Exempt vs. Non-Exempt Employees

As a business owner with employees, it's crucial to have a clear understanding of the
differences between exempt and non-exempt employees. This knowledge is essential not only
for compliance with federal labor laws but also for managing payroll effectively and planning
your labor costs. Misclassification of employees can lead to significant legal and financial
penalties, making it imperative for you to get it right. Here’s a straightforward guide to help you
understand these classifications and apply them correctly in your business operations.

What Defines Exempt and Non-Exempt Employees?
The classification of employees as exempt or non-exempt is governed by the Fair Labor
Standards Act (FLSA), which sets rules for minimum wage, overtime pay, and other
employment standards. The primary differences between exempt and non-exempt employees
hinge on pay, duties, and rights under the FLSA.

Non-Exempt Employees:
Non-exempt employees are entitled to earn at least the federal minimum wage and receive
overtime pay equal to “time and a half,” or 1.5 times their regular rate, for hours worked over 40
per week. This category typically includes hourly workers, but some salaried employees can
also be non-exempt depending on their job duties and salary level.

Exempt Employees:
Exempt employees are excluded from overtime regulations under the FLSA. To qualify as
exempt, employees generally must be paid on a salary basis at not less than $684 per week (as
of the last update in 2020), and must perform specific types of work that are executive,
administrative, professional, outside sales, or certain computer-related roles.

Key Considerations for Classifying Employees
Salary Threshold:
The salary basis test is a starting point. Employees earning less than $684 per week are
automatically considered non-exempt. However, simply paying an employee more than this
amount does not automatically classify them as exempt.

Duties Test:
Exempt employees must perform job duties that are considered executive, administrative, or
professional:

Executive: Includes employees who supervise two or more other employees, have management
as the primary duty, and have genuine input into job status of other employees (e.g., hiring,
firing, promotions).
Administrative: Includes employees who perform office or non-manual work directly related to
management policies or business operations, who exercise discretion and independent
judgment.
Professional: Includes employees performing work requiring advanced education or training,
typically in fields like law, medicine, teaching, architecture, and accounting.

Record Keeping:
For non-exempt employees, you must keep detailed records of hours worked and wages paid.
Exempt employees do not require such detailed tracking, but maintaining records of salary and
job classification is advised to substantiate the exemption status.

Practical Implications in Your Business
Understanding these classifications allows you to strategically plan your labor costs and avoid
costly legal issues. For instance, misclassifying an employee as exempt can lead to back pay of
overtime, penalties, and interest. Moreover, proper classification affects employee morale and
productivity, as employees are more likely to feel valued and fairly compensated when classified
correctly.

Steps to Ensure Compliance
Conduct Regular Audits: Regularly review job descriptions and actual job duties to ensure they
align with FLSA requirements.
Consult Legal Expertise: Employment laws are complex and ever-changing. Consider
consulting with an HR professional or a lawyer to ensure compliance.
Update Payroll Practices: Ensure your payroll system can handle different classifications and is
set up to properly calculate overtime where applicable.

For business owners, the distinction between exempt and non-exempt employees is more than
just an administrative detail; it's a critical aspect of operational strategy and compliance. By
understanding and applying these classifications correctly, you can avoid legal pitfalls and
create a transparent, fair work environment that supports your business's long-term growth and
success.