Exempt vs. Non-Exempt Employee: How it Impacts Your Business

The Fair Labor Standards Act (FSLA) requires that any business that currently has employees categorize those employees as either exempt or non-exempt.

Employees that are classified as exempt are automatically excluded from minimum wage and overtime requirements that the FSLA provides, as well as any state overtime regulations. Instead of an hourly wage, exempt employees are paid a salary.

Overview: What is an exempt employee?

Exempt employees, as the name indicates, are exempt from overtime regulations, as well as from most of the protections that are offered to non-exempt employees.

The biggest difference between exempt status and non-exempt status is that non-exempt employees are entitled to overtime pay.

Types of exempt employees

To be considered exempt from current FSLA regulations, employees must qualify for one of the following exemptions:

1. Executive exemption: The executive exemption requires that the employee’s primary duties include management tasks such as the supervision of at least two employees, as well as the authority to both hire and fire employees.
2. Administrative exemption: The administrative exemption requires that the employee’s primary duties be related to management or general business operations, and that the duties must include discretion and independent judgement.
3. Professional exemption: The professional exemption requires that an employee perform work that is predominantly intellectual and that requires advanced knowledge, such as research, science, or teaching.
4. Computer employee exemption: The computer employee exemption includes computer programmers, software analysts, or similar occupations, with the employee’s primary duties consisting of development, documentation, analysis, creation, and testing of computer systems or programs.
5. Outside sales exemption: The outside sales exemption is used for employees whose primary duty is making sales, including obtaining orders, creating contracts, and selling services. The employee who is categorized in outside sales must spend the majority of his or her time outside the employer’s regular place of business.
6. Other exemptions: There are a variety of other job roles that are typically exempt from overtime. These include the following:

• Independent contractors
• Seasonal employees
• Newspaper deliverers
• Fishing operators
• Agricultural workers
• Babysitters and domestic companions

According to the new exempt employee law that went into effect January 1, 2020, all executive, administrative, professional, computer, and outside sales exemptions require that the employee be compensated on a salary basis at a rate of no less than $684 per week or $35,568 annually.

For more information, you can check out the FSLA Fact Sheet, which provides more detailed information on each exemption category.

The above exempt employee rules do not apply to blue collar workers, police officers, fire fighters, paramedics, and first responders of any kind, no matter what their salary is.

How overtime rules affect payroll processing for exempt and non-exempt employees

Before processing payroll for any employee, you must determine whether they are exempt or non-exempt.

If they are exempt, be sure that they fit into one of the exemptions mentioned above. If they don’t, they will have to be considered a non-exempt employee. If they are a fit and can be paid by salary, payroll processing is fairly straightforward, as a salaried employee is paid the same amount each pay period.

However, if you’re paying a lot of hourly employees, you must be sure to abide by both FSLA rules as well as any rules that your state currently enforces. Here are some examples:

Standard overtime

John currently earns $11 per hour. Last week, John worked a total of 47 hours in one week. According to FSLA rules, you must pay John his normal hourly wage, which is:

$11 x 40 hours = $440

You will also need to pay John overtime for the 7 hours he worked in excess of 40 hours last week. Normal overtime is paid at 1½ times the employee’s regular hourly rate, which would be $16.50. That calculation is as follows:

$16.50 x 7 hours = $115.50

That means that John’s taxable wages would be:

$440 + $115.50 = $555.50

Daily overtime

In most states, if your employee does not work more than 40 hours in a week, they are not eligible for overtime. However, there are some states, such as Alaska, California, and Nevada that have instituted daily overtime requirements that employers need to abide by. Here is an example:

Sara currently earns $11 per hour. Last week, she worked 9 hours on Monday, and 10 hours on Tuesday, but only 5 hours on Wednesday and Thursday, and did not work on Friday. That puts her total hours worked for the week at 29 hours; well short of 40 hours. However, because Sara works in Nevada, she is entitled to overtime pay for both Monday and Tuesday, since she worked more than 8 hours in a day. You would calculate Sara’s pay this way:

$11 x 26 hours = $286

You would also need to calculate her 3 hours of overtime from Monday and Tuesday:

$16.50 x 3 hours = $49.50

Total pay for Sara for the week would be:

$286 + $49.50 = $335.50

If you were to pay Sara only $286, you would violate Nevada Department of Labor rules.

Exempt employee vs non-exempt employee: What’s the difference?

Aside from overtime pay, there are some other differences between exempt and non-exempt employees that you need to be aware of. Here are a few:

Workers’ rights

While exempt employees are not afforded protection under FSLA regulations, non-exempt employees are offered protection from wage and overtime abuse. This means that all non-exempt employees must be paid at least minimum wage, according to either federal or individual state minimum wage requirements.

In addition, FSLA rules afford employees the right to be paid for any overtime worked at the appropriate rate. In addition, any employee that attends a meeting outside of work hours, completes additional work at home, or works through lunch may also be entitled to be paid for that time.

State and federal classification

Guidelines for exempt and non-exempt employees can vary widely from state to state, so it’s always best to check with the appropriate state for their current rules.

If you pay employees in more than one state, be sure to check exempt vs non-exempt regulations for each state where your employees reside.

Tax implications

Tax implications are generally the same for exempt and non-exempt employees, with one big exception: tipped employees.

While the IRS doesn’t care whether your employees are paid hourly or receive a salary, they do care if your employees earn tips and those tips are not properly accounted for. Tips need to be calculated into an employee’s base salary in order for the appropriate amount of taxes to be withheld.

Employer costs

Employer costs remain the same for both exempt and non-exempt employees. However, if you typically pay more non-exempt employees, be sure that you are tracking and paying overtime wages properly.

This area can be a potential landmine for employers, and disgruntled employees will not hesitate to report you to the state or federal labor board if they feel they are not getting paid properly. With penalties that can run in the thousands of dollars, this is one area where you want to be sure you fully understand the rules and regulations.

Exempt or non-exempt: How will your employees be paid?

As an employer, it’s important that you classify your employees properly. While paying exempt employees is much easier than paying non-exempt employees, it’s important that you understand the difference between the two and classify your employees properly.

If you’re looking for a payroll software service that can easily pay both exempt and non-exempt employees, be sure to check out The Ascent’s payroll software reviews.