Exempt vs. Non-Exempt: What Does It Mean and Why Does It Matter? Not sure whether your employees count as exempt vs. non-exempt? Discover the difference between these employee types in this detailed guide.

All employees are one of two types: exempt and non-exempt. As an employer or aspiring business owner, you need to know the difference between exempt vs. non-exempt employees.

This knowledge can help you determine the kind of taxes you need to pay, how you are legally obligated to pay your employees and much more.

This article will detail the differences between exempt and non-exempt employees.

The Fair Labor Standards Act and exemption status

In 1938, the Fair Labor Standards Act went into effect. This act established things like minimum wage, record-keeping standards for employers and overtime pay eligibility, which people often expect and take for granted these days.

It also added guidelines regarding employment for the public and private sectors, preventing child labor (the norm back then) from being exploitative.

The labor laws from the FLSA are still relevant today and are enforced by the U.S. Department of Labor. They break up employees into two broad categories: exempt and non-exempt employees.

The FLSA generally provides exemptions from overtime rules and minimum wage laws for employees in fields such as:

• Administrative or executive
• Professional
• Computer related occupations
• Outside sales

However, job titles don't determine whether an employee is exempt or not, nor is it based on the job description. Instead, this is determined based on specific job duties and salary level/rate of pay.

You can determine an employee's classification with human resources specialists or use a duties test, which is often used to determine exempt vs. non-exempt according to federal law.

This is important to avoid misclassification and penalties according to state laws.

Related: 5 Things Franchise Owners Should Know About the New Department of Labor Rule on 'Joint Employment'

What does "exempt" mean?

"Exempt" means an employer doesn't have to pay an employee overtime wage, even if they work more than a 40-hour workweek.

However, employers can still pay employees overtime or compensate them in other ways, such as through benefits packages or extra time off, if they want to.

Related: The Rules of Overtime

What is an exempt employee?

Therefore, exempt professionals are not automatically given overtime pay or entitled to overtime pay if they work more than 40 hours a week.

Instead, the vast majority of exempt employees are paid salaries. Non-exempt workers, on the other hand, get extra pay for overtime hours (usually one and one-half times their regular pay rate).

Salaries are set wages that employees earn no matter how many hours they work.

For instance, an employee may be paid a salary of $120,000 a year or $10,000 per month. For one week, the employee works 30 hours, but during another, the employee works 60 hours. It doesn't matter in the end; the employee still earns $10,000 for that month.

In addition, exempt employees are not counted under other FLSA laws, such as how work hours must be documented.

To be an exempt employee, the employee must earn a salary with a monetary basis of at least $35,568 per year or $684 per week. If the employee is salaried but earns less than this salary threshold, they are classified as non-exempt.

Related: As a salaried employee, am I obligated to start working weekends and holidays with no comp time?

What is a non-exempt employee?

A non-exempt employee is the opposite: They must be paid overtime wages if they work more than 40 hours a week. According to the FLSA regulations, the employee has to be paid 1.5 times whatever their hourly rate is for each hour worked over the 40-hour limit.

Furthermore, you must pay non-exempt employees the federal minimum wage of $7.25 or more. Some states have higher minimum wages above the federal limit based on their cost of living.

Note that being a non-exempt employee doesn't mean they must be paid an hourly wage. They can also be paid a salary or commission; as broken down above, if the employee's salary is low enough, they may be classified as non-exempt by default.

Exempt vs. non-exempt employees

To summarize, exempt vs. non-exempt employee status depends on whether the employee is:

• Salaried, and
• Earn above a certain amount of money

Here are some examples of both types of employees so you can understand them a little better:

Mary is an exempt employee. She receives a salary from her employer and ultimately works 55 hours per week. Despite working overtime to finish a presentation or report, she earns the same amount as if she had worked 40 hours per week.

David is a non-exempt employee. He takes a few extra shifts, so he works 55 hours in the same week. Because of this, he is paid 1.5 times his hourly rate for 15 hours in total, the number of hours beyond his 40-hour standard limit.

Some jobs, typically hourly or non-exempt, may be classified as exempt; examples include certain computer professionals, teachers, professional educators, lawyers, and doctors.

Even though these professionals earn money on an hourly basis, they are exempt due to their status.

Related: Here's What Happens When Salaried Employees Become Hourly

Salaried vs. hourly employees

To further break down these definitions, here's a look at salaried vs. hourly employees:

• Salaried employees receive the same amount of money every week, no matter how many hours they work. It can be one hour, 40 hours or 100 hours. Exempt employees have to get paid on a salary basis, but that salary has to be above the federal limit described above.
• Hourly employees receive an hourly wage for all the work they perform. They are generally classified as non-exempt, so they have to be paid overtime wages for any hours they work over 40 per week.

Related: Do Salaried Employees Legally Require Breaks?

Why is exemption status important?

Exemption status is crucial because it helps employers determine how much they will pay their employees.

If you have exempt employees, you don't have to worry about overtime. Everyone can pull together, and you can accomplish big business projects or reports without considering overtime pay or the strain it may put on your salary budget.

However, overtime pay is attractive to many employees. Many corporations and small businesses offer overtime pay to their non-exempt employees specifically to get them to work longer hours. This is particularly common in the service industry or entry-level jobs.

Exemption status is further important because it allows employers to know how they should treat different employees and what they are legally entitled to request. For example, you may have some extra work to get done ASAP. But if your staff comprises non-exempt employees, you must pay them overtime or face legal consequences.

In many cases, organizations hire managers or administrators as exempt employees. They pay them a set salary, which serves as an incentive. If a manager or administrator does their job correctly, they will hypothetically be able to work 40 hours or less and receive the same amount of money.

However, due to administrative exemptions and executive exemptions, these employees may also end up working more than 40 hours a week without any additional compensation.

On the other hand, most front-line or standard workers are non-exempt employees. Generally, the more replaceable employees are, the more likely they are to be non-exempt rather than exempt.

Related: Here's What Happens When Salaried Employees Become Hourly

Summary

Exempt employees don't have to be paid overtime pay, according to the FLSA, while non-exempt employees have to be paid overtime if they work more than 40 hours a week.

Consider these differences when determining whether to pay your employees on a salaried or hourly schedule.

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