Employee Classification: Exempt vs. Non-Exempt Roles

When hiring employees for your company, one of the most important decisions you have to make is how you will classify your employees. One of the most confusing dilemmas is between an exempt vs. non-exempt employee.

Under the federal Fair Labor Standards Act (FLSA), the difference between the two starts with their weekly salary. However, there are a couple of additional nuances you should be aware of when classifying your employees.

What is a non-exempt employee?

Non-exempt employees are workers that have a set of different rights than your regular employees have. Non-exempt employees are typically hourly-rate employees earning less than $684 a week per federal law. The limit may vary depending on the state, but they usually make less than the amount.

Non-exempt employees are also entitled to overtime pay. They also cannot hold executive, administrative, or professional positions.

In terms of overtime pay, non-exempt employees are entitled to an overtime rate of 1.5 times the hourly rate.

However, there is another distinction used to differentiate exempt and non-exempt employees. It lies in the level of supervision these employees need.

Non-exempt employees are directly supervised by higher-level employees who decide the workload. These employees typically don’t have a say in terms of management decisions. This is why assembly line workers are often used as an example of non-exempt workers.

Other examples include construction workers, maintenance, and other manual workers. Non-exempt employees dominate sectors that involve carrying out repetitive tasks or physical labor.

Apart from the financial side, the FLSA has other requirements that exempt employees from overtime. Non-exempt employees cannot be "bona fide executive, administrative, professional, and outside sales employees.” This doesn’t apply to teachers, academic personnel, and computer workers.

What is an exempt employee?

In comparison to non-exempt employees, exempt employees earn more hourly. They do not fall under the requirements for minimum wage and overtime pay. Rather, the exempt employees receive a salary. They are not entitled to overpay, even though they might be working more than 40 hours a week.

Unlike non-exempt employees, exempt employees can hold managerial positions in the company.

Should you classify employees as exempt or non-exempt?

Now that you know the difference between exempt vs. non-exempt employees, understanding how to classify them should be easier. Here are a couple of rules to follow:

1. Salary level

Any employee paid below the determined threshold in your state is considered non-exempt.

2. Salary bases

An exempt employee receives a guaranteed minimum pay regardless of hours worked.

3. Duties

Non-exempt employees typically require supervision. They don’t have a managerial say about their workload.

The first two parts of this test are fairly easy to understand. However, the third can be tricky and causes many companies to misclassify their employees.

There are three most common classifications of workers exempt from overtime pay. To ensure that your employees are exempt, they must meet all the following criteria.

1. Executive exemption

The employees who are exempt from overtime pay under executive exemption must:

• Have a primary duty of managing a company’s department or the company itself.

• Are supervising at least two or more full-time employees or the equivalent.

• Have the authority to hire or fire other employees.

2. Learned professional exemption

This exemption requires employees to:

• Perform work that requires advanced knowledge. This is defined under FLSA as predominantly intellectual work. It includes consistent exercise of judgment and discretion.

• Work in a field of learning or science.

• Have an advanced degree.

3. Administrative exemption

The most confusing of the three is administrative exemption. Under this exemption, these employees must:

• Have a decision-making authority.

• Perform office or non-manual work which is related to the management or business operations of the employer.

It is easy to confuse this language, which is why this exemption is the main cause of most misclassifications. Some examples of administrative functions that fall under the exemption are human resources employees, payroll, and finance. Accounting and tax, marketing and advertising, and public relations are some other good examples.

Is it better to be a non-exempt worker?

The main reason workers accept the non-exempt worker role is their work-life balance preferences. Overtime plays an important role in the non-exempt status. Exempt employees are not entitled to overtime pay. Typically, exempt employees work much more than forty hours a week. This labor is covered by their salary.

Those who prefer to put in long hours and get compensated for those enjoy the role of non-exempt worker. The hourly rate might be lower, and their presence is the main requirement to earn it. Plus, non-exempt workers are typically better protected by the FLSA than exempt employees.

Exempt employees, on the other hand, receive their paycheck at the end of the week regardless of the hours they’ve put in. For example, an exempt employee at a construction site will receive their paycheck even though unforeseen circumstances have closed the site for the week. Non-exempt employees in this situation are not eligible for pay, as they haven’t logged any hours.

Another distinction lies in the experience and knowledge required. It differs significantly for exempt and non-exempt workers. Non-exempt employees will likely have an easier time finding jobs. These positions are often entry-level in terms of experience and knowledge. Unfortunately, this may also limit career advancement opportunities.

One thing exempt and non-exempt employees have in common is that they are both eligible for government employment benefits. These include Social Security benefits after retirement. There is also eligibility to collect weekly unemployment payments if they lose their jobs.

However, exempt employees usually get more perks and benefits from their employers. Paid time off is also an important factor, and is something non-exempt employees aren't offered.

The seriousness of employee classification

It's important to classify your employees properly. The employer risks serious liability if they misclassify their employees. They can find themselves owning years of unpaid wages or overtime. They may also face statutory penalties, and in a worse-case scenario, attorney fees.

Misclassification is one of the most common reasons for lawsuits against employers. Both small and medium-sized ones have had to pay significant amounts because of misclassification. Make sure to understand how to classify your employees as exempt or non-exempt to avoid costly repercussions.

FAQ:

What are the three factors to determine exempt or nonexempt?

Three factors used to determine whether a worker is exempt or nonexempt are salary rate, salary base, and duties. Non-exempt workers earn less than $684 per week. Exempt employees receive a salary at the end of the week regardless of hours worked. Non-exempt typically log hours. Lastly, non-exempt workers need supervision, while exempt workers may be managers.

What does it mean to be not exempt?

A non-exempt worker is an hourly-rate worker who earns less than $684 a week per federal law. These workers are entitled to overtime pay, and they cannot hold executive positions in the company. An example often used to explain non-exempt workers is line assembly workers.

What are the disadvantages of being a non-exempt employee?

The most common disadvantages of being a non-exempt employee often are lower rates when compared to exempt employees. The non-exempt roles typically require less experience and knowledge, but it can also limit career advancement opportunities.