Exempt vs. Non-Exempt

US government entities recognize many different types of employees. The US Department of Labor’s Fair Labor Standards Act outlines two major classification categories: exempt and non-exempt employees.

In any given organization, classifying employees significantly impacts their rights in the workplace. It governs how employers handle their work hours, wages, and benefits. Learning the distinction between the two helps employers comply with labor laws and ensure employees are satisfied.

Exempt and Non-Exempt Employee Classifications

An exempt employee doesn’t qualify under the Fair Labor Standards Act to receive overtime pay or minimum wage provisions. A non-exempt employee is just the opposite. Because the employer is not exempt from following FLSA rules for these employees, non-exempt employees must receive overtime pay and are entitled to an hourly wage above or equal to the federal minimum wage.

Employers can decide whether an employee is non-exempt vs. exempt by using three tests:

• Salary basis test: The employee is salaried, which means they’re paid a fixed amount each pay period regardless of the number of hours worked.
• Salary level test: The employee is paid an amount each week greater than or equal to a set threshold, which is currently $684 per week or $35,568 per year.
• Duties test: The job duties fall into the category of administrative, executive, professional, outside sales, or computer work.

On April 24, 2024, the US Department of Labor issued a final rule raising the exemption threshold for the salary level test. Starting on July 1, 2024, the minimum weekly threshold for the salary level test will rise to $844 per week (or $43,888 per year). Starting January 1, 2025, the minimum weekly threshold will increase to $1,128 weekly (or $58,656 yearly).

One additional test that an employer may use to determine an employee’s exemption status is the “highly compensated test.” This test currently requires that the highly paid employee receive at least $107,432 per year in total compensation (with at least $684 paid weekly on a salary or fee basis), perform non-manual work, and regularly perform an exempt duty in the administrative, executive, or professional work category.

The US Department of Labor’s 2024 final rule also affects this test. On July 1, 2024, the threshold for the highly compensated test will rise to $132,964 per year (with at least $844 paid weekly on a salary or fee basis). On January 1, 2025, the threshold will rise to $151,164 per year (with at least $1,128 paid weekly on a salary or fee basis).

Here’s a bit more information about the criteria that distinguish an exempt employee vs. non-exempt employee.

What Is an Exempt Employee?

In addition to being paid a certain amount, an exempt employee’s primary line of work must be aligned with one included in a long list of exemption criteria. Furthermore, exempt employees are often eligible for an employer’s pre-tax benefits, such as health insurance and retirement matching.

Seeing examples of positions that frequently fall into the exempt category can help employers make the proper determinations. The following roles are usually exempt:

• Teachers
• Lawyers
• Managers
• Graphic designers
• Office administrators

It’s essential to know that being salaried doesn’t automatically make an employee exempt. Employers must also realize that some exempt employees are only exempt from specific FLSA rules.

For example, airline employees are only exempt from overtime pay regulations but not necessarily from minimum wage provisions. Federal criminal investigators are exempt from both provisions.

What Is a Non-Exempt Employee?

Non-exempt employees are usually paid by the hour. They’re not always eligible for health insurance and other benefits commonly offered to exempt employees. Non-exempt employees can work in a variety of roles, depending on how an employer structures their work. Many work with their hands in the following types of positions:

• Retail employees
• Plumbers
• Electricians
• Fast food servers
• Manufacturing assembly line employees

Note that non-exempt employees are not always paid by the hour. They can be classified as salaried non-exempt based on their employer’s payment arrangement.

The Importance of Classifying Employees Correctly

Misclassifying employees is never a good idea for the business or the employee. First, it can negatively impact employee satisfaction if they’re supposed to be receiving a minimum wage or overtime pay and don’t get it. This dissatisfaction can lead them to file a complaint against the employer with the US Department of Labor’s Wage and Hour Division (WHD).

Suppose WHD investigators find that an employer has violated FLSA regulations and decide to pursue the case. That employer can be required to pay back wages and may even be fined or imprisoned for the violations. Employees can also bring their own lawsuits, which can be costly.

Misclassifying employees may also have tax implications. For example, if an employer withholds and pays too little in payroll taxes, They could face monetary penalties from the IRS.

Wage and Labor Laws That Impact Exempt and Non-Exempt Employees

The FLSA determines the laws surrounding exempt and non-exempt employee classification and the rights of those employees based on their status. Many states have their own rules governing these issues. However, every employer must ensure compliance with the FLSA above all else.

Employee Overtime

According to the FLSA, non-exempt employees are entitled to overtime pay. This is defined as a rate of “time and one-half” their regular rate of pay for all hours worked over 40 in the same workweek. If an employer doesn’t pay a non-exempt employee by the hour, they can figure out their hourly wage by dividing their total pay by the number of hours worked.

According to federal regulations, exempt employees are not owed overtime pay. While employers may choose to provide it anyway for exempt employees, no organization is required to do so.

Minimum Wage

Non-exempt employees are also entitled to a federal minimum wage of at least $7.50 per hour. No state law can allow businesses to pay a wage below this minimum. However, the FLSA does permit states to enact minimum wage laws above this threshold. Washington, D.C., currently has the highest minimum wage: $17.50 per hour, effective July 1, 2024.

Individual State Laws

Some states have their own laws governing how much exempt employees must earn to qualify for this classification:

• Alaska: $938.40 weekly
• California: $66,560 yearly
• Colorado: $1,057.69 weekly
• Maine: $816.35 weekly, with exemption determined by job duties only
• New York: 75 times the state minimum wage
• Washington: Must multiply minimum wage by an increasing multiplier through 2028 to calculate the exemption threshold

Keep in mind that all state laws must be more—not less—favorable to employees than federal labor laws. The FLSA is the minimum, and state laws cannot go below that regarding classification thresholds, overtime pay, or minimum wage.

Accurate Classification Keeps Everyone on the Right Track

What’s the difference between an exempt and non-exempt employee? Knowing the answer to this question is crucial for employers. Getting it right leads to greater compliance and decreases the risk of penalties and lawsuits.

Accurate classification also enhances the employee experience. When you classify employees correctly, it ensures that everyone gets what they’re entitled to, leading to increased job satisfaction and peace of mind all around.