Exempt vs. Non-Exempt Employees: What’s the Difference?

/ Best Practices, Human Resources, Time & Labor

When it comes to exempt versus non-exempt classification for employees, it’s not uncommon for employers to have questions. While there are several distinctions between these two types of employees, the most significant difference is overtime pay, as this has the biggest financial impact on you as an employer.

To understand if your employees are exempt from overtime pay, you need to be clear on regulations set forth by the Fair Labor Standards Act (FLSA). If you have non-exempt employees, it’s important to know the wage and hour regulations and communicate them effectively to your employees. By communicating clear policies with your employees and following best practices, you can avoid wage violation issues and back pay down the road.

Are your employees covered by the FLSA?

Before we break down the employee classifications, you may be wondering if the FLSA regulations apply to your employees. The FLSA covers almost everyone, but there are two specific types of coverage for employees:

  • Enterprise: This includes employees at a business with two or more employees, and an annual sales revenue of at least $500,000. It also includes employees at hospitals, businesses providing medical or nursing care, schools, and government agencies with two or more employees.
  • Individual: Employees are covered if they are engaged in interstate commerce, even if the business doesn’t have enterprise coverage.

This may make it seem like the FLSA only covers employees at large companies, but interstate commerce is a broadly applied term. For example, if employees produce goods that will be sent out of state, make phone calls to other states, do internet research, or accept credit card payments, it’s considered interstate commerce. So chances are if your employees aren’t protected under enterprise coverage, they’ll be covered individually.

What is an exempt employee?

The FLSA classifies specific categories of employees as exempt, which means they’re not entitled to overtime pay, and they don’t qualify for the minimum wage. Currently, to be considered exempt, employees must be paid a salary of at least $23,660 (or $455 per week). However, this minimum threshold may increase by more than double to $47,476 in the future, so make sure to stay current on requirements. Additionally, these employees are paid for the type of work they perform, rather than the hours they work. Based on the FLSA, exempt employees typically fall into one of these main categories:

  • Administrative
  • Executive
  • Professional (learned or creative)
  • Computer
  • Outside sales
  • Highly compensated

When analyzing whether your employees are exempt, keep in mind you can’t determine their status based on job titles; job titles have no impact on exemption. Instead, you need to evaluate your employees’ specific job duties and salary to see if they meet FLSA exemption standards. For each of these categories, employees must pass specific “duties tests,” which are used to evaluate whether their work duties qualify as high-level exempt work, as defined by the FLSA.

What is a non-exempt employee?

Non-exempt employees are entitled to overtime pay and at least the federal minimum wage. If non-exempt employees work more than 40 hours in a week, employers are required to pay time and a half their regular rate of pay. And while it’s a common misconception that non-exempt employees are only paid on an hourly basis, they can also be paid on a salary basis if they earn less than $455 per week.

If you have non-exempt employees, confirm your city or state’s minimum wage. Many of these wage requirements are higher than the federal minimum wage, and you need to pay the highest applicable minimum wage. You also need to check your state law on special overtime regulations, as they can vary from state to state.

Policies to keep in place.

Under the FLSA, employers are required to track time for non-exempt employees. It’s critical to take the measures below to help ensure you’re compliant with FLSA regulations and have accurate time records.

  • Keep employees informed. All employers are required to conspicuously post the most recent FLSA poster so employees can readily read it and know their rights.
  • Communicate time tracking policies. Provide training and be clear with your employees on your expectations for time tracking. Hold up your end of the deal and pay wages on regularly scheduled days.
  • Use discipline as needed. If you have clear policies on time tracking standards and overtime work authorization and your employees don’t comply, you cannot withhold their paycheck. However, you can discipline them so they understand the seriousness of the policy.
  • Keep records. Under the FLSA, you are required to keep records of your employees for up to three years. These records must include basic identifying information about employees and their total hours worked and wages earned.

Make time tracking easy.

Tracking and managing time under FLSA for non-exempt employees takes a lot of work. Bringing on the right tools to make this process easier, more efficient, and accurate will help you remain compliant and productive. With our product, Orbit Time & Labor, not only can you ensure precise calculation of hours worked, but you can collect real-time data and create custom reports. To learn more about how our technology can make your organization’s time tracking processes easier, contact your client service representative (CSR) or send us a note today!

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