Exempt vs. Non-exempt Employees: What are the Differences?

Under the Fair Labor Standards Act (FLSA), there are two key categories of employees: exempt and non-exempt. These categories are sometimes called salaried and hourly and often come about in employment classification conversations. You may have seen the terms on a job requisition or heard another small business owner talk about them. While they sound like they belong in a legal textbook, the categories indicate whether an employee is covered by the FLSA’s minimum wage and overtime protections. 

Frankly, understanding labor laws can take time and effort. Fear not – we’ll guide you through the nuances of exempt vs. non-exempt employees so you can better navigate how to classify small business employees correctly. If you have questions about the proper classification of any employee, contact a legal advisor.

By the way, “What is the FLSA?”

The FLSA sets and enforces standards for minimum wage, overtime pay, child labor laws, equal pay, work conditions, employee tips, and other labor laws. The FLSA also requires that business owners maintain accurate employee records, like records of hours worked, wages paid, bonuses, time off, and other important payroll information. (All the more reason to outsource a payroll professional to handle these mission-critical payroll processing tasks.)

How employee classification is determined

You, the employer, are responsible for ensuring that your employees are correctly classified as either exempt or non-exempt under the FLSA.  A job title doesn’t determine someone’s classification. Read on to hear the two tests that matter.

Exempt employee definition

Exempt employees receive a set salary regardless of hours worked and are exempt from the FLSA’s minimum wage and overtime obligations. Exempt employees tend to hold higher-level management or executive positions within a company.

To be classified as exempt under the FLSA, an employee must meet both a salary and duties test:

• Salary test: As of July 1, 2024, an employee must earn a gross salary of at least $844 per week or $43,888 annually. Starting in January 2025, an employee must earn a gross salary of at least $1,128 per week or $58,656 annually. (Note: the new salary thresholds are the subject of several legal challenges. Reach out to your legal advisor for updates.)
• Duties test: To satisfy the duties test, an employee must have higher-level professional responsibilities requiring a certain amount of independent discretion. The most common exempt categories are:
• Executive: Their primary duty involves managing the company (or a department of the company); they must oversee at least two full-time employees; and they must have the authority to hire, fire, or promote employees (or be able to recommend the same).
• Administrative: They perform office or non-manual work directly related to the management or business operations of the company, and they must exercise discretion and independent judgment with respect to significant business matters.
• Professional: Their primary duty involves performing work that requires advanced knowledge in a field of science or learning. It usually requires a professional license or advanced education. It also generally requires the consistent exercise of discretion and judgment.
• Computer-oriented: They work in the IT field as computer systems analysts, software engineers, programmers, designers, or other IT-related professions, and their primary duty involves:
  • The application of systems analysis techniques and procedures; The design, development, documentation, analysis, creation, testing or modification of computer systems or programs; the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
  • a combination of the above.
• Outside sales: Salespeople whose primary duty involves making sales to potential customers and whose work usually occurs outside the company’s place of business.

What is a non-exempt employee?

Unlike exempt employees, non-exempt employees tend not to exercise the same level of independent discretion in their work duties. The FLSA dictates that non-exempt employees must receive minimum wage and must be paid overtime for any hours worked over 40 in a standard workweek. Overtime is customarily paid out at 1.5 times the amount of their regular hourly rate. Not that some state laws set out a higher overtime rate and/or mandate overtime pay when employees work over a certain number of hours per day. Consult your state Department of Labor laws for additional guidance. It’s essential that non-exempt employees record their hours worked accurately and don’t work “off-the-clock.”

Similarities between exempt and non-exempt employees

While exempt vs. non-exempt employees have their differences, they are similar in that:

• Worker rights: State and federal laws apply to both classifications, including laws governing the right to a safe work environment, rights associated with the Family and Medical Leave Act (FMLA), equal employment opportunity laws, and other federal labor laws.
• Unemployment benefits: Non-exempt and exempt employees can collect unemployment benefits.
• Tax liability: Taxable employee wages must be reported no matter the classification.

Speaking of taxes, here’s a little trick of the trade – enlist tax help from Block Advisors!

Pros and cons of exempt vs. non-exempt workers

Remember, an employer cannot choose whether it gets to classify an employee as exempt or non-exempt.  The correct classification under the FLSA is dictated by an employee’s salary and duties as set out above.  In the eternal battle of exempt vs. non-exempt, there isn’t necessarily a winner or loser. Frankly, each classification comes with pros and cons, which we’ll outline now.

Exempt employees

Here are the benefits and drawbacks of having an exempt employee.

• Pro: The ability to demand a certain level of performance or output while maintaining a fixed budget.
• Con: Because the salary threshold is higher, exempt employees typically cost more than their non-exempt counterparts.

Non-exempt employees

Having non-exempt employees comes with benefits and drawbacks for employers.

• Pro: Non-exempt employees offer flexibility in hours worked. You can schedule them based on your company’s ebbs and flows.
• Con: It may be harder to budget for non-exempt employees, as their salaries fluctuate based on hours worked. As such, you need to accurately track hours.  And you will have to accurately calculate and pay any overtime worked.

The Importance of correct employee classification

Understanding the nuances of exempt and non-exempt employees is vital as an employer. You must know the basics to correctly classify employees and comply with FLSA and other federal and state employment laws. Misclassification can lead to back wages, fines, penalties, and the accuracy of your payroll reports and other bookkeeping records.

Thankfully, with the help of a Block Advisors pro, you can put your mind at ease when it comes to small business taxes, bookkeeping, or payroll.

With millions of small business clients, rely on our Block Advisors small business certified tax pros to keep your business on track.

Connect with a tax pro now!

This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice.