Exempt vs. Nonexempt Employee Explained

Job applicants should know whether their employer classifies their new role as exempt or nonexempt. How employers classify jobs has enormous ramifications for things like salary and overtime. Exempt and nonexempt employment also have different advantages and disadvantages that set them apart, which leads to employers and employees favoring one over the other.??

Before taking a job, employees should understand every compensation detail. Specific verbiage influences how much pay an employee receives for regular work and any opportunities for extra income due to extended hours.

The Fair Labor Standards Act (FLSA) of 1938 dictated specific guidelines for employers to classify employees. And while this law has evolved since its original passage, employers must follow these rules or risk paying significant fines due to compliance violations.

What Are Exempt Employees?

The FLSA defines exempt individuals as those who do not receive overtime provisions. Most exempt employees meet specific criteria for the exemption. Companies typically classify exempt individuals as:

• Executives
• Administrative personnel
• Outside sales employees
• Management

Most exempt employees receive their pay on a salary basis instead of hourly.

What Are Nonexempt Employees?

Nonexempt individuals must receive overtime pay for all work hours beyond the standard 40-hour workweek. These nonexempt employees may receive payment on a salary or hourly basis. Other types of compensation structures may apply.

How Does the Fair Labor Standards Act (FLSA) Affect Exemption Status?

FLSA rules govern the federal minimum wage and other requirements, such as overtime and record keeping. Some jurisdictions, like state and city governments, have local laws. The Department of Labor states that employers must apply the most favorable minimum and overtime rates.

The FLSA states that employers must pay any nonexempt employee no less than time and one-half their regular rate for any hours over 40 in a standard workweek.

Salary vs. Hourly Pay

Paychecks alone do not determine exemption or lack thereof. It can, however, dictate policies a workplace follows. Hourly workers may track time and attendance for accurate payroll. Salaried employees usually do not find themselves subject to these requirements.

How to Classify Exempt vs. Nonexempt Employees

Some jobs, such as agricultural work and employees in movie theaters, are excluded from FLSA requirements. Most other employees covered by the FLSA are nonexempt. To be exempt from FLSA overtime requirements, an employee must usually meet three specific tests:

• Salary level test: Employees who make less than $35,568 per year (around $684 per week) are nonexempt. Those who make more than that are typically exempt.
• Salary basis test: Salaried employees must have a guaranteed minimum amount of money they can count on for any workweek. It does not need to be their total compensation.
• Job duties test: Any employee who meets the salary and salary basis tests is exempt only if they perform job duties. This work is typically high-level. Note that job titles may not be a reasonable basis for determining exemption. The types of work that exemptions often fall under include executive, administrative or professional ones.

If workers do not belong to the above categories, they are nonexempt.

Pros and Cons of Exempt Employees

Hiring exempt employees comes with a few perks. For one, they tend to have more experience and are ready for extra responsibility. And because businesses do not have to pay them overtime, they have additional flexibility.?

On the other hand, exempt employees may expect a higher salary to offset those responsibilities and extra hours. Furthermore, employers of exempt workers cannot deduct pay for any hours the exempt associate does not work.

Pros and Cons of Nonexempt Employees

Nonexempt employees can earn additional income thanks to overtime, but their employers often keep a closer eye on their hours. These employees typically see heavier supervision than exempt workers.?

Nonexempt employees enjoy more protections thanks to overtime rules for their work. Exempt employees who work upward of 45 to 50 hours do not receive protections regarding these extended hours.?

For companies that want to hire nonexempt employees, knowing the rules and regulations surrounding how long these associates can work is paramount to avoid paying costly fines or fees due to lawsuits or broken laws.

Final Thoughts on Exempt and Nonexempt Employees

Anyone taking a job or hiring for a position must understand the nuances and rules around exempt and nonexempt positions. Failure to do so leads to costly penalties and can negatively impact turnover and attrition. A company’s reputation toward workers hinges on whether employees receive fair treatment.

Top Takeaways

• FLSA rules mandate two classes of employees: exempt and nonexempt.
• Exempt employees do not receive overtime pay for their work above 40 hours, but they often receive minimum salaries.
• Nonexempt employees may have a lower hourly rate than their exempt counterparts, but they can earn overtime by working more than 40 hours a week.
• Both exempt and nonexempt employees have pros and cons.

(Reporting by NPD)