What's the Difference Between Exempt and Non-Exempt Employees?

Properly classifying your employees is vital to avoiding costly and embarrassing fines and potential employee lawsuits. However, it can be tough to know when to consider an employee exempt or non-exempt. 

The difference is defined in the Fair Labor Standards Act (FLSA). Instead of reading the legislation in full, check out this quick guide to help you stay compliant. 

What is the FLSA? 

Staying up to date with compliance changes is exhausting. The FLSA is no different.  

The FLSA requires that nearly every employer in the United States classify their employees as being either exempt or non-exempt regarding overtime pay. An exempt employee, for example, would not be entitled to overtime pay for hours worked over 40 in one week, whereas a non-exempt employee would receive overtime pay. 

Determining whether the FLSA does not entitle an employee to overtime pay, and therefore exempt, is not as simple as just classifying them as exempt. There is a lot that goes into this determination, much of it confusing and easy to trip up even the most well-intentioned employers. 

What does it mean to be a non-exempt employee? 

When an employee is properly classified as non-exempt, that means they are entitled to receive overtime pay and a minimum wage for their hours worked. The FLSA governs overtime pay and minimum wage requirements. 

To make matters more complicated, your state law also applies. So if your state has a higher minimum wage than the federal government, your state minimum wage must be adhered to in order to remain compliant.  

What is an exempt employee? 

An exempt employee under the FLSA is not entitled to receive overtime pay for any hours worked over 40 in a workweek. Simply putting your employees on salary does not make an employee exempt. 

This is a common mistake that employers make, and it opens them up to costly fines and employee lawsuits. Properly classifying an employee as exempt requires a much more detailed process. Getting this right is important to prevent common FLSA violations. 

How do you determine exemption? 

When you hire a new employee, you need to determine whether their job is exempt or non-exempt. There are three tests used to determine exempt status, and an employee must pass all three tests. 

Job Duties 

The FLSA provides for a job duties test as part of the classification process. To pass this test, an employee's job duties must include regularly exercising discretion and independent judgment. To be clear, this test requires that the employee's job duties themselves pass this test, not just their job title. 

Salary Basis 

Employers must pay an exempt employee a regular salary. Companies cannot arbitrarily reduce this salary for poor work performance or for working less than 40 hours in a given workweek. 

Salary Level 

If an employee passes the first two steps, the last hurdle to a proper exempt classification is the amount of salary the employee receives. The FLSA sets a current minimum threshold of $684 per week, but many states have a higher minimum than the FLSA. You need to check your state laws for guidance. 

Main Categories of Exempt Employees 

The FLSA provides some clarity on what types of employees may be exempt. The five main exemption categories are: 

• Executive - the primary duties of the employee must center on managing the business or a department and must supervise at least two employees, with the ability to hire, fire, and discipline employees 
• Professional - the primary duties of an employee must require advanced knowledge or education in a highly specialized field, like a doctor or lawyer 
• Administrative - the employee's main duties must relate to the general business operation and must include the exercise of discretion and independent judgment 
• Computer - the employee must be a skilled worker in the computer field 
• Outside sales - the employee's primary duties must include making sales away from the employer's main place of business 

These categories provide employers with broad discretion to classify employees in one of these categories. If an employee does not fall under one of these categories, they are non-exempt and entitled to overtime pay of one and one-half times their normal hourly rate of pay for time worked over 40 hours in a workweek. 

Understanding the Difference Keeps Your Company Safe 

Here's your takeaway: exempt employees are not entitled to overtime pay, and non-exempt employees are entitled to overtime pay. How you get there, though, is much more complicated. 

Following the FLSA's guidelines about exempt versus non-exempt employee status can help you get to the right answer. Unfortunately, even the most well-intentioned employees make mistakes when determining classification status. This often results in costly fines and employee lawsuits. 

When you have a trusted HR outsourcing partner at your side, you can rely on their recommendations about how to classify your employees. This peace of mind can help you rest easy at night, knowing that your company remains compliant.