Exempt vs. Nonexempt Employees: What's the Difference?March 13, 2023
Take a closer look at the differences between exempt and nonexempt employees, and what you need to know to ensure that you're classifying them correctly.
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Out of all the different ways to classify employees, exempt vs. non-exempt is the broadest - and perhaps least self-descriptive.
Understanding the distinction, however, has critical implications for both employers and employees, impacting wages, work hours, and benefits.
Today we'll take a closer look at the differences between exempt and nonexempt employees, and what you need to know to ensure you're classifying employees correctly.
The main difference between an exempt and nonexempt employee in the U.S. has to do with how they're paid and whether they're eligible for overtime pay.
- Exempt employees usually hold administrative, professional, or executive positions. They’re “exempt” from the FLSA overtime regulations and, therefore, not entitled to overtime pay.
- Nonexempt employees are typically paid hourly and perform more manual or technical duties. They’re entitled to overtime pay for any hours worked beyond 40 in a work week (seven consecutive 24-hour periods.)
What Is an Exempt Employee?
An exempt employee is someone whose job is not governed by the Fair Labor Standards Act’s (FLSA). Exempt employees are paid a regular salary, distributed in equal amounts at the end of every pay period, but do not qualify for minimum wage.
It's worth noting there are certain criteria that must be met for an employee to be classified as exempt. For example, they must be paid at least a certain amount (currently $684 a week or $35,568 per year), and their job duties must primarily involve executive, administrative, or professional work.
Pros and Cons of Being an Exempt Employee
Pros of being an exempt employee:
- Higher salary: Exempt employees earn a fixed salary each pay period, regardless of the number of hours worked. This means they can have the potential to earn a higher salary than nonexempt employees who are paid hourly.
- Flexibility: Exempt employees may have more control over their work-life balance by working from home or occasionally adjusting their schedules to accommodate personal or family needs.
- Professional development: Exempt employees are often considered to be higher-level employees with more responsibilities and opportunities for professional growth and development.
Cons of being an exempt employee:
- Longer work hours: Exempt employees are not entitled to overtime pay, which means they may be expected to work longer hours or be available outside of regular work hours without additional compensation.
- No overtime pay: Exempt employees don’t receive overtime pay, which may mean missing out on additional income during periods of heavy workloads or high demand.
- Increased pressure and responsibility: Exempt employees are often in more senior or managerial positions that can have greater responsibility for the success of the organization. This can come with added pressure and stress.
In summary, employers can more easily stay within their budgets by hiring exempt employees, who aren’t owed overtime pay. And for employees, exempt workers are eligible for benefits and enjoy paycheck stability.
Tax Implications for Exempt Employees
Because exempt employees receive a fixed salary each pay period, their earnings are considered regular income and are subject to federal income tax, as well as state and local income tax, where applicable. Exempt employees may also be eligible for pre-tax benefits, such as health insurance, retirement plans, and flexible spending accounts, which can reduce their taxable income, potentially lowering their tax liability.
It's worth noting that employers are responsible for withholding taxes from an employee's paycheck and remitting them to the appropriate government agencies, including federal income tax, Social Security tax, and Medicare tax. The amount of taxes withheld will depend on the employee's salary, as well as the information they provide on their W-4 form.
Exempt employees may also be subject to additional taxes if they receive certain types of compensation, such as bonuses or stock options. These types of compensation are often taxed at a different rate than regular income and may require additional reporting and withholding.
What Is a Nonexempt Employee?
A nonexempt employee is “not exempt” from FLSA provisions, so they are eligible for minimum wage and overtime pay.
Pros and Cons of Being a Nonexempt Employee
Pros of being a nonexempt employee:
- Overtime pay: Perhaps the biggest advantage of being a nonexempt employee is being entitled to overtime pay for working more than 40 hours in a work week. This means employees are compensated for any extra time put in, which can be a significant boost to their income.
- Variable work schedule: Nonexempt employees are generally hourly workers, so they can sometimes add or swap shifts as needed to create a more favorable schedule.
- Accurate pay: Nonexempt employees are paid based on the hours they work, so their pay is more likely to reflect the actual time worked (as opposed to salaried workers, who may put in more hours than were scheduled).
Cons of being a nonexempt employee:
- Limited flexibility: As a nonexempt employee, you're generally expected to work set shifts and may have less flexibility when it comes to taking time off.
- Lower pay: Nonexempt employees are paid hourly, which means they may have a lower pay rate than exempt, salaried employees.
- Limited job responsibilities: Nonexempt employees are usually responsible for specific tasks and have less authority and decision-making power than exempt employees, which can be limiting if you're looking to advance your career or take on more challenging work.
In summary, nonexempt employees are owed overtime for hours worked beyond 40 in a week, but they offer employers flexibility in labor as needed. Employees receive accurate pay, but it likely varies week to week depending on hours worked.
Wage and Hours Laws
The FLSA governs federal minimum wage, overtime, recordkeeping, and youth employment for employees working in both the private and public sectors.
Overtime for nonexempt employees: Some state and local jurisdictions have their own wage and hour laws, and employers must apply the minimum wage or overtime rate that is most favorable to the employee. Non-exempt employees must be paid no less than time and a half their regular pay rate for each hour over 40 in a workweek.
Overtime eligibility: Exempt employees, who are paid a salary and meet certain criteria, are not required to be paid overtime. The Department of Labor (DOL) has established guidelines to determine who is eligible for overtime pay.
How to Classify Exempt vs. Nonexempt Employees
There are three tests used to determine whether a worker’s role qualifies to be an exempt employee:
- Salary basis: Verifies an employee is being paid a fixed amount each week regardless of number of hours worked.
- Salary level: Confirms an employee is being paid at least $684 per week.
- Job duties: Ensures an employee’s job duties are consistent with exemption status, such as administrative, professional, and executive jobs.
Consequences for Errors
Misclassifying employees is one of the most common payroll errors and one of the most costly.
Any employer that misclassifies an employee could be subject to legal action. For example, an employee could file a complaint with the DOL or file a lawsuit against the employer for unpaid wages, overtime, or other benefits they were entitled to as a result of being misclassified. The DOL can then assess penalties for reparations on the employee’s behalf.
Misclassifying employees can also damage a company's reputation. A high-profile lawsuit would lead to negative publicity and harm the company's relationships with its employees, customers, and the public.
State Laws and Nuances
In addition to federal regulations, some states have unique wage and hours laws that affect exempt, nonexempt, or both categories of employees.
Due to an increase in the state’s minimum wage rate, the new minimum pay rate to qualify for exemption is $868 weekly, which is twice the minimum wage for a 40-hour work week.
California’s minimum wage rate increased on January 1, 2023, so employees must now earn $1,240 per week — two times the minimum wage rate — to qualify for exemption. Unless the employee works in computer software, as they have a unique wage rate ($53.80 hourly, $9,338.78 monthly, or $112,065.20 annually) to qualify for exemption eligibility.
The Colorado Overtime & Minimum Pay Standards Order (COMPS) increased the minimum pay rate to qualify for exemption to $961.54 per week. Highly technical computer employees must also earn this rate, paid weekly or hourly at $31.41 per hour, to qualify.
Additionally, an exempt employee’s pay rate must always meet or exceed minimum wage, regardless of number of hours worked.
Employees in Maine must earn a salary that exceeds $796.17 per week. The employee’s duties determine whether the employee is exempt or non-exempt, not whether they are paid by salary.
Executive and administrative employees in New York must be paid at least 75 times the state’s minimum wage to be exempt from overtime pay. If upstate employees earn $1,065 per week, they may also be considered exempt. This is a state where “professional” employees (as defined by a job duties test) do not have a minimum pay rate to qualify for exemption.
Effective July 1, 2020, salaried Washington employees must earn 1.25 times the new minimum wage rate to qualify as exempt. Thereafter, each January 1 through 2028, employees must earn certain salary thresholds based on employer sizes.
For 2023, the salary thresholds are:
- For organizations with 50 or fewer employees: 1.75x minimum wage ($1,101.80 weekly or $57,293.60 annually)
- For organizations with 51+ employees: 2x minimum wage ($1,259.20 weekly or $65,478.40 annually)
Exempt vs. Nonexempt Frequently Asked Questions
Can you re-classify an employee from exempt to nonexempt?
Yes, it is possible to re-classify an employee from exempt to nonexempt — or the other way around. In fact, it's not uncommon for employers to re-evaluate employee classifications and make changes as necessary to comply with wage and hour laws.
To reclassify an employee from nonexempt to exempt status, the employer must ensure that the employee's job duties and salary meet the requirements for one of the FLSA exemptions, such as the administrative, executive, or professional exemption. The employee's job duties must primarily involve managerial, professional, or administrative tasks, and they must be paid a salary that meets the minimum threshold set by the FLSA.
However, it's important for employers to handle the reclassification process carefully and fairly. Employers should communicate with the affected employee(s) and explain the reasons for the reclassification. Employers should also make sure that the employee's new pay rate and other benefits are adjusted accordingly.
Is it better to be exempt or non-exempt?
Whether it's better to be exempt or non-exempt depends on individual circumstances and preferences. Some employees may prefer the stability of a set salary and benefits, while others may prefer the opportunity to earn more money through overtime pay. Ultimately, it's important for employees to understand their job duties and compensation structure to make an informed decision.
Can highly compensated employees ever be eligible for overtime pay?
The Supreme Court has held that highly compensated employees are eligible for overtime payment if their compensation is calculated solely on a daily basis. A daily rate worker does not qualify as salary exempt simply because their daily pay rate is above the minimum amount to qualify for exemption from FLSA requirements.
Employees that are paid on a daily or hourly basis may still qualify for exemption from overtime pay, so long as an employer also provides a guaranteed weekly amount approximating what an employee usually earns in addition to the other requirements.
Stay Organized With Better HR Software
Managing a mix of exempt and nonexempt workers can add complexity to routine HR and payroll tasks for organizations of all sizes. Payroll software can help simplify the process by organizing employee data and ensuring accurate and timely payment. It can also help companies comply with tax and labor laws, avoid financial penalties, and improve employee satisfaction.
Furthermore, payroll software can provide valuable insights and analytics that inform decision-making and drive business growth. By choosing Paylocity as your payroll provider, you can access these benefits and more. Request a demo today to learn more about Paylocity and its potential as a payroll service for your organization.
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