What Is the Difference Between an Exempt and Non-Exempt Employee

Congratulations! You just finalized an offer letter to a potential new hire.

Before you send it off, are you sure you've classified the offer correctly?

As a professional in the industry, you also need to be sure you are compliant with employee classification. You have a variety of workers on your payroll but are still a little tentative when it comes to making sure you're providing new hires with the right compensation expectations. 

So-- what is the difference between exempt and non-exempt? Keep reading to find out.

What Is the Difference Between Exempt and Non-Exempt Employees? 

What is an exempt employee vs. a non-exempt employee? Employee status will vary depending on the type of work and the likelihood of overtime requirements. 

The Fair Labor Standards Act 

The Fair Labor Standards Act regulates the employment standards of employees in the private sector and in Federal, State, and local governments. It was most recently updated in July of 2009 and includes: 

• Federal minimum wage requirements ($7.25 per hour effective July 24, 2009)
• Overtime requirements 
• Hours worked
• Employer recordkeeping 
• Child labor restrictions 

All employers must follow these guidelines to remain compliant with Fair Labor practices. Failure to do so may result in severe penalties to your business.

Exempt Employees

Exempt employees are usually always paid by an annual salary-- not by the hour. They are typically professional or executive roles, and meet any of the following criteria: 

• Administrative - primary duty must be the performance of office or non-manual work
• Executive - Must manage the enterprise and direct the work of at least two or more other full-time employees--maintains hiring and firing power
• Computer - skilled worker employed in the computer or technology field
• Outside sales - primary duty is making sales away from the employer’s place or places of business

If you are unsure if your employees meet this exemption criteria, you may refer to the Department of Labor duties test to determine where they land.

Non-Exempt Employees

A non-exempt definition is most important for contractors, freelancers, interns, retail associates, and similar jobs in the United States. They are most commonly hourly workers that track their hours. 

Non-exempt employees are usually paid an hourly wage or earn a salary that’s less than a minimum amount determined by the Department of Labor. If employees are non-exempt, it means they're entitled to minimum wage and overtime pay when they work more than 40 hours per week.

Wage and Hour Laws

The most common application of FLSA law is determining the type of wage and hours eligible for compensation during an employee's workweek. A workweek is a recurring period of 168 hours or seven consecutive 24-hour periods. Certain individuals or groups of employees may have different workweeks. 

FLSA Overtime Rule

The FLSA requires that most employees be paid at least the federal minimum wage for all hours worked. Once an employee has exceeded 40 hours in a workweek, that employee is entitled to time and one-half the rate of pay for all additional hours. This is considered "overtime" pay. 

Exempt Employee Overtime

The FLSA allows for an exemption for overtime pay and minimum wage for employees in certain categories. These are typically "white collar" exemptions that keep employers from compensating unnecessary hours outside of a standard workweek. 

In other words, overtime pay is not required for those who meet executive, administrative, professional, computer work, or outside sales. 

These employees may still be eligible for nondiscretionary bonuses and incentive payments (including commission earnings) paid on an annual or more frequent basis. 

Salary vs. Houry Pay

Salaried employees are not paid based on the hours they have worked. Instead, they're paid the same amount on a consistent pay schedule. These employees are offered an annual amount upfront that is divided up into equal payments throughout the year.

Hourly employees must track and record their hours for their employer. They are then paid based on the total hours they have worked in a given pay period. 

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Salaried Non-Exempt Employees

Salaried exempt employees must be paid a minimum amount of at least $913 a week or $47,476 a year in salary in order to avoid overtime requirements. If an employee is salaried and makes less than this amount, they are no longer exempt and must be paid appropriate overtime wages. 

Hourly Exempt Employees

Most hourly employees fall under the "non-exempt" category for employee classification. However, the following positions industries contain hourly exempt employees: 

• Truck Driving
• Theater and Stage Work 
• Railroad
• Movie Theater Staff
• Wait Staff and Servers 

Due to the nature of their work, these industries are specifically excluded from FLSA guidelines.

Consequences of Employee Misclassification

Non-compliant employers face severe consequences for failing to abide by FLSA requirements. Fines, lawsuits, and additional costs may be in store if you are not fully aware of the correct way to classify and compensate your employees. 

Regulatory Enforcement Action

The FLSA may investigate complaints of workers claiming their rights are being violated. The Department of Labor may also target low-wage industries with records of violations for in-depth investigations of current practices.

Fines and Penalties

Knowing violations of the FLSA may result in criminal prosecution and fines of up to $10,000. A second conviction or repeated non-compliance may result in imprisonment.

Employee Lawsuits for Unpaid Overtime

An employee lawsuit could result in liquidated damages equal to the amount owed. Additionally, an employer may be required to reimburse an employee for payment of the employee’s attorneys’ fees.

Costs to Remedy Misclassification

A misclassified employee may be entitled to up to two years of back pay for any wages owed to them. This amount can increase to three years of entitled back pay if the court determines a willful violation has occurred.

Eliminate the Stress From Your Payroll Process

What is the difference between exempt and non-exempt? We hope this guide helps to clarify this common question so you can get back to running your small business. 

Are you taking full advantage of all of your payroll and business tools? Schedule a free consultation today, and let Bulldog Payroll answer all of your payroll and payroll processing questions.



Are you looking for more payroll processing information? Check out our Ultimate Guide to Payroll Processing.

Is payroll a thorn in your side? Let us handle all the stress related to payroll so you don't have to...