Exempt vs Non-Exempt Employees: What’s the Difference?

To avoid misconduct and legal ramifications imposed by the Fair Labor Standards Act (FLSA), all organizations must classify employees as exempt or non-exempt.

As a result, knowing the difference between hiring exempt and non-exempt employees is vital.

• All exempt employees are salaried. However, not all salaried employees are exempt. Salaried employees receive the same salary each week, regardless of how many hours they worked.

• All hourly-paid employees are non-exempt, which means they are entitled to overtime pay and pay rates that meet the FLSA or state minimum wage (whichever is higher). The FLSA does not enforce these regulations for the majority of salaried employees. Note that non-exempt employees can also be paid on a salary basis.

Some regulations vary between states. For example, Alaska, California, Colorado, Maine, New York and Washington set out their own salary and duties tests, which must be used to determine whether an employee is exempt from overtime pay under state rules.

Read on to learn more about the basic rules you should follow when classifying employees as exempt or non-exempt.

What are exempt employees?

Exempt employees are exempt from receiving overtime payments. Exempt employees earn a regular salary of a minimum of $684 per week, and this applies to around 85% of the US workforce.

Exempt employees do not qualify for minimum wage and must not receive overtime pay, so regardless of how many hours they work, they will receive the same amount per pay period.

Exempt employees carry out administration, executive or professional duties.

What are non-exempt employees?

Non-exempt employees are eligible for minimum wage. They are entitled to overtime pay at 1.5 times their usual hourly pay rate. Often, they are paid hourly for the amount of time they worked during a specific pay period.

There are no limitations or requirements to how many hours a non-exempt employee can work each week.

However, non-exempt workers must receive overtime pay if they work more than 40 hours in one week.

Exempt vs non-exempt employees: Key differences

The FLSA has set out three basic tests that can be used to determine if an employee should be classified as exempt or non-exempt:

1. Salary level test. If the employee earns over $35,568 per annum ($684 per week), they qualify as exempt, although this is not guaranteed.

2. Salary basis test. If the employee receives a guaranteed minimum salary, regardless of the time they work, they qualify as exempt, although this is not guaranteed.

3. Duties test. If the employee meets the exemption requirements of tests one and two, they must also meet the duties test. For example, if they are working in an exempt executive role, they must have responsibility for hiring and firing staff.

Overtime pay

A poll by Gallup (2019) identified that 52% of full-time employees worked in excess of 40 hours per week.

If an exempt employee works more than 40 hours per week, they are not entitled to overtime pay.

Non-exempt employees must be paid at least time and a half for any hours worked more than 40 in a week. There is no limit to the number of hours an employee aged 16 years or over can work in a week.

The FLSA does not require overtime pay for work carried out on Saturday, Sunday, public holidays or days of rest unless the hours take the employee over the 40-hour threshold.

An employee’s working week is a fixed, recurring timeframe of 168 hours, seven consecutive days. It can begin on any day of the week, at any hour of the day.

Employers cannot average the hours over two or more working weeks. In most cases, overtime is paid on the normal pay day for the pay period during which the employee earned the wages.

Employees who earn less than $684 per week must be paid overtime for any hours worked over 40 per week, even if they are a manager or professional worker.

When calculating salary, incentive payments, commissions and non-discretionary bonuses can be considered, as long as they do not exceed 10% of the standard salary level.

Salary

At the time of writing, under the FLSA, exempt employees must be paid at least $684 per week. This must be paid to the employee in full in any week they work, regardless of their output in terms of quality or quantity.

There are some exceptions - for example, there is no minimum salary requirement associated with outside sales employees. For computer professionals, the employee must be paid a salary, as long as this works out to be a minimum of $684 per week.

In Alaska, the minimum salary for administrative, professional and executive employees is $868 per week to qualify for the exemption.

In California, the minimum salary for administrative, professional and executive employees is $1240 per week to qualify for the exemption. For computer software workers, the minimum monthly salary is $9338.78 to qualify for the exemption.

The Colorado Overtime & Minimum Pay Standards Order is in force in the state of Colorado. It states that the minimum salary for administrative, professional and executive employees is $961.54 to qualify for the exemption. For highly technical computing roles, employees can be paid by salary (at least $961.54 per week) or by the hour ($31.41 per hour).

In Maine, the minimum salary for administrative, professional and executive employees is $796.17 per week to qualify for the exemption.

In New York, executive and administrative workers must meet the state’s minimum salary requirements and duties tests. The minimum salary for executive and administrative workers is $1065 weekly to qualify for the exemption.

In Washington, the overtime exemption salary threshold is worked out in line with the employer's size. Employers with 50 or less employees must pay administrative and executive workers a minimum of $1101.80 per week to qualify for the exemption

Employers with 51 or more employees must pay administrative and executive workers a minimum of $1259.20 per week to be eligible for the exemption.

For computer professionals, the minimum hourly rate is $55.09 per hour to qualify for the exemption.

Job duties

The FLSA defines an exempt employee's duties as computer-related, outside sales, executive, administrative or professional.

• Computer-related - software engineer, systems analyst or similar. The job's primary duties must involve implementing information technology systems, creating computer programs or the application of systems analysis best practice techniques.
• Outside sales - the job's primary duties must involve making sales and orders or setting up contracts with clients. The employee must be expected to work outside the company’s usual place of business regularly.
• Executive - the job's primary duties must involve being responsible for a managerial position within a department, division or overall business. The employee must be responsible for directing and managing at least two other full-time members of staff (or the equivalent). They must also have the authority to hire, fire or change an employee’s working status.
• Administrative - the job's primary duties must involve carrying out office-based or non-manual work directly linked to company management or business operations. The employee must be responsible for using their discretion and judgment to manage important company matters.
• Professional - the primary duties of the job must involve having the advanced skills or knowledge required for intellectual work, either in a science or education-based field. This will usually be acquired via a course of specialized learning, for example, laboratory sciences, teaching or engineering.

Work schedules

Exempt employees can be asked to work more than 40 hours during a working week. However, they are not entitled to receive overtime pay for hours worked more than 40 per week.

Exempt employees are often required to make themselves available to other team members in the interest of the team and business objectives.

Exempt employees must be paid their regular weekly salary, regardless of their overall output or quality of work during the working week.

For example, employers cannot deduct pay for reduced quality or quantity of work unless the employee has taken a period of personal or sick leave, is suspended for disciplinary reasons, or is working their first or final week of employment.

Non-exempt employees must be paid the federal minimum wage for any hours worked up to 40 in a working week. If they work in excess of 40 hours, they must be paid at a rate of 1.5 of their usual hourly rate.

The most common work schedule for non-exempt employees is 9.00 am to 5.00 pm, Monday to Friday, which allows for the typical 40-hour working week. However, working patterns vary between organizations.

When should you hire exempt or non-exempt employees?

Here are the main things to consider when determining whether to hire an exempt or non-exempt employee.

• Overtime payments. Exempt employees are not entitled to overtime, regardless of how many hours they work per week. The salary of exempt employees remains the same, whether they work 20 hours or 50 hours in a week. On the other hand, non-exempt employees must usually be paid overtime pay of at least 1.5 times their normal hourly rate if they work more than 40 hours a week.
• Experience. Often, exempt employees are more knowledgeable and experienced than non-exempt employees. If you are looking for highly skilled workers or people with significant experience, consider hiring an exempt employee.
• Working patterns. Exempt employees will be key during major changes and business events. During these times, you can ask them to work longer hours without having to offer overtime payments. You must also be mindful that you cannot deduct pay for any hours that have not been worked. Even if they work less than 40 hours per week regularly, you will still be expected to pay their full salary.
• Cost. Even though you will never need to pay an exempt employee overtime pay, they are still likely to cost more in the long run. This is due to their experience level and suitability for highly responsible job roles. Even without having to factor in the cost of overtime pay, their overall salary may be more than that of a non-exempt employee’s salary and overtime payments.

When deciding whether to hire an exempt or non-exempt employee, it is important to consider the duties required of the post and whether you want to pay them hourly or on a salaried basis.

In general, non-exempt employees will be a better match for temporary or seasonal work, such as seasonal retail workers. Exempt employees are a better choice if you are hiring for an administrative, executive or professional role.

Exempt employees receive a steady income stream, regardless of the hours worked during a working week. They generally earn higher salaries than non-exempt or hourly workers.

Both full-time and part-time exempt employees usually have access to retirement benefits such as 401(k) plans, healthcare plans, bonuses, and paid time off for things like sick days and vacations.

The biggest downside of being classed as an exempt employee is not being eligible to receive overtime pay. However, the benefits of being classed as an exempt worker usually outweigh the potential negative aspects.

Before deciding whether an employee is exempt from overtime pay, employers must confirm the employee satisfies the tests for exemption according to federal and state laws.

Where an employee is covered by federal and state law but does not meet both sets of tests, employers should seek expert legal advice to help determine how the employee should be classified.