Exempt vs. Non-Exempt Employees: How To Categorize Your Workers Correctly

ByJulija A.
December 16,2022

As an employer, you should be well-versed in labor law to keep compliant with regulations and keep your expenses in check. For instance, classifying your employees as either exempt or non-exempt correctly from the get-go will help you evade costly and unnecessary lawsuits.

In this article, we’ll compare exempt vs. non-exempt employees. In addition, we’ll explain the Fair Labor Standards Act (FLSA) in terms of how it regulates the two types of employees and discuss what happens if an employer doesn’t comply with the rules.

What Is an Exempt Employee?

An exempt employee is a worker that is usually paid a salary rather than an hourly rate. They are referred to as “exempt” because they are not eligible for minimum wage and overtime pay. However, the employer may choose to compensate them if they work overtime and reward them with bonuses.

What Is a Non-Exempt Employee?

As opposed to exempt workers, employees that are classified as non-exempt tend to be paid on an hourly basis. Furthermore, the employer is obligated to pay them in accordance with the overtime rate for each week that had them working over 40 hours.

Further distinctions between exempt and non-exempt workers have to do with their job responsibilities. All of these rules are regulated by the Fair Labor Standards Act, which we’ll explore in more detail in the section below.

What Is the Fair Labor Standards Act and How Does It Affect Employees’ Exempt Status? 

The Fair Labor Standards Act (FLSA) is a federal law that establishes certain rules whose purpose is to protect employees. These rules are related to the minimum wage, overtime pay, recordkeeping, work hours, and youth employment.

This act was signed into law in June 1938 by President Franklin D. Roosevelt. Under the FLSA regulations, the federal minimum wage is set at $684 per week or $35,568 per year, which has been in effect since January 1, 2020.

According to the FLSA rules, employers must compensate non-exempt employees if they work for more than 40 hours a week. The overtime payment can’t be less than one-and-a-half times their hourly rate.

Salaries or hourly wages, overtime pay, bonuses, and other payments for employees can easily be calculated using some of the top-tier employee payroll software. Tracking hours your employees worked doesn’t have to be complicated either, as there are programs that can do just that. 

What Job Duties Qualify an Employee for Exemption?

Rather than classifying each worker as an exempt employee or a non-exempt employee according to their job title, the FLSA has established specific types of potentially exempt workers. These categories of exempt employees include executive, administrative, learned professional, creative professional, computer-related, outside sales, and highly compensated employees. 

These employees are exempt if they meet specific requirements. Apart from the above-mentioned criteria, which include salary amount and payment type, there are certain job responsibilites that qualify them for exemption.

Executive Employees

To be considered exempt, according to the U.S. Department of Labor, an executive employee’s duties must include supervising a minimum of two full-time or four part-time employees. Full-time employees are typically considered those who work more than 35 hours a week, while their part-time counterparts work below that threshold. 

In addition, their responsibilities should be related to managing the business, at least in part, and managing the employees in terms of assigning tasks, hiring, and the like.

Administrative Employees

An exempt administrative employee is a person who makes business decisions without being supervised by another employee. This worker performs non-manual or office duties that directly correlate with business operations.

Learned and Creative Professional Employees

Learned and creative professional employees are both types of exempt employees. The exempt learned professional employee is considered to be someone who has gained advanced knowledge through some form of education. 

This knowledge is referred to as “intellectual in character.” These employees must utilize their advanced knowledge of the fields of science or learning in a way that requires discretion and judgment.

On the other hand, creative professional employees belong to the group of exempt occupations if they work in a recognized artistic or creative field. Their duties must require “invention, imagination, originality or talent.”

Computer-related employees must perform one of the specifically outlined duties or a combination of them to be considered exempt. These duties include:

  • Performing system analysis and consulting with users to determine the functional specifications of the hardware, software, or system
  • Managing computer systems or programs related to user or system design specifications, which includes creating, designing, modifying, analyzing, and testing 
  • Managing computer programs related to machine operating systems in terms of creation, design, modification, analysis, and testing

Outside Sales Employees

For an outside sales employee to be exempt under the FLSA, their primary duty needs to be related to selling products or services or dealing with contracts or orders. This work must be conducted outside of the employer’s business premises. 

Highly-Compensated Employees

Highly-compensated employees are workers who earn at least $107,432 per year. They are exempt if at least one of their duties overlaps with the responsibilities of exempt executive, administrative or professional employees.

On the other hand, as a rule, non-management blue-collar positions are typically categorized as non-exempt. The same goes for first responders, such as police officers, detectives, deputy sheriffs, investigators, inspectors, correctional officers, firefighters, paramedics, ambulance personnel, and rescue workers. That’s because their duties usually don’t meet the FLSA criteria.

What Happens if You Don’t Classify an Employee Correctly?

For example, in the Philip Fowler and Jeffrey Swans v. OSP Prevention Group, Inc. and William E Mabry II case, two property damage investigators sued the company they worked at for classifying them as exempt administrative employees and thus not compensating them for overtime work. 

They argued that they were, in fact, non-exempt employees, as they were being paid by the hour rather than a salary. As they worked over 40 hours per week, they believed they were entitled to an overtime rate.

The district court ruled in favor of OSP Prevention Group. However, Fowler and Swans appealed this decision to the U.S. Court of Appeals for the Eleventh Circuit. This time, the plaintiffs won the case, as it was ruled that they should have been indeed classified as non-exempt workers and that they ought to be reimbursed for having worked overtime.

Final Comments

As you can see, the differences between exempt and non-exempt workers are not as clear-cut as they may seem on the surface. That’s why it’s imperative that employers carefully and thoroughly study labor laws. Only then can they be sure they comply with all of the laws and treat their employees fairly.

Frequently Asked Questions
What type of employee is exempt?

An exempt-status employee earns more than the federal minimum wage, which is $684 per week or $35,568 per year. This type of employee is paid a salary rather than an hourly wage.

Is exempt equivalent to salaried?

Salaried workers are not necessarily exempt employees. While an exempt employee typically receives a salary, and a non-exempt employee is paid an hourly rate, that is not the only criterion that distinguishes the two. An exempted worker also receives at least the minimum wage and performs a specific set of main duties.

Is it better to be exempt or non-exempt?

When it comes to exempt vs. non-exempt employees, saying which one is better would be oversimplifying the matter. Exempt employers are typically paid more, but they may not be compensated for overtime work.

Which mistake do many companies make regarding exempt employees?

Some employers may assume an employee is exempt because they perform one of the duties outlined by the U.S. Department of Labor, but without realizing that that duty isn’t primary.

About the author

Julia A. is a writer at SmallBizGenius.net. With experience in both finance and marketing industries, she enjoys staying up to date with the current economic affairs and writing opinion pieces on the state of small businesses in America. As an avid reader, she spends most of her time poring over history books, fantasy novels, and old classics. Tech, finance, and marketing are her passions, and she’s a frequent contributor at various small business blogs.

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