Employees want the wages they deserve. Employers want to avoid penalties and fines. Want the best of both worlds? Understand the difference between exempt vs. nonexempt employees.
Then, correctly classify your employees.
That way, your team gets the wages they deserve, and you can skip the penalties for misclassifying your employees.
It’s a win-win … win.
Exempt vs. nonexempt employees
OK, so you’ve determined that you have employees and not independent contractors. But if you thought that process was complete, think again. Now, it’s time to determine if employees are exempt or nonexempt.
|Still haven’t determined what type of worker you have? No worries. Check out our FREE guide, “A Guide to Independent Contractors vs. Employees.”|
What’s the difference between exempt and nonexempt employees?
Whether an employee is exempt or nonexempt affects how you process payroll. But, you don’t get to choose. The Fair Labor Standards Act (FLSA) sets the guidelines for exempt vs. nonexempt.
The FLSA protects nonexempt employees. As a result, nonexempt employees must receive overtime pay and earn at least the minimum wage.
Exempt employees are exempt from the FLSA. But, an employee must meet specific requirements to earn the exempt status.
An employee’s status all boils down to three little (actually pretty big) things:
- Salary vs. hourly
- Salary amount
- Job duties
Let’s take a deeper look at exempt vs. nonexempt employees.
If you have a nonexempt employee, pay them overtime for hours worked above 40 hours per week. Overtime pay, or time and a half, is at least 1.5 times an employee’s hourly rate.
Some states have different laws for minimum wage and overtime pay. Check with your local Wage and Hour District Office for more information.
Nonexempt employees meet at least one of the following. A nonexempt employee:
- Receives hourly wages
- Earns below the exempt threshold of $35,568 annually (or $684 per week)
- Does not have executive, administrative, or professional job duties
- Does not qualify for the computer, outside sales, or highly compensated employee exemptions
- Is a blue-collar worker or a first responder
Many employees who are nonexempt are hourly workers. But, nonexempt employees can earn salaries. If you have salaried nonexempt employees, you need to know how to calculate overtime pay for salaried employees.
Again, exempt employees are not protected by the FLSA. If you have an exempt employee, you do not need to pay them overtime wages.
According to the FLSA duties test, an employee must meet all three of the following requirements for exemption. An exempt employee:
- Receives a salary
- Earns at least $35,568 annually or $684 per week
- Has executive, administrative, or professional job duties
Exempt job duties include high-level responsibilities that directly affect the company’s overall operations.
The FLSA provides additional guidelines for exempt job duties. And, there are other requirements for employees in specific fields that might also result in an exempt status.
Executive job duties
Executive jobs are those that involve supervising two or more employees as a major part of the position.
An exempt executive position has direct input on an employee’s status, including assigning tasks, hiring, and firing.
Administrative job duties
Administrative positions must directly support the business’s main activities. Examples of administrative positions include staff in human resources, payroll, and public relations.
Administrative positions are non-clerical and require independent judgment and discretion when making significant business decisions.
Professional job duties
Positions that require a high level of skill or education classify as professional jobs. Examples include doctors, lawyers, architects, writers, and actors.
Other exemption requirements
Employees considered “nonexempt” under the three-part test might still qualify for exemption. But, keep in mind that some job positions are never exempt.
Exemptions do not apply to blue-collar workers (e.g., construction workers or mechanics), regardless of how much they receive. And, first responders are not eligible for exemption from the FLSA.
Examples of first responders include:
- Police officers, deputy sheriffs, and state troopers
- Detectives and investigators
So, what are the other exemption requirements? There are three types:
- Computer employees
- Outside sales
- Highly compensated
1. Computer employees
Employees who carry out certain tasks relating to computers could be eligible for a special computer employee exemption.
To qualify, the employee must meet all of the following. A computer employee with exemption:
- Receives a salary of at least $684 per week or a fee of at least $27.63 per hour
- Works as a computer system analyst, computer programmer, software engineer, or something similar
- Has primary duties that meet the FLSA’s computer exemption requirements
2. Outside sales
The next exemption applies to employees who work in outside sales. An employee who meets the outside sales exemption:
- Has a primary duty of making sales or obtaining orders or contracts AND
- Is regularly engaged away from the main business office
For more information, check out the FLSA’s Fact Sheet.
3. Highly compensated
Employees who receive a high salary (excluding first responders and blue-collar workers) might be eligible for exemption.
To qualify for this exemption, employees must:
- Receive annual compensation totaling $107,432 or more
- Perform at least one of the executive, administrative, or professional duties
Exempt vs. nonexempt employee: Flowchart
Still unsure about the difference between exempt and nonexempt employees? Use our flowchart to move through the three-part FLSA test:
Keeping track of exempt and nonexempt employees
Categorize employees as exempt or nonexempt as soon as you hire them. That way, you can maintain payroll reporting compliance with the FLSA. This also helps prevent errors in how employees track their hours.
Keep timesheets for nonexempt employees so they can easily track their hours and any overtime worked. You should also track hours worked by exempt employees to account for any paid time off used (if applicable).
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This article was updated from its original publication date of June 24, 2015.
This is not intended as legal advice; for more information, please click here.