Exempt vs. Non-Exempt Employees

Gabrielle Sinacola | Nov 27, 2023

Exempt vs. Non-Exempt Employees

Understanding the difference between exempt and non-exempt employees is critical to properly running your business and paying your employees fairly. Review with Mosey the basics of exempt and non-exempt employees.

What Is an Exempt Employee?

When we talk about exempt employees, we’re referring to employees who aren’t covered by the Fair Labor Standards Act (FLSA). These employees are paid a fixed salary and are exempt from earning overtime pay, among other protections.

To classify as exempt, employees need to meet specific criteria. First, the employee must earn at least $684 a week or $35,568 per year and have job duties primarily in the executive, administrative, or professional realms. Exempt employees are paid a consistent amount regardless of the number of hours they work.

Their job duties are generally managerial or administrative, or they require advanced knowledge. Here’s a glance at some job titles that often fall into the exempt category: office manager, lawyer, marketing associate, graphic designer, teacher, and software engineer.

What Is a Non-Exempt Employee?

Non-exempt employees are covered by the FLSA, making them eligible for minimum wage and overtime pay. They’re usually paid an hourly wage, and the classic 40-hour threshold often dictates their workweek, so they receive overtime pay (time and a half) after crossing that line. Unlike their exempt counterparts, non-exempt employees must keep detailed records of their work hours to calculate overtime.

Employees who usually fall into the non-exempt zone include carpenters, electricians, retail workers, food servers, and mechanics.

What Are the Differences Between Exempt Employees and Non-Exempt Employees?

Understanding employee classification can be complicated. Let’s break down the details that set exempt and non-exempt employees apart, touching on tax implications and job responsibilities.

Tax Implications

When it comes to taxes, exempt employees have a fixed income that is subject to federal income tax, as well as state and local taxes where applicable. Employers handle the duty of withholding these taxes.

Exempt employees may also qualify for pre-tax benefits like health insurance and retirement plans that may lower their tax liability.

Non-exempt workers are also subject to federal, state, and local income taxes. However, the amount of tax withheld can vary more significantly because their income isn’t as stable as their exempt counterparts. Their eligibility for pre-tax benefits may vary based on company policy and labor laws.

Work Hours

For exempt employees, the 40-hour workweek is more a suggestion rather than a hard cap. Exempt employees are not entitled to overtime pay — which means clocking extra hours doesn’t add to their paycheck, but it might earn them a badge of honor.

Conversely, non-exempt employees are bound by the 40-hour workweek rule. They’re eligible for overtime pay under FLSA regulations, so working more than 40 hours entitles them to more pay.

Salary vs. Hourly Wages

Those who are on a salary in the office earn a consistent income regardless of the number of hours they work. Determining their pay is straightforward for the most part.

Non-exempt workers usually earn an hourly wage, which directly reflects the actual time spent laboring. This can be a double-edged sword for some employees, as earning potential can skyrocket with overtime but plummet during a slow week.

Applicable Regulations

Both classifications are governed by the U.S. Department of Labor. However, state laws and guidelines can offer additional protections or requirements. For example, some states have a higher minimum wage than the federal minimum wage.

Job Responsibilities

Usually, exempt employees occupy roles that require advanced knowledge, independent judgment, and a high degree of decision-making and authority. These are your managers, administrators, and professionals who often have wider job descriptions.

Non-exempt workers typically have more defined job duties and less decision-making power. They may not have the word “executive” in their job titles, but they keep business operations running smoothly.

How Do You Know if an Employee Is Exempt or Non-Exempt?

Business leaders should use a standard set of criteria to ascertain an employee’s exemption status. This criteria, governed by federal law, consists of three main components:

Salary Basis

The first thing to consider is whether the employee is paid on a salary basis. This means that the employee should receive a predetermined and fixed amount of pay each week, which is not subject to reductions due to variations in the quality or quantity of work.

Salary Level

The second element concerns the salary level. According to federal regulations, an employee must earn a minimum of $684 per week to be eligible for exempt status. Failure to meet this minimum salary level precludes an employee from exemption under the Fair Labor Standards Act.

Job Duties

The third and final component involves the nature of the job duties performed by the employee. Roles that are considered for exempt status often fall under administrative, professional, or executive categories. The primary duty of the employee must align with these categories.

By carefully applying these standards, business owners can accurately determine an employee’s exemption status, ensuring compliance with labor laws and avoiding potential legal complications.

How Can Businesses Stay Compliant When Paying Employees?

Employee compensation involves more than just issuing paychecks. To maintain compliance and foster a transparent working environment, here are some practical steps businesses can take:

Clearly Communicate HR Policies

One of the cornerstones of compliance is transparent communication. Human resources should create a comprehensive employee handbook detailing policies on everything from paid sick leave to overtime. This ensures that both full-time and part-time employees are aware of their rights and responsibilities.

Give Employees the Latest Labor Law Notices

Businesses are obliged to keep their workforce informed about the most recent labor laws, such as FLSA overtime rules or regulations regarding paid time off. These notices can usually be obtained from the U.S. Department of Labor and should be visibly displayed in the workplace.

Classify Employees Correctly

Misclassifying an employee as an “exempt professional” when they should be a “nonexempt worker” can lead to complications, including financial penalties. Make sure to apply the correct classifications based on salary level, job duties, and other criteria following federal and state laws.

Automate Payroll

Manual payroll processes are rife with opportunities for error, and inaccurate tax withholding can land a business in hot water. Companies need to accurately withhold federal and state payroll taxes based on each employee’s regular pay rate, classification, and pay period. Automated systems can help achieve this accuracy.

Automating payroll minimizes these risks and ensures that employees are paid based on their correct classification, whether they are salaried employees, white-collar professionals, or part-time workers.

Stay Up-to-Date on Labor Laws

Laws related to minimum wage, paid time off, and overtime can change. Businesses, especially small ones without a dedicated legal team, should regularly consult trusted sources or FAQs to stay current on the latest updates.

Use Mosey To Remain Compliant Across States

The more you scale your business, the more complicated compliance can be, especially if you employ workers across states. Enter Mosey — a streamlined platform designed to simplify business compliance.

A complete system for state compliance, we help you automate compliance tasks and give you real-time alerts for anything from new legislation affecting nonexempt workers to changes in sick leave policies, keeping you in the know. You can even integrate your payroll provider to track all of your employment requirements, exempt and non-exempt employees alike.

Our compliance management platform tracks HR and payroll compliance with a few clicks, so you can automate tax accounts and get new hires on payroll without having to look up regulations each time. What’s more, Mosey offers pay-as-you-go pricing, fitting the compliance needs of scaling businesses across various sectors.

The Bottom Line

Understanding exempt vs. non-exempt classifications is crucial for any business, small or large. If you want to keep your compliance on point and hassle-free, Mosey is your trusted solution. Contact us to schedule a demo today.

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