Why does exempt vs. nonexempt matter?
The Fair Labor Standards Act (FLSA) is a law that explains how people should be treated at work. It includes standards on minimum wage, leave, overtime, record-keeping, and more.
When it comes to classifications, the FLSA divides employees into two spheres:
Whether your employee is exempt or nonexempt depends on how they get paid and the type of work they do, which we’ll get into below.
What is an exempt employee?
There’s a common misconception that if you pay someone a salary, they’re automatically labeled as exempt. Spoiler alert: this isn’t true.
Exempt status is linked to a person’s duties, salary, and how much independence they have over their work. Here are the three conditions folks need to meet in order to be labeled as exempt, as outlined by the DOL:
- Salary level test: You have to get paid above a certain salary for the year. Employees must be paid a salary of at least $684 per week ($35,568 per year).
- Salary base test: You have to receive a concrete salary that can’t be changed, even if you make a mistake on the job.
- Duties test: You need to be in an executive, administrative, outside sales, professional, or computer/systems-related role to be seen as exempt. However, you don’t need to have one of those words in your job title. It’s really about the tasks you perform every day that influence whether you’re exempt or not. Fun fact: Babysitters, sugar processing workers, and cab drivers are all exempt.
As you can see, this determination can get fairly complicated—and the Department of Labor also recently updated the law. If you have any questions, talk to an attorney, CPA, or another business advisor to help you set things straight.
What is a nonexempt employee?
As implied, nonexempt employees are not excused from the FLSA rules. That means they need to receive overtime pay if they work more than 40 hours in a given week.
Be sure to check with your state regulations for specific guidance, though. For example, if you’re an employer in California, overtime kicks in if a nonexempt employee works eight hours or more in a single day — not just at the 40-hour tipping point.
What is the difference between nonexempt and exempt employees?
As mentioned above, exempt employees are excused from FLSA laws, while nonexempt employees are not excused from FLSA laws. Generally, employees classified as exempt are paid an annual salary and not entitled to overtime and may not need to be paid minimum wage, while nonexempt employees are paid hourly and are entitled to overtime pay and minimum wage.
State law plays a role in setting the difference between exempt and nonexempt employees. The type of work an employee performs, as well as their industry, plays a role in the distinction.
A job title can help clarify, too. That’s because paying overtime rates to an executive whose duties usually involve working more than 40 hours per week – often far more than 40 hours per week – could prove close to impossible for even the most cash-flush businesses.
This chart breaks down the differences between exempt and nonexempt employees:
|Entitled to minimum wage||Possibly||Yes|
|Exempt from FLSA laws||Yes||No|
Benefits of an exempt employee
Since you don’t need to keep the FLSA in mind when it comes to wages and benefits for exempt employees, an immediate and obvious benefit of an employee with exempt status is that employment is a little less complicated. Other benefits include:
- No need to calculate overtime pay. Even if your company uses a payroll platform that makes overtime tracking easy, exempt employees mean you can skip overtime tracking and management altogether. No matter the number of hours worked in a pay period, an exempt employee’s salary will remain unchanged.
- Exempt employees may be more integral to your company. Generally, exempt employees perform work crucial to your business no matter the number of hours per week it takes to get the job done. Luckily for the employer, exempt employees don’t have to be paid more than their usual rates of pay.
Benefits of a nonexempt employee
Since you must adhere to FLSA regulations when calculating pay for nonexempt employees, you might feel like hiring nonexempt employees presents unique challenges to your business. In reality, nonexempt employees are especially key in certain situations:
- Nonexempt employees form the backbone of certain businesses. Since the FLSA can be interpreted to include most office workers as exempt, almost any employee whose work primarily involves physical labor is nonexempt. The manufacturing, construction, and maintenance industries are just a few industries where nonexempt employees are commonplace. Retail employees who interact directly with customers in-store are also nonexempt employees.
- Nonexempt employees may accept lower pay rates. A person with a job title such as head of business development – almost certainly an exempt position – will likely require a high salary. The work done by nonexempt employees tends to be associated with less expensive (though crucial) labor, so by hiring nonexempt employees, you may save money on labor costs.
How does it work with salaried vs. hourly employees?
While hourly workers are always nonexempt, salaried workers are not always exempt. This means you can have…
- Salaried employees who aren’t eligible for overtime (salary/exempt): These employees earn a fixed salary regardless of how many hours they work.
- Salaried employees who are eligible for overtime (salary/nonexempt): These employees earn a fixed salary if they work 40 hours or less in a given week and are eligible for overtime if they work more than 40 hours per week.
- Hourly employees who are eligible for overtime (hourly/nonexempt): These employees earn money based on the number of hours they work and earn overtime when it applies.
Does exempt vs. nonexempt really matter?
Understanding the distinction between exempt and nonexempt employees is key for keeping your business in compliance with the FLSA. Especially when it comes to overtime payment and leave, knowing whether you must track and pay for administrative employees’ work the same way you log your custodial staff’s time will keep you in compliance. You can also learn another important thing from the distinction between administrative and custodial employees: The job itself rather than the applicant determines FLSA exemption status.
That’s why you should consider the requirements for, and benefits of, exempt versus nonexempt employees when first assessing your hiring needs rather than after. If you’d rather not have to track overtime and pay time and a half – the standard overtime pay rate for all work over 40 hours in the vast majority of the United States – to employees who work more than 40 hours per week, you may want to craft your job guidelines to fit within exemption standards. Or, if the job itself invariably falls under the nonexempt umbrella and you don’t want to pay overtime, consider hiring several part-time employees or even independent contractors.
So, what does it all mean?
Yes, there can be a lot to keep in mind when it comes to the exempt versus nonexempt distinction, but keep this short checklist in mind to save some time (and confusion):
- Nonexempt employees qualify for the protections outlined in the Fair Labor Standards Act, including overtime pay, minimum wage, and more.
- Not all salaried employees are exempt. Use the salary level, salary base, and duties tests to determine whether your salaried employee is exempt.
- Hourly workers are always nonexempt, even if they are full-time.
- Exempt workers do not require overtime pay and may often work more than 40 hours per week.
- Nonexempt workers are crucial to certain industries and may demand lower salaries than exempt employees in certain fields.
- The exempt versus nonexempt distinction is most important in legal compliance, somewhat important in figuring out how to fulfill your company’s needs, and relatively unimportant in hiring someone for a job opening.
Do you offer your employees benefits? If so, it’s important you understand and complies with legal requirements.
If you offer an ERISA-covered employee benefit plan to your employees, you may need to deal with IRS Form 5500. In short: ERISA is a federal law that protects the employees who are enrolled in the plan to ensure discrimination does not take place and that employers share key information about the plan with employees.
Form 5500 is only three pages long—but the instructions currently run a whopping 82 pages, and there’s a laundry list of required supplemental filings. There are also two alternate versions of the form, Form 5500-SF and Form 5500-EZ.