Q: What’s the Difference Between an Exempt and Nonexempt Employee?

Is your new hire an exempt or nonexempt employee? It can be a little confusing as to how you should categorize your employees, but it’s vitally important for your business to get right.

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In this article, we’ll break down the different categories so you can figure out how to pay your employees.

Why does exempt vs. nonexempt matter?

The Fair Labor Standards Act, or FLSA, is a law that explains how people should be treated at work. It includes standards on minimum wage, leave, overtime, record-keeping, and much more.

When it comes to classifications, the FLSA divides employees into two spheres:

  • Exempt
  • Nonexempt

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?

Exempt employees are excused from the rules in the FLSA. This means they don’t receive overtime and may not be entitled to a minimum wage.

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 $455 per week ($23,660 per year).
  • 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, so if you have any questions, talk to an attorney, CPA, or other business advisor to help you set things straight.

Note: The applicability of this law is in flux for the time being, but here’s where things currently stand.

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.

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So 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.

Now, take some time to review the people on your team to double (and triple!) check that they’re in the correct bucket. And then take a look at how overtime and double overtime works.

Once you do, take a deep exemption exhale. You know which laws apply to each type of employee, and you’re ready to pay them fairly and on the dot.

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