Understanding Exempt Vs. Non-Exempt Employees

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In the United States, the Fair Labour Standards Act (FLSA) creates employee terms. It includes the rules for their minimum wage, overtime pay, and recordkeeping. One of the ways that they do this is by classifying employees as either exempt or non-exempt. 

As an employee, you may be wondering why it matters. It is because this classification impacts your earnings. It also determines if you get overtime pay and how your salary is calculated.

This article explains what exempt status means and how it differs from non-exempt. We’ll also explore the pros and cons of this classification and some common mistakes employers make.

Table Of Contents

What Does Exempt Employee Mean?

Exempt employees are usually not qualified for overtime pay. They are also known as salaried employees or overtime-exempt employees. These employees are not covered by the federal minimum wage requirements. Therefore, if you work more than 40 hours a week as an overtime-exempt employee, your paycheck still remains the same.

Determining an employee’s status depends on the type of work they do. The common categories of work include:

  • Executive roles: This includes managers and leaders who oversee the entire team. They are usually in charge of hiring or firing employees.

  • Professional roles: These are jobs where the employees have specialized education or advanced skills. They can be doctors, lawyers, engineers, or creative professionals.

  • Administrative roles: These include high-level office jobs. They usually involve people who make independent decisions on business issues.

You need to know that if you’re being paid a salary, it doesn’t automatically make you ineligible for overtime pay. You can be paid monthly and still be non-exempt. This simply means that you qualify for overtime. The key lies in meeting specific tests set by the FLSA, one of which is the salary threshold.

For most salaried employees, the federal salary threshold determines their status. This may, however, depend on your state because some states set higher thresholds. Even if you qualify under the criteria for federal law, it might not be the same under state law. Therefore, being overtime-exempt is about how you’re paid, how much you’re paid, and the kind of work you do.

There are some cases where your employer can deduct your pay as an exemption. These cases can be:

  • If you don’t work the full week in the first or last week of employment

  • If you have an unpaid leave under the Family and Medical Leave Act (FMLA)

  • If you have certain disciplinary suspensions for workplace misconduct

The FLSA also has special exemptions for specific industries and roles. It can be farmers, employees who work in movie theatres, commissioned sales employees and transport workers. These groups may be exempted from overtime pay rules even if they are not in the executive, administrative, or professional categories.

Exempt vs Non Exempt Employees

What differentiates these two categories is the overtime and the minimum wage. Overtime-exempt employees do not get paid any overtime wages. On the other hand, you qualify for federal minimum wage and overtime pay as a non-exempt employee.

You’ll be able to receive overtime pay if you work for more than 40 hours in a workweek. It is usually 1.5 times their hourly rate. They are, however, different from tax exempt.

  • Typically, exempted workers are paid monthly, which is by salary. This means that they earn the same amount every pay period regardless of the hours they worked.

  • Non-exempted workers are usually paid hourly. Therefore, what they get paid depends on the number of hours they work. The roles might include jobs relating to retailing, customer service, or factory work. These are jobs that pay by the hour.

You should note that, in some cases, some employees can receive a monthly salary but are still non-exempt. In cases like this, they receive a fixed salary, but must still be paid overtime if they work more than 40 hours a week. This mostly happens when a role doesn’t meet the FLSA’s duties test or falls below the salary threshold.

How To Tell if a Job Is Truly Exempt

You already know that not every salaried job is exempted under the Fair Labour Standards Act (FLSA). However, a position usually has to pass three specific tests to qualify. You can think of them as a checklist. So if any box isn’t ticked, the employee may actually be a non-exempt.

  1. Salary Level Test

The job must pay at least $684 per week, and about $35,568 per year. The bar is much higher for highly compensated employees, $107,432 annually.

  1. Salary Basis Test

The employee must receive a set amount every pay period. Since it is not based on hours worked or the quality of work, their paycheck stays the same. Even if the workload changes. Employers can count up to 10% of the salary from nondiscretionary bonuses or incentives. This works as long as these are paid at least once a year.

  1. Duties Test

This focuses on what the employee does, not just their job title. They’d have to have either an executive, administrative or professional role. If a role or job position doesn’t pass all three tests, then it’s likely non-exempt. Employers and employees should understand these criteria before assuming the right classification for a job.

Pros and Cons of Being an Overtime-Exempt Employee

Like most job classifications, being a salaried employee has its own pros and cons. When you understand it, it can help you decide if it’s the right fit for you.

Pros

  1. Predictable Income: Your salary stays the same whether you work 38 or 48 hours a week. This could help make your budgeting easier when planning your monthly expenses.

  2. Higher Pay and Benefits: Many of the positions usually have better salaries. They may also have benefits like health insurance, retirement plans, paid time off, and performance bonuses.

  3. Flexibility: The role can give you more freedom to manage your schedule. For example, if you want to leave early for a family event. You can also have the chance to work from home occasionally.

Cons

  1. No Overtime Pay: Unlike non-exempt employees, you won’t earn extra for working beyond 40 hours. Even if you have deadlines or busy seasons pushing your workweek longer, the pay remains the same.

  2. Longer Hours and Heavier Workloads: Your employer would expect you to finish all tasks regardless of the time it takes. Sometimes, this can take all of your evenings and weekends.

  3. It May Lead to Burnout: Especially in companies where they don’t have a lot of staff, you may have to do extra duties. You’ll have to do this without any additional compensation. This leads to getting tired over time.

Common Mistakes Employers Make When Classifying Employees

exempt employee

Misclassifying employees isn’t just any error. In certain situations, it can create legal, financial, and workplace issues. Here are the most common mistakes employers make:

  1. Assuming “Salary” Automatically Means “Exempt”: Many employers think that if someone is paid a salary, they’re automatically ineligible for overtime. Meeting the salary level is only one part of the test; the employee also has to meet the duties test. If the role doesn’t fit those criteria, the employee may still be non-exempt, regardless of their pay.

  2. Overlooking the Legal Risks: Misclassification can lead to serious consequences. This can include fines, lawsuits, and maybe having to pay years of back wages and overtime. In some cases, employers may also owe penalties for not being able to keep proper time records.

  3. Damaging Employee Morale During Reclassification: It can feel like a demotion when employees are reclassified from salaried workers to non-exempt. This is even if their pay stays the same. Workers might feel unappreciated or lose their previous flexibility. This can damage team spirit and hurt productivity.

Final Thoughts

As an employee, it is important for you to understand your status. This helps when it comes to your paycheck and work hours. You’ll know that you’re being paid correctly and on time. Employers should follow the Fair Labour Standards Act (FLSA) guidelines. This keeps them compliant and helps avoid various issues. Make sure that you double-check employee classifications regularly. It helps everyone and creates a better work environment for both employers and employees.

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Understanding Exempt Vs. Non-Exempt Employees
Samantha Clark

A Warrington College of Business graduate, Samantha handles all client relations with our top-tier partners. Read More

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