Non-Exempt vs. Exempt Employees: Differences Explained

The Fair Labor Standards Act (FLSA) classifies workers as either non-exempt vs. exempt employees to help employers determine the minimum wage, regular salary rates, benefits, and work schedule for their staff.

Employers must know the distinction between non-exempt vs. exempt employees because the difference has direct implications for preparing overtime compensation and benefits packages for extra work hours.

In this article, we’ll discuss the definition of an exempt and a non-exempt employee, the differences between the two, and why this is essential information that both employers and employees must be familiar with.

Key Takeaways

• Exempt employees receive a fixed salary, follow a standard work schedule, and are entitled to retirement and healthcare benefits but are not entitled to overtime pay.
• Non-exempt employees are paid the minimum wage hourly. They have a flexible work schedule and are entitled to overtime compensation.
• Independent contractors are not regarded as employees. That means they do not fall under the exempt or non-exempt category.
• Exempt employees and non-exempt income are both subject to federal, state, and local taxes. Both types of employees are also eligible for tax and unemployment benefits.

What is an Exempt Employee?

An exempt employee is a worker who is not qualified to receive overtime compensation. One of the main reasons why exempt employees are not entitled to overtime pay or the minimum wage is because they receive a stable or fixed salary.

Jobs in the executive and administrative departments, the computer technology field, and workers with professional roles such as lawyers, engineers, doctors, accountants, and outside sales are categorized as exempt.

But where and how did the exempt and non-exempt classifications originate?

In 1938, the FLSA passed the category that identified exempt employees to establish ground rules for fair labor practices and regulations.

Aside from the jobs that fall under the exempt category, the FLSA adds that employees who earn at least $684 weekly or $35,568 annually, employees of American vessels, railroads, local broadcast stations, and motion picture theaters, as well as farm workers and taxi drivers, are also considered exempt. The additional qualification was recently included in 2022.

While exempt employees are not eligible for overtime pay, they may be entitled to receive year-end bonuses, retirement plans, and paid sick or vacation leaves instead.

What is a Non-Exempt Employee?

The meaning of a non-exempt employee is someone who qualifies to receive the minimum wage and is also entitled to overtime pay. Their overtime pay is in effect once they exceed 40 hours of work within a week.

In calculating a non-exempt employee’s overtime compensation, their hourly rate is multiplied by 1.5. It is important to note that the minimum wage may differ based on their employment location.

Non-exempt employees use a timecard to monitor their work hours and cross-reference the hours they have completed with their wages. Examples of non-exempt employees are servers, maintenance crew, para-professional workers, interns, and people in the clerical sector.

People who work under a supervisor who delegates their tasks or those who are not involved in important decision-making processes in the business are also considered non-exempt.

FLSA Wage and Hour Laws

Among the main responsibilities of the Fair Labor Standards Act (FLSA) is governing and ascertaining the regulations on minimum wage and overtime compensation.

Consequently, the Department of Labor’s Wage and Hour Division executes the FLSA’s regulations. The federal minimum wage is set at$7.25per hour.

In 2023, the following states increased the minimum hourly wage for non-exempt employees:

• Alaska: $10.85/hour
• Arizona: $13.85/hour
• California: $15.50/hour
• Colorado: $13.65/hour
• Connecticut: $15.00/hour
• Illinois: $13.00/hour
• Maine: $13.80/hour
• Maryland: $13.25/hour if the company has 15 employees or more; $12.80/hour if the company has 14 employees or less
• Michigan: $10.10/hour
• Minnesota: $8.63/hour if the employer’s annual gross volume does not exceed $500,000; and $10.59/hour if the employer’s annual gross volume exceeds $500,000
• Missouri: $12.00/hour
• Montana: $9.95/hour
• Nebraska: $10.50/hour
• New Jersey: $14.13/hour if the company houses at least six employees; $12.93/hour if employer hired fewer than six employees or if employees are hired seasonally
• New Mexico: $12.00/hour
• New York: $15.00/hour in Nassau, Suffolk, and Westchester counties; $14.20/hour in the rest of the state
• Ohio: $10.10/hour
• Rhode Island: $13.00/hour
• South Dakota: $10.80/hour
• Vermont: $13.18/hour
• Virginia: $12.00/hour
• Washington: $15.74/hour

In some instances, an employee may have been granted or entitled to a performance-based increase that already matches the new minimum wage rate. Employers are advised to assess how the increase will impact employee satisfaction, fairness, and operational costs.

Exempt Employee vs. Non-Exempt Employee: Pros and Cons

There are advantages and disadvantages to being an exempt vs. non-exempt employee.

Let’s discuss them one by one:

#1. Exempt Employees Pros & Cons

Pros for Employees:

When discussing one of the main differences between non-exempt vs. exempt employees, the salary difference always tops the list. Exempt employees typically earn more compared to non-exempt workers.

Not only that, they are paid a fixed salary and are not required to complete a 40-hour work week. Fixed salaries and work hours also provide a more secure income source. They are also entitled to multiple benefits, such as health insurance and retirement benefits in the form of 401(k) plans or SIMPLE IRAs.

Cons for Employees:

Exempt employees must follow a fixed work schedule. They do not work flexible business hours and are not entitled to overtime pay even if they exceed the 40-hour work week. There are also higher expectations from their employer because determining their salary is mostly performance-based.

Pros for Employers:

With exempt employees earning fixed salaries, employers find it easier to budget their labor costs in advance and calculate their payroll accruals more accurately for the succeeding months.They can also use performance assessments to negotiate salary increases and bonuses with their employees.

Cons for Employers:

While exempt employees earn a fixed salary compared to non-exempt employees, their rates are significantly higher. Employers must be ready to meet the salary demands and expectations of exempt employees.

#2. Non-Exempt Employees Pros & Cons

Pros for Employees:

In weighing the advantages of non-exempt vs. exempt employees, a notable plus for the former is their eligibility for overtime compensation. They are also paid by the hour, and so they are assured they get every last penny for all the hard work they put in.

Non-exempt employees are also entitled to flexible work hours.

Cons for Employees:

Their extra work hours may be well-accounted for, but their work schedule and salary are often inconsistent. They may be hired on a project-based or part-time basis only. Moreover, they receive a lower income compared to exempt employees.

Pros for Employers:

Employers get to save more on labor costs. They can pay non-exempt employees the established minimum wage in their state or location.

The flexible work hours and hiring setup allow employers to arrange a short-term employment contract that benefits their business’s timetable and demands.

Cons for Employers:

It is crucial for employers and non-exempt employees to have a reliable time-tracking system to monitor all the work hours completed. Doing so ensures that the employer gives employees proper compensation, particularly when the latter completes extra work hours.

While exempt employees receive the same salary whether they complete the 40-hour work week or not, with non-exempt employees, employers must see to it that their workers’ wages and their pay stubs reflect every completed work hour down to the very last minute.

This can prove tedious for small businesses with limited manpower and no human resources department or startups whose employees have limited backgrounds in accounting and payroll processing.

Exempt vs. Non-Exempt Employees Tax Implications

Now that we’ve enumerated the pros and cons of being a non-exempt vs. exempt employee, let’s briefly discuss tax implications.

There are no distinctions between non-exempt vs. exempt employees when it comes to their tax obligations. The IRS taxes exempt and non-exempt income the same and uses their filing status and tax bracket in determining their taxes owed.

With exempt and non-exempt workers subject to paying federal income tax, including state and local taxes, this also means they are entitled to certain tax benefits or tax breaks.

Tax benefits are useful in reducing an employee’s tax liabilities. Employers are responsible for withholding income taxes from their employee’s pay. Employers use their employee’s Form W-4 to determine the exact amount that goes to their employee’s taxes and contributions.

Unemployment Benefit

FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act) are taxes meant to provide funding for the federal and state government’s unemployment support programs.

Exempt and non-exempt employees are both eligible to receive unemployment benefits. However, they must consult with the authorities in their area because states and locales have different compliance practices and regulations for providing unemployment assistance.

How to Classify Non-Exempt vs. Exempt Employees

There are specific requirements set by the Department of Labor that classify whether an employee is non-exempt vs. exempt.

The following are the main tests used to distinguish between the two categories:

• Salary grade. Exempt employees typically receive a weekly salary of $684 and above. Meanwhile, non-exempt employees are paid hourly wages, with the rates based on the established minimum wage in their state or locale.
• Compensation structure. Another key way of classifying non-exempt vs. exempt employees is by assessing whether they are required to follow a strict and fixed schedule or if they work more flexibly, such as in a contractual or part-time position.
• Job role. Employees taking on a role in the administrative, executive, or computer technology department are considered exempt. Doctors, lawyers, and supervisors are also exempt employees. Non-exempt employees are those whose work requires the close supervision of an individual holding a managerial or higher position. Other job roles that fall under the non-exempt category include servers, maintenance, and clerical tasks.
• Outside sales. An outside sales employee is different from a sales personnel who conducts inside sales of products for the company. Outside sales entails generating sales and getting customer orders and contracts outside of the company’s or the employer’s main area of business. Outside sales employees are exempt from overtime pay.

Non-Exempt vs. Exempt State Laws

All states follow non-exempt vs. exempt FLSA or federal regulations. However, some states have specific regulations and compliance practices that employers must abide by.

Below are some of these state-exclusive laws for hiring non-exempt and exempt employees:

Alaska

In response to the increased minimum wage, exempt employees are now set to receive at least $868 per week.

California

If an employee earns $1,240 weekly, they are considered an exempt employee. The only exception is if the employee’s job is mainly involved in computer software. In California, the monthly rate of computer software-related jobs must be $9,338.78 or more for employees to qualify as exempt.

Meal and rest break regulations for non-exempt workers are quite strict. Non-exempt staff are eligible for a 10-minute break for every four-hour shift, one 30-minute break if their shift lasts longer than five hours, and two 30-minute breaks if their shift lasts more than 10 hours.

Colorado

The Colorado state government requires that employees earn income equal to the minimum wage or make at least $961.54 weekly to be eligible for exempt status.

Aside from regular employees, part-time and contractual workers are also entitled to paid sick leave.

Maine

In Maine, non-exempt vs. exempt employees are distinguished not by their salary but by the roles and responsibilities associated with their position or job title.

New York

Each county in New York has varying requirements for identifying non-exempt vs. exempt employees. New York’s laws on minimum wage and overtime compensation are also more elaborate compared to existing FLSA laws and regulations in other states.

For instance, employees in the administrative and executive department must receive income that’s worth 75 times the minimum wage in the state, while workers in the professional field need not have a minimum hourly, weekly, or monthly rate to qualify as exempt.

Final Thoughts

Knowing the key differences between non-exempt vs. exempt employees is a necessity for employers. It’s a prerequisite for giving proper compensation to each of their employees and regulating their payroll expenses accordingly.

More importantly, it prevents employers from overstepping boundaries in labor practices, violating rights that may be exclusive to an exempt or non-exempt employee, or depriving employees of benefits that are universally available for both classifications.

Non-Exempt vs Exempt Employees FAQ

#1. Is it better to be an exempt or non-exempt employee?

When it comes to comparing non-exempt vs. exempt employees, exempt employees earn more than non-exempt employees. Ultimately, deciding which of the two categories is better depends on the employee’s preferred work setup and pay structure.

#2. Can you reclassify an employee from exempt to non-exempt?

Yes, you can reclassify an exempt employee as non-exempt. However, it entails proper documentation to describe the job role, the change in compensation, and honoring all laws that apply to the said change. Employers must convey the reclassification to their employees in a clear and concise manner.

#3. Are exempt employees required to work certain hours?

Exempt employees are not required by law to complete a specific number of work hours. On the other hand, the majority of companies hiring exempt staff would often require employees to complete a minimum of 40 work hours per week.

#4. Can exempt employees earn overtime?

No, exempt employees cannot earn overtime because they are not entitled to overtime pay. Employers who want to bridge this gap may offer additional compensation for extra work hours instead.