Exploring the Differences Between Exempt and Nonexempt Employees

According to a U.S. Department of Labor report, about 10-30% of employers have misclassified some workers. Employers should ensure correct classification when employees may or may not be exempt from the Fair Labor Standards Act (FLSA) to avoid legal action and financial penalties.

Exempt vs Non-Exempt Employees

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What is an Exempt vs Non-exempt Employee?

Exempt employees are salaried workers paid a fixed income equally distributed over each pay period. They work following a standard 9-to-5 schedule and are not eligible for overtime pay regardless of hours worked. 

On the other hand, non-exempt employees are workers paid on an hourly basis. They’re eligible for federal minimum wage and overtime pay for working more than 40 hours per week.

Proper classification of exempt or non-exempt employees is vital to avoid confusion when assigning job responsibilities, and determining salary structures and eligibility for overtime pay.

How to Determine Exempt vs Non-Exempt Employees

Employers should know the criteria for exempt and non exempt employee classification. These are outlined in the FLSA Act, and they relate to employee’s salary structure, salary level, federal minimum wage, overtime pay, and job duties.

The FLSA Framework

The Fair Labor Standards Act (FLSA) establishes the legal framework differentiating exempt vs non exempt employees. It sets the salary and duties tests to help employers determine who qualifies for exempt status. The Department of Labor (DOL) makes regular updates on these criteria, so employers should stay updated to ensure compliance.

Salary and Overtime

Pay structure and overtime eligibility make the key differences between exempt vs non exempt employees. To qualify for exempt status, an employee must meet the following salary requirements:

• Paid on a salary basis: Exempt employees should be paid a fixed salary each week regardless of number of hours worked.
• Meet a certain salary level: An exempt employee should earn a minimum wage of US$684 per week or US$35,568 per year.
• No overtime pay: Exempt employees aren't entitled to overtime pay. However, employers may choose to compensate them for extra work through benefits packages.

On the other hand, non-exempt employees are entitled to a minimum hourly wage and overtime pay. Per the FLSA overtime rule, non exempt employees are eligible for overtime pay at a rate of 1.5 times their regular rate for extra hours worked over 40 per week. If an employee isn't paid on an hourly basis, the hourly rate can be calculated by dividing the total pay by the number of hours worked.

Job Responsibilities

Salary structure and overtime pay aren't enough to determine an employee's exempt status. To be classified as exempt, employees must pass specific job classification and duties tests set by the Department of Labor.

Exempt employees must be highly skilled professionals who perform office duties that require specialized education and experience. These employees typically perform duties in managerial, administrative, and professional roles, and have the authority to make decisions and exercise judgment.

Employees in outside sales, highly compensated workers making US$107,432 or more, certain computer professionals, and specific types of employees in unique industries are also exempt. Examples include jobs in movie theater sets, railroads, and agriculture.

Examples of exempt employees include:

• School administrators
• Lawyers
• IT professionals
• Public employees
• Department managers
• Physicians
• Pharmacists

Non-exempt employees perform manual or service-related job tasks and don't hold decision-making authority. These employees work under close supervision following established routines and procedures. They're sometimes called “blue-collar” workers because their job duties don't require specialized education or experience.

Examples of non exempt employees include:

• Cashiers
• Delivery drivers
• Office clerks
• Janitors
• Security guards
• Retail associates
• Restaurant wait staff
• Interns

Employers should remember that job titles alone can’t be used to determine exempt status. It's essential to consider the nature of work and the level of responsibility to ensure correct classification.

Compliance and Risks

Wrong employee classification can turn out to be a costly payroll error, resulting in legal pitfalls and financial penalties. Common misclassification risks include:

• Lawsuits for unpaid wages, overtime, benefits, etc
• Legal penalties and fines
• Damage to a company's reputation

Employers should prioritize adherence to the FLSA Act through regular audits and reviews of salary structures, overtime policies, and job duties to ensure they align with regulation.

Practical Examples and Case Studies of Exempt vs Non-Exempt Employees

Below are 3 companies that paid heavily for misclassifying exempt vs non exempt employees.

1. In 2008, Family Dollar Stores paid US$35.6 million for misclassifying hourly employees as managers not entitled to overtime pay.
2. In 2012, Walmart paid about US$4.83 million in damages and back wages and US$4.64 in penalties for misclassifying 4,500 managers and coordinators as exempt.
3. In 2006, Boston Market Corp agreed to pay US$3.75 million in cash payments and US$10.3 million in future pay scales for classifying over 7,000 employees as exempt but requiring them to regularly handle non-exempt employee duties.

Streamlining Employee Classification with Playroll

Differentiating exempt vs non exempt employees comes down to their pay structure, job duties, work schedules, and other legal considerations outlined by the Fair Labor Standards Act (FLSA).

Employers should work closely with payroll experts to ensure compliance and avoid penalties and reputational damage when hiring exempt and non exempt employees in different regions.

Playroll is a platform that offers employment solutions to help you hire and manage global teams in compliance with global labor regulations. We help you avoid misclassification risks through:

• Compliance guidance and HR support
• Team building services
• On-time, accurate payroll management solutions
• A payroll dashboard to manage your team from one place
• Automated tax deductions, and insurance contributions

Request a demo