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The Difference Between Exempt vs. Non-exempt Employees

Compliance
March 26, 2021

The term “exempt” here means that the worker is exempt from overtime pay.

In addition to exempt workers, some workers are not exempt from being paid overtime — all businesses should know the difference. Overtime work is closely monitored by the Department of Labor, and there are penalties for ones that fail to comply.

How to classify the employees? Which rules and regulations apply? Are there any exceptions?

Find the answers to these and many more questions below! We’ll explain all the differences between exempt and non-exempt employees, the most recent legal changes in the US, as well as the exceptions and guidelines that apply.

What is an exempt employee?

Employers are required to pay their workers at least minimum wage (for work that takes up 40 hours in the workweek), along with overtime for any additional number of hours employees spend at work.

This doesn’t go for exempt employees. As mandated by the Fair Labor Standards Act (FLSA), exempt employees aren’t entitled to overtime pay. Exempt employees aren’t subject to overtime hours and time tracking.

However, employers aren’t exactly forbidden to pay non-exempt employees for overtime work. It’s not mandated by federal law, but it’s at their discretion to decide. To create a more attractive contract and retain exceptional workers, employers can offer a benefits package that includes overtime pay.

Employee exemption test

It’s important to note that employees’ job title has nothing to do with exemption status. Tasks performed while on the job determine the status.

There is a three-tier duties test for employers (and employees) need to go through to determine whether the worker should be exempt:

  1. Employees receive a yearly salary
  2. That salary amounts to $684 per week, or $35,568 per year
  3. Employees are highly-skilled and perform exempt job tasks

Let’s elaborate on part No3.

Exempt employees are usually white-collar professionals: they perform job duties that demand formal training and dedicated office space. These workers usually provide other businesses, agencies, corporations, and clients with their services.

To be more precise — the US Department of Labor (DOL) dictates that exempt status comes from being paid by salary, and performing executive, administrative and professional duties, with outside sales and computer professionals included.

Types of exempt employees with exemption guidelines

There are several categories of exempt employees recognized by the Fair Labor Standards Act:

  1. Executives — they have management roles: managing the business, or their department/ division/ subdivision. They have the authority to hire and fire, and their hiring/ firing commentaries have great weight. They also direct the work of at least two other employees
  2. Professional employees — their primary duty requires specific, advanced knowledge of complex topics: engineering, teaching, IT, or specific field of science
  3. Administrative employees — for non-manual/ office work including general business operations of the employer (human resources, for example); their primary duty consists of “the exercise of discretion and independent judgment with respect to matters of significance”
  4. Computer professionals — software engineer, computer programmer, computer systems analyst, and similar roles belonging to the computer field
  5. Outside sales employees — they need to work outside of their business premises and have a primary duty to make sales or obtain contracts/ orders

The following occupations don’t belong to any category mentioned above, but may also be exempt from the overtime pay:

  • Domestic service workers living on their employers’ premises
  • Farmers/ farmworkers
  • Taxi drivers, seamen (on US vessels), railroad, air carrier and motor carrier employees, local delivery employees paid on approved trip rate plans
  • Commissioned retail/ service employees

For the full list take a look at the official DOL and FLSA guidelines!

Independent contractors/ freelancers are exempt as well since they’re not protected by the FLSA. See our Independent Contractor and 1099 Employee guides to learn more about tax benefits and exemptions.

Hire employees

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What is a non-exempt employee?

Non-exempt employees are paid on an hourly basis. Employers are required by law to pay non-exempt employees for their overtime work. Overtime rules order that overtime work counts as time spent working that exceeds full-time hours, i.e. anything more than 40 hours per week. Also, employees must be paid at least the federal minimum wage ($7.25 per hour starting the year 2021) to be considered non-exempt.

It’s worth noting that $7.25 per hour is only federal law, and some cities and counties have established higher minimum wage and other better conditions for non-exempt employees.

Taking California as an example:

  • As of this year, non-exempt employees that work for a business owner who hires up to 25 people are entitled to be paid at least $13.00 per hour
  • If employers hire more than 25 workers, the minimum wage is $14.00 per hour
  • Non-exempt employees are owed twice their regular hourly rate if they’ve worked more than 12 hours in a day, or more than 8 hours each day for a whole workweek

In case the employee is subject to both federal and state law, the higher standard applies (the one that entitles them to the higher overtime pay).

Read more about hiring independent contractors in California

How to calculate overtime for an hourly wage?

Overtime pay formula looks like this:

your regular rate of pay (hourly pay rate)

x          1.5

x          overtime hours

=          Total weekly pay

Let’s see how that works with an example:

Normally, a non-exempt employee (let’s call him Karl) works 45 hours per week, and his rate is $30 per hour.

This means that Karl is paid $1,200 (40 hours x $30), plus $225 ($30 x 1,5 x 5) for the additional 5 hours overtime. This amounts to $1,425 per week.

Fair Labor Standards Act and U.S. Department of Labor regulations

According to the U.S. Department of Labor, the Wages and the Fair Labor Standards Act covers overtime pay.

All the rules mentioned above stem from FLSA; these rules below are also worth noting:

  • Employees aged 16 and older can work as many hours as they please, with no legal limitations
  • There’s no special overtime pay for weekend, holidays, or regular days of rest — unless overtime work happens to include those days
  • The Act considers a period of 168 hours (seven consecutive 24-hour periods) a workweek

As far as the hours worked are concerned:

  • On-Call time spent at the employers’ premises is considered working time; if an employee is on call at home, it doesn’t count as working time
  • Rest and Meal Periods count as working time (20 minutes)

Employers need to keep records of:

  • Time and day of the week when employee's workweek begins
  • Hours worked each day and total hours worked each workweek
  • The basis on which employee's wages are paid
  • Regular hourly pay rate
  • Total daily or weekly straight-time earnings
  • Total overtime earnings for the workweek

The consequences of classifying the employees as (non) exempt

Wrong employee classification has serious implications, as it’s usually done to evade taxes and deny the workers their money for personal gains.

By avoiding paying the non-exempt employees for their overtime work, employers risk these penalties mandated by DOL:

  • Employers who intentionally violate the federal overtime rules may be prosecuted criminally and fined up to $10,000
  • Repeated offenders risk jail time, or paying up to $1,100 per violation for civil money penalties

Different states have different rules, but federal rule dictates the minimum fine.

Apart from state/ federal penalties, the wronged employees may sue, and legal fees add up to a huge amount of money.

With our Employee Misclassification guide, you won’t need to worry about this topic again.

Summary: Exempt vs Non-exempt employees

Exempt employees are paid on a fixed salary basis.

Non-exempt employees are paid by the hour; for each hour they work overtime, non-exempt employees are entitled to time and one-half of their usual hourly rate. For overtime work, they’re compensated with (hourly rate) x 1,5 x (number of hours overtime), on top of their regular salary.

Labor laws may differ from one place to another, so be sure to check for each place of your interest.

Further reading:

Disclaimer: This text is of a purely informational character and should not be used instead of legal services. Be sure to check the official U.S. Department of Labor and other relevant government websites.

Compliance
March 26, 2021

The term “exempt” here means that the worker is exempt from overtime pay.

In addition to exempt workers, some workers are not exempt from being paid overtime — all businesses should know the difference. Overtime work is closely monitored by the Department of Labor, and there are penalties for ones that fail to comply.

How to classify the employees? Which rules and regulations apply? Are there any exceptions?

Find the answers to these and many more questions below! We’ll explain all the differences between exempt and non-exempt employees, the most recent legal changes in the US, as well as the exceptions and guidelines that apply.

Hire employees

Hire employees abroad, without setting up an entity

Get access to the World’s best talent. Hire full-time employees in 150 countries without having to set up a legal entity in a new country.

Learn more

Employers are required to pay their workers at least minimum wage (for work that takes up 40 hours in the workweek), along with overtime for any additional number of hours employees spend at work.

This doesn’t go for exempt employees. As mandated by the Fair Labor Standards Act (FLSA), exempt employees aren’t entitled to overtime pay. Exempt employees aren’t subject to overtime hours and time tracking.

However, employers aren’t exactly forbidden to pay non-exempt employees for overtime work. It’s not mandated by federal law, but it’s at their discretion to decide. To create a more attractive contract and retain exceptional workers, employers can offer a benefits package that includes overtime pay.

Employee exemption test

It’s important to note that employees’ job title has nothing to do with exemption status. Tasks performed while on the job determine the status.

There is a three-tier duties test for employers (and employees) need to go through to determine whether the worker should be exempt:

  1. Employees receive a yearly salary
  2. That salary amounts to $684 per week, or $35,568 per year
  3. Employees are highly-skilled and perform exempt job tasks

Let’s elaborate on part No3.

Exempt employees are usually white-collar professionals: they perform job duties that demand formal training and dedicated office space. These workers usually provide other businesses, agencies, corporations, and clients with their services.

To be more precise — the US Department of Labor (DOL) dictates that exempt status comes from being paid by salary, and performing executive, administrative and professional duties, with outside sales and computer professionals included.

Types of exempt employees with exemption guidelines

There are several categories of exempt employees recognized by the Fair Labor Standards Act:

  1. Executives — they have management roles: managing the business, or their department/ division/ subdivision. They have the authority to hire and fire, and their hiring/ firing commentaries have great weight. They also direct the work of at least two other employees
  2. Professional employees — their primary duty requires specific, advanced knowledge of complex topics: engineering, teaching, IT, or specific field of science
  3. Administrative employees — for non-manual/ office work including general business operations of the employer (human resources, for example); their primary duty consists of “the exercise of discretion and independent judgment with respect to matters of significance”
  4. Computer professionals — software engineer, computer programmer, computer systems analyst, and similar roles belonging to the computer field
  5. Outside sales employees — they need to work outside of their business premises and have a primary duty to make sales or obtain contracts/ orders

The following occupations don’t belong to any category mentioned above, but may also be exempt from the overtime pay:

  • Domestic service workers living on their employers’ premises
  • Farmers/ farmworkers
  • Taxi drivers, seamen (on US vessels), railroad, air carrier and motor carrier employees, local delivery employees paid on approved trip rate plans
  • Commissioned retail/ service employees

For the full list take a look at the official DOL and FLSA guidelines!

Independent contractors/ freelancers are exempt as well since they’re not protected by the FLSA. See our Independent Contractor and 1099 Employee guides to learn more about tax benefits and exemptions.