Exempt vs. Non-Exempt Employees: The Ultimate Guide

Exempt vs. non-exempt employees are worker categories that govern whether or not an employee must be paid overtime. Before advertising a position and hiring, an employer should decide this based on the job responsibilities.

Because misclassification is expensive, we’ll walk you through the three criteria that determine whether an employee is exempt or non-exempt.

You must properly categorize workers as exempt or non-exempt when they are hired, according to federal law.

Exemption vs. Non-exemption

Exempt vs. non-exempt status, according to the Fair Labor Standards Act (FLSA), is determined by the kind of work performed rather than the employee’s job title. If you label an hourly worker a manager when they’re mainly performing entry-level duties, for example, they’re deemed non-exempt and will be eligible for overtime compensation.

Managers, on the other hand, are usually excluded. What do the exempt managers get away with? They are not entitled to overtime pay.

• Exempt implies that the employee is not entitled to overtime pay. Overtime compensation is not needed for employees who are classified as “exempt.”
• The employee will be paid overtime as required by federal and state law if they are non-exempt. In most states, overtime compensation is 1.5 times the hourly rate when an employee works more than 40 hours each week.

Nicholas J. Daukas, a qualified employment law specialist, adds the following caveats:

“The true issue is which occupations are exempt from overtime pay and which ones are not.” The rules of the FLSA provide answers to these issues.

“In its most basic form, the FLSA mandates that employees be paid at least minimum wage for all hours worked and that any hours worked beyond 40 in a workweek be paid at one and one-half the normal rate, or overtime rate.” Employers may be confused by the fact that certain occupations are “free” from the overtime obligation under this rule.

“Once a work is designated as exempt, businesses must take care to preserve the exempt status by not treating the employment as non-exempt,” Daukas continues. When an exempt job may be “docked” or earn a lower pay, there are certain criteria that must be followed. Here are a few examples:

• When a judge orders it
• Vacation days.
• Violation of a critical safety rule
• For other qualifying circumstances.

We suggest having an HR manager on your team or engaging with an HR consultancy like Bambee because of these complications. HR and hiring regulations are complicated and vary from state to state. In California, for example, non-exempt employees must be paid overtime if they work more than eight hours in a single day. They get double-time compensation if they work more than 12 hours in a single day, regardless of their weekly total hours.

Exempt vs. non-exempt employee status is determined by three tests.

In general, an employee must satisfy the “three criteria” to be deemed exempt from overtime pay. There are numerous exceptions to these criteria, which is why working with an HR expert or legal counsel to avoid errors is frequently beneficial. Unless exceptions apply, an employee must pass all three of these criteria to be excused from overtime compensation.

The three criteria for determining whether a job is exempt are as follows:

• Salary level test: Does the employment pay enough to be deemed exempt, with a salary of at least $35,568 per year?
• Is the employee’s pay constant when compared to a typical work schedule?
• Are the job responsibilities executive, administrative, or professional in nature?

If you answered yes to all three questions, your work is likely to be deemed exempt, which means you won’t have to pay overtime. There are certain exceptions and exclusions, which we’ll go over in more detail later.

For the time being, let’s look at each of these three criteria to see whether you’re exempt or non-exempt before employing your first employee.

Salary level test

Employees who are paid more than $684 per week or $35,568 per year pass the first test to be categorized as exempt, meaning they are not required to pay overtime, according to the FLSA at the time of publishing. Employees making less than this, on the other hand, are deemed non-exempt, which means you must pay overtime compensation. Teachers, for example, are an exception.

2. Salary basis test

Your employee would satisfy the second test—be deemed exempt—as long as they are paid consistently the same amount with very little variation. This would make them salaried, which the government would view as such. Non-exempt employees, on the other hand, are paid hourly with compensation that varies significantly depending on their work schedule and the hours are given. There are certain exceptions, such as farmworkers and outside salesmen, who may be deemed exempt even if they are paid hourly.

3. Roles and Responsibilities (White Collar Exemption)

Employees who satisfy the pay level and salary base criteria are exempt only if they also undertake executive, professional, or administrative exempt job responsibilities.

Keep in mind that job names and descriptions alone aren’t enough to establish whether or not this exam has been passed. What matters are the real work duties. For example, if you offer someone the title “Director of Facilities Operations,” but they work as a janitor, doing maintenance and cleaning floors, you must categorize them as non-exempt under this regulation. This test was implemented to prevent businesses from evading overtime regulations by using inflated job titles.

Executive Responsibilities

Executive responsibilities need the supervision of two or more full-time workers. The main responsibility of the job is to manage workers, and the individual in the position offers feedback on choices impacting those team members, such as hiring, firing, job promotions, or work assignments. People managers and supervisors are often included in this group.

Professional Job Responsibilities

Jobs in “learned” and “creative” professions such as physicians, attorneys, graphic designers, actors, and engineers are examples of professional responsibilities. In most cases, these professional positions are deemed exempt. Professional refers to occupations that need a post-secondary education beyond high school.

Administrative responsibilities

Administrative tasks are occupations performed when working on business support teams such as marketing, operations, accounting, or human resources—administrative activities that keep the company operating. They aren’t the people who manufacture widgets on the “line,” wait staff who serve clients, service workers who fix windows, or shop clerks who stock shelves and operate the register. Instead, they are members of the office staff that assist the company.

Exempt vs. Non-exempt Employees

The distinction between exempt and non-exempt employment status is critical for any company that employs direct-hire personnel. Most companies employ a mix of employees that fall under both the exempt and non-exempt categories.

The following are some instances of worker categories in various industries:

• Employers in the retail and foodservice industries often recruit hourly shift workers who are paid overtime and are deemed non-exempt.
• Hourly service workers, such as laborers and service technicians, who are paid hourly and are deemed non-exempt, as well as office managers who book customers, oversee staff, and handle payroll, are common in service businesses.
• Professional services: These businesses often hire highly educated employees as well as administrative personnel who may be exempt provided they satisfy the three criteria.
• Business and office firms: The majority of corporate companies employ exempt executives, professionals, and administrative employees. However, non-exempt hourly employees such as mailroom personnel, maintenance workers, and receptionists are common.

Each sector has its own set of regulations, and it is up to the employer to be aware of them and designate workers as exempt or non-exempt in order to avoid fines and penalties. Any business may avoid compliance issues by designating all of its employees as non-exempt. It’s essential to understand that the FLSA allows for exceptions to the employment categorization requirements, commonly known as exclusions. Let’s take a look at a few of the exclusions.

Employee Classification: Exempt vs. Non-exempt Exclusions

Unlike other federal and state labor regulations, employment law covers a wide range of occupations, with the exception of teachers. Individuals in technical jobs, for example, who are highly paid work long hours and have no managerial responsibilities. Technical jobs such as information technology (IT) support, programmers, and IT administrators are still being investigated to see whether they should be included as exceptions to these regulations.

The following occupations are currently exempt from the three tests:

• Farmworkers and migrant workers are examples of agricultural laborers.
• Ushers and concession staff, for example, work at movie theaters.
• Jobs controlled by collective bargaining units are known as union jobs.
• Those who operate in the rail transportation sector are known as railroad employees.
• Clergy, registered nurses (RNs) but not licensed practical nurses (LPNs), accountants but not bookkeepers, engineers, actuaries, scientists but not technicians, and pharmacists are examples of learned professions.
• Actors, musicians, composers, authors, cartoonists, and many journalists are examples of creative professions.
• Outside salespeople, for example, who work from home or away from the employer’s main office and sell goods and services on a commission basis.

Because of these exclusions, there are certainly gray areas in employment law. To assist demonstrate, we’ve included a couple of these unique situations below. This is why, if you’re unsure, we suggest engaging with an online legal service or a small company HR consulting agency like Bambee.

Industries Exempted Due to Extenuating Circumstances

Some sectors have unique conditions that make their employees exempt (from overtime) under the FLSA. We’ve included links to resources where you can learn more about each of these kinds of employment.

• If you own a retail shop and your workers are paid commissions on sales, you’ll want to make sure you’re in compliance with the FLSA when it comes to commissioned retail employees.
• Employees who earn more than $107,432 per year, regardless of job responsibilities or activities, are usually exempt from the FLSA.
• Computer systems analysts, computer programmers, software engineers, and other related jobs are generally free from overtime provided they satisfy specific criteria, such as job responsibilities and salary levels.
• Workers in the sales and parts departments of automobile dealerships These positions are exempt from the FLSA’s overtime compensation requirements since they are employed by car dealerships.
• Farmworkers: If they deal with products that will move across states, most farm laborers are covered by the FLSA. There are a few complex exceptions, however.
• Drivers, loaders, and mechanics: Motor carriers, such as bus companies, are subject to additional overtime restrictions under the FLSA.
• Employees who work for less than seven months a year, such as those who work at a hockey stadium, are usually excluded from the FLSA.

3 Non-Exempt Employee Classification Examples

There are a variety of approaches to determining whether an employee is exempt or non-exempt. If you’re unsure, it’s better to go with the non-exempt option. Extra overtime hours, on the other hand, may add up quickly, particularly if your administrative, executive or professional staff works long hours after hours.

Let’s look at some real-life instances to demonstrate (and put your abilities to the test):

Operations Coordinator

Let’s suppose a business that manufactures TV mounts pays an operations coordinator $14 per hour for 20 hours per week (it is considered a manufacturing company). From inside the corporate office, the role mostly involves dealing with customers, suppliers, and assisting the accounting staff. The operations coordinator works an average of 20 hours a week, however, this varies depending on the workload. The hours may change at any time.

Is it better to be exempt or non-exempt? Because of the irregularity of compensation and earnings below the threshold, the operations coordinator position is non-exempt. They are entitled to overtime if they work more than 40 hours a week. The employer, on the other hand, has the option of classifying this employee as either salaried or hourly.

Business Development Representative

Let’s suppose your business development representative’s primary responsibility is inside sales, which is a commission-based position with a yearly salary guarantee of $20,000. This individual works full-time from home for approximately 37 hours each week. They sell software for a major software business and are paid about $120,000 per year. This implies that commissions account for 84 percent of the total remuneration. Doesn’t seem like you’re exempt, does it?

Within the exempt vs non-exempt argument, “inside sales” is a distinct stance. Inside salespeople, for the most part, are non-exempt workers who sell to customers over the phone, rather than traveling or “carrying a bag” and seeing consumers face to face. If the employee worked in outside sales, the regulations are somewhat different. Outside sales are, for the most part, excluded. Outside sales jobs don’t have to pay a certain minimum wage. Employees in these jobs are often paid on a commission basis and are thus classified as contractors.

Is it better to be exempt or non-exempt? Despite working as an inside sales agent, this job position is exempt since the person works from home and earns a substantial income, which is $120,000 per year, and fits the criteria of a highly paid employee (above $107,432 per year).

Head Writer

Assume a head waiter is employed by a steakhouse and is required to work full-time 40 hours a week, or five full shifts. When they have free time, they may take up a sixth or even seventh shift. The restaurant is sluggish some weeks, and they only work 25 hours a week, so their income is uncertain. As the head waiter, they are in charge of hiring and firing new employees as well as determining the restaurant’s staffing requirements. The head waiter is paid the state’s minimum tipped pay and must disclose cash tips at the conclusion of every shift. They also get a $1,000 monthly incentive for handling head waiter responsibilities. The average salary for a head waiter is about $60,000 per year.

Is it better to be exempt or non-exempt? Because of the broad range of hours worked and the inconsistency of compensation, the head waiter is not exempt. This worker is due overtime on his hourly pay when he works more than 40 hours a week. The head waiter may be compensated on a salary or on an hourly basis.

What are some examples of misclassification as exempt costs?

The consequences of misclassifying workers as exempt and failing to pay them deserved overtime pay may be enormous. Recently, a small local company in my region with around a dozen workers was found to have misclassified its service technicians and was forced to pay the employees double pay (back pay) for three years as well as pay a fine in excess of $10,000.

The following are the most significant expenses of misclassification:

• Fines and penalties: Fines ranging from $1,000 to $10,000, as well as the possibility of imprisonment
• Backpay: For all extra hours worked for up to three years, all misclassified workers get back pay, which is typical twice the hourly rate.
• Hundreds of dollars per hour for legal consultation and documents preparation
• Local consumers and workers may retaliate if your brand is tarnished.

It’s foolish to take a do-it-yourself strategy to employee job categorization and risk financial and reputational harm. You may frequently engage with an HR consulting company like Bambee or partner with an online legal service for a fraction of the cost of a single infraction. Consider it a risk-avoidance and cost-cutting investment in labor law compliance:

Here’s what one lawyer said when she informed us about the real cost of non-compliance:

“The consequences of a business misclassifying its workers are expensive. There could be retroactive overtime, back pay, fines, penalties, interest, taxes, benefits, and contributions that should have been paid on the employee’s behalf originally—such as taxes, FICA [Federal Insurance Contributions Act], FUTA [Federal Unemployment Tax Act], or retirement contributions—and that’s before attorney’s fees for the employee who filed the wage and hour claim or the company’s own attorney fees to resolve the claim.

“It’s much better for a business to err on the side of caution and treat its workers as non-exempt than to pay the price for misclassification later.” —Amanda J. Shuman, Esq., DangerLaw, LLC attorney

Exempt vs. Non-Exempt Classification Management Providers

Outside of hiring an HR consultant or an attorney, businesses without an HR manager on staff have a variety of options for ensuring labor law compliance. Many of these businesses provide self-service decision tools or support personnel to assist you in determining the appropriate employee classification—exempt vs. non-exempt employee—for the job function.

These companies provide solutions to assist employers to categorize and managing exempt and non-exempt workers.

1. Software for scheduling

When it comes to managing non-exempt workers, keeping track of hours worked is a must. If you have less than 100 employees across several locations, scheduling software solutions like When I Work go a step further by offering an online job board to assist you to locate hourly workers for $2 per employee each month.

2. Apps for tracking time and attendance

Employee scheduling software is similar to time and attendance applications in that they monitor employee hours worked and offer extra compliance capabilities such as managing paid and unpaid breaks. Standardized job descriptions for non-exempt positions are included in tools like Homebase, which is also free for one location. Homebase provides a free plan for life as well as inexpensive premium options with GPS tracking.

3. Payroll and HR Software

HR and payroll software has the advantage of integrating directly with scheduling and timekeeping software, lowering the chance of overtime pay mistakes.

4. PEO

You’re in for a surprise if you haven’t explored a professional employer organization (PEO). For a monthly per-employee charge that varies from under $100 to several hundred dollars per month depending on the services you desire such as employee benefits, training, and performance evaluations, a PEO acts as the employer of record for your employees, removing difficult compliance issues off your plate. At Fit Small Business, we used TriNet as our PEO to guarantee that we provided the greatest possible employee experience.

5. HR or legal advisor

Outsourcing that service to a third-party supplier is a backup alternative for individuals who don’t have access to other providers, compliance software, or an in-house HR specialist. These HR compliance consultants usually charge a monthly fee of $90 to $100 per month, which is a modest investment for peace of mind and much less expensive than hiring a full-time HR manager, which may cost well over $50,000 per year.

Exempt vs. Non-exempt Employees: Advantages and Disadvantages

There are certain advantages to both exempt and non-exempt employee statuses when weighing the pros and disadvantages. When an employer tries to save money by designating non-exempt workers as exempt in order to avoid having to pay overtime, it’s frequently the apparent cost-saving advantages that land them in trouble.

The Benefits

• Reduced risk: If you designate all workers as non-exempt and pay all employees overtime, you’ll almost never have an overtime pay compliance problem.
• Extra compensation is 1.5 times the normal pay rate, thus paying workers overtime will be more expensive. Some companies get around this by restricting an employee’s weekly work hours to less than 40, such as 37.5 hours.

Disadvantages

• Exempt workers get a set pay rate, which means you won’t have to worry about overtime compensation if you work more than 40 hours in a week.
• Exempt workers may be paid a salary using Pro-Payroll. As a result, there’s no need to keep track of work hours or compute overtime hours on time cards.
• Risky: If you misclassify a non-exempt employee as exempt, you risk causing financial harm to your company.

Exempt vs. Non-exempt Employees: Alternatives to Dealing With Them

There are alternatives if labor-law compliance problems like employee exempt vs. non-exempt employment categories are making your head spin. To fulfill your company’s job needs, you may employ contractors, work with virtual assistants, or contract with a temporary agency. These alternatives are useful for companies that need specialist expertise who can work remotely or who require typical services like accounting, IT, nursing, and administrative services.

Here are three options to directly recruit workers.

Workers on a contract or on a freelance basis

FLSA regulations don’t apply to independent contractors like gig workers and freelancers, therefore you don’t have to pay them overtime. However, the Internal Revenue Service (IRS) and the Department of Labor (DOL) have regulations about who may be categorized as a contract worker versus an employee.

Companies that provide virtual assistants

Companies that offer virtual assistants (VAs) exist to provide organizations with a flexible workforce. They, not you, control the employees’ job classifications and payroll as the employer of record. You just have to pay a service charge on an hourly or monthly basis. VA companies supply employees who can answer phones, give customer service, develop software, enter data, and perform research, marketing, or writing tasks, typically from a distant or foreign location.

If the task can be done online, you’ll most likely be able to locate a virtual assistant company that can help you. Work may be done for as little as $1 per job or $5 per hour with VA companies.

Firms that provide temporary staffing

Staffing companies are usually local or industry-specific enterprises that supply employees to fill vacant positions. They employ the person on their payroll, similar to a VA company, and you just “lease” the staff for the task. Working with a temp agency is usually approximately 30% more expensive than hiring an individual directly.

Frequently Asked Questions

Are contractors who work on a freelance basis excluded from overtime pay?

Because independent contractors are not employees, they are automatically excluded from overtime compensation.

How can I make up for lost overtime pay?

Provided you discover a mistake in job categorization or fail to pay overtime, you may correct it with retroactive compensation if the error was not deliberate.

Conclusion

It’s essential to correctly classify your employees’ jobs in order to pay them fairly and comply with federal labor regulations. Before designating a position as exempt from overtime, it’s a good idea to have detailed job descriptions in place that detail the activities that the employee does.