrectly say all salary workers are exempt while all hourly workers are non-exempt.

While this oversimplification may often be correct, it distorts the actual difference between these two classifications and can lead to dangerous outcomes. The difference between exempt and non-exempt employees has to do with how much these workers make and the duties they perform; any employees who meet these specific (and sometimes subjective) criteria are exempt from FLSA-mandated minimum wage or overtime pay requirements.

Understanding which criteria qualifies an employee for exempt status affects both your hiring and payroll practices. Misclassifying an employee, even unknowingly, can result in serious DOL investigations and fines. Once you understand what a non-exempt employee is and why, you can hire with confidence, knowing that there are no reclassification surprises awaiting your company moving forward.

What is an exempt employee?

An exempt employee is anyone who earns a salary or makes more than $684 a week and falls under one of these specific exemption categories:

• Exemption for executive employees: Anyone whose primary duties primarily are concerned with running the business or a major division of a company. Read the specific requirements required to qualify for the executive exemption.

• Exemption for administrative employees: Anyone who primarily does non-manual work that relates to the management of business operations or customers. They must also be free to use their own discretion on “matters of significance.” Read the specific requirements required to qualify for the administrative exemption.
• Exemption for professional employees: Anyone whose duties require an advanced background in the sciences or learning. Read the specific requirements required to qualify for the professional exemption.
• Exemption for employees in computer-related occupations: Anyone whose duties primarily include advanced computer skills, including things like computer programming or data analysis. Read the specific requirements required to qualify for the computer employee exemption.
• Exemption for outside sales employees: Anyone whose duties primarily include selling products away from the business, like a traveling salesperson. Read the specific requirements required to qualify for the outside sales exemption.
• Exemption for highly compensated employees: Anyone who earns more than $107,432 in non-manual work that also at least partly overlaps with the executive, administrative, or professional exemptions. Read the specific requirements required to qualify for the highly compensated employee exemption.

It’s important to note that job titles alone do not satisfy these exemptions. Job duties should align with job titles in case your classifications are ever contested.

What is a non-exempt employee?

A non-exempt employee is anyone who does not meet any of the exceptions listed above. This includes anyone considered blue collar or who is employed as a first responder. Generally, salaried workers fall under some form of exemption; however, this is not always necessarily the case.

All non-exempt employees receive certain protections under the Fair Labor Standards Act (FLSA). These protections include:

• Minimum wage requirements set by both federal and state governments.
• Overtime wages of no less than 1.5x normal hourly rates when employees work more than 40 hours a week. In some states, overtime is calculated daily, so anyone working more than 8 hours a day is entitled to this benefit. 
• Records for each employee that include information like hours worked each day, pay rate, and overtime earnings. Time & attendance software can help you keep these records up to date and compliant.
• Youth employment standards that lay out whether minors are eligible to work, for how long, and what duties they can perform.

These standards are updated from time to time, so be sure to check back periodically with the DOL website for any changes made to the FLSA.

What are the repercussions of misclassifying non-exempt employees?

Employee misclassification is no small matter. Even honest mistakes can lead to financial hardships and reduced morale for your employees. Here’s what you can expect if you’re forced to reclassify an employee.

• Fines and penalties from regulators
• Back pay for unpaid overtime or minimum wage violations
• Employee dissatisfaction

All of this can add up to thousands of dollars for your company and be a major headache for HR as you scramble to deal with the fallout.

How to ensure you’re classifying employees correctly

To avoid the costs associated with misclassification, get all of your employee classifications accurate from the start. Here are some tips you can follow to get it right every time.

Check industry specifics

Although there is a standard set of rules for classification, there are also exceptions and distinctions for specific industries or jobs. For instance, the DOL explicitly details what youth lifeguards are allowed to do and at what age.

Before you classify an employee, be familiar with relevant exemptions that may affect the employees you hire. You can find all of these exemptions on the DOL website — just look through to see if there are any factsheets that might affect your hires.

Be wary of classifying as an independent contractor

Some businesses try to get around the exempt vs. non-exempt distinction by classifying employees as independent contractors to save money. Like exempt employees, independent contractors do not get protection under the FLSA, so businesses don’t need to pay them overtime or minimum wage. As well, because they aren’t technically employees, businesses don’t need to provide benefits or pay certain employment taxes.

However, misclassifying your employees as independent contractors runs similar risks as misclassifying non-exempt employees. Your company could be on the hook for thousands in fines, back pay, back taxes, and more if you’re forced to reclassify.

Know the state laws where you operate

Know the state laws, if any, that add extra protections for employees. A common example of this in play is in California where they have implemented more stringent salary requirements to meet exemption criteria.

Each state may have its own laws that affect minimum wage, exemption requirements, or more. Frequently review these laws to make sure they’ve not been updated and that you’re still in compliance.

Ensure duties align with job descriptions

Exemption classifications are based on what employees actually do on the job and not what their job description says. For instance, if someone holds the job title “manager,” but doesn’t have the ability to influence hiring or firing, they wouldn’t qualify under the exemption for executive employees.

HR needs to be aware of gaps between what employees do and what their stated duties are. If this gap exists and a misclassification has occurred, it’s better to deal with this problem sooner rather than later to avoid further disruptions and financial penalties.

Be proactive when it comes to compliance

Staying compliant with employee classification is just one facet of what HR departments need to handle every day to keep their businesses out of trouble with labor laws and regulations. To help them do their job more effectively, they need the right workforce management tools and education that’ll allow them to proactively make sure every facet of hiring and payroll is compliant with relevant labor laws.

To learn more about keeping your business compliant, read our Complete Guide to Wage and Hour Compliance. In this guide, you’ll see what you can do to ensure your business keeps up with the ever-changing rules and expectations of our modern economy.