Exempt vs. Nonexempt: What’s the Difference?

To truly comply with confidence, organizations must recognize the differences among employees. For example, you may already know that depending on where your business operates, it and your workforce could be subject to unique:

• payroll taxes
• reporting requirements
• pay transparency laws
• scheduling restrictions
• and other rules and regulations

But beyond this guidance, companies need to also determine which employees should be classified as exempt or nonexempt from certain stipulations of the Fair Labor Standards Act (FLSA).

Let’s examine the specific differences between exempt and nonexempt employees, examples from each category and how to avoid employee misclassification.

What is the Fair Labor Standards Act (FLSA)?

The FLSA is a federal law that establishes protections for workers against unreasonable pay and working expectations. Since the act was established in 1938, it continues to evolve to account for new employer and employee needs. Most employers are not exempt from the FLSA, and those that aren’t may still be required to adhere to a specific wage threshold.

Though it originally outlawed child labor, the FLSA grew to address discrimination and set a federal minimum wage. Notably, the law also specifies what kind of employees should be exempt or nonexempt from its requirements.

FLSA exclusions

The exempt and nonexempt statuses relate to two primary pieces of the FLSA:

• Overtime pay or which employees qualify to earn time and a half based on the hours they work each week.
• Minimum wage or which employees qualify to earn the federal minimum hourly wage requirement.

Keep in mind that an exempt employee generally won’t make less than an employee who earns the hourly minimum wage. In many cases, the value of an individual’s salary — and the nature of their job — must exceed a certain requirement for them to be exempt from FLSA.

What is an exempt employee?

An exempt employee is a worker performing a job that isn’t covered by the overtime provision and minimum wage requirements of the FLSA.

The Department of Labor recommends that employers and employees should closely examine if one’s job duties are actually exempt before making assumptions. For example, if a worker performs a combination of exempt and nonexempt duties, then they would ultimately be considered nonexempt for the week they performed any nonexempt labor.

Examples of exempt employees

Though the FLSA covers a majority of employees, it doesn’t apply to some everyday occupations. According to the Department of Labor, the most common exempt jobs include:

• commissioned sales reps
• computer professionals
• drivers, loaders and mechanics employed by a motor carrier
• farmworkers employed by a small farm
• certain employees of seasonal and recreational establishments
• executive, administrative, professional and outside sales employees

Other positions, such as with airlines and auctions, may still be subject to the minimum wage but exempt from overtime. In the newspaper delivery industry, even the child labor guidance of the FLSA doesn’t fully apply.

Pros and cons of being an exempt employee

While several benefits and potential disadvantages exist for exempt employees, it’s not a status they get to choose. In fact, the Department of Labor specifies that for salaried employees to be exempt, they can’t make less than $684 per week ($35,568 per year).

This gives exempt employees two main advantages. First, they will generally make more than nonexempt workers because of the salary requirement. Second, an employer can’t deduct pay from an exempt salaried employee if they didn’t technically work a full 40 hours per week. Doing so would also compromise their exempt status.

On the other hand, an exempt employee could be asked to work more than 40 hours a week without overtime compensation — or any additional pay beyond their regular salary (unless a state or local law requires it).

Tax implications for exempt employees

“Exempt” doesn’t mean an exempt employee doesn’t have to pay certain taxes. As far as the IRS is concerned, exempt and nonexempt employees are taxed the same. Granted, the average higher salary for exempt employees may also mean that they tend to fall into a more heavily taxed income bracket.

Overtime pay and eligibility for exempt employees

Exempt employees are not required to receive overtime pay for working more than 40 hours a week, per the FLSA. However, nothing stops an organization from voluntarily paying its exempt employees overtime. In fact, businesses in certain industries may offer it to better compete in a tight labor market.

What is a nonexempt employee?

A nonexempt employee refers to a worker who is covered under all requirements of the FLSA. Nonexempt employees must be paid at least the federal minimum hourly wage (currently $7.25 an hour) and receive overtime pay for working over 40 hours a week.

It’s also worth noting that the FLSA doesn’t clarify between full-time and part-time employees, but state laws may. This means employers should assume a worker qualifies as nonexempt simply because they work the equivalent of a part-time schedule.

Examples of nonexempt employees

Outside the commonly exempt positions, a nonexempt employee must be directly supervised by managers and can’t hold the following positions:

• bona fide executive
• administrative
• computer
• professional
• outside sales

Retail, food service, hospitality workers and more would likely be considered nonexempt under the FLSA. Keep in mind a workplace can have a combination of exempt and nonexempt employees, such as an HR specialist who manages the staff of a movie theater.

Pros and cons of being a nonexempt employee

The biggest advantage of a nonexempt employee comes down to their earning potential. Unlike exempt employees, nonexempt workers must receive pay for every hour they work. Plus, nonexempt employees are eligible for overtime pay.

Conversely, the average income of a nonexempt employee will typically be less than their exempt counterparts. At the same time, a nonexempt employee could actually lose money if they don’t have the benefit of a consistent schedule.

Tax implications for nonexempt employees

Like exempt employees, the IRS does not differentiate between taxpayers who are or aren’t covered by the FLSA. Additionally, overtime pay doesn’t get taxed any differently than an employee’s normal rate. Ultimately, it’s an employee’s gross pay that influences their taxes.

Overtime pay and eligibility for nonexempt employees

Nonexempt employees may earn overtime pay for any hours worked beyond 40 per week. While a company can opt to pay its employees more, the Department of Labor requires overtime pay to be at least at a rate of an employee’s time and a half. This formula can help you define it:

Employee’s hourly regular rate of pay x 1.5 = overtime pay

How to classify exempt and nonexempt employees

While the FLSA outlines distinct examples, the exact difference between an exempt and nonexempt employee may not always be clear.

Generally, nonexempt employees will receive hourly pay and hold more manual or service roles. Exempt employees, on the other hand, will usually hold administrative, professional and leadership positions.

Use an FLSA exemption test to help eliminate any ambiguity. You should also keep the following factors in mind to help better differentiate between the two classifications.

Compensation

Regardless of the benefits an employee receives, they must make at least $684 a week to be exempt from the FLSA. In 2020, this new threshold replaced the previously weekly wage requirement of $455. Keep in mind that certain seasonal employees may still be considered exempt from FLSA despite falling under the weekly pay threshold.

Compensation type

In most cases, exempt employees will earn a salary and nonexempt employees will earn an hourly wage. But hourly employees who earn above the FLSA wage threshold and meet the job duties test may be considered exempt. (Keep in mind a state law could still entitle high-earning hourly employees to overtime pay.)

Additionally, a salaried employee could be classified as nonexempt if they make less than $35,568 annually. It’s rare, but businesses shouldn’t assume any member of their staff is exempt or nonexempt based on their compensation type alone. Think of it as a likely indicator of their classification, but not the sole variable that defines it.

Job roles

Job roles play a significantly larger part in defining an employee’s exemption status. The Department of Labor broadly identifies exempt employees as those with an executive, administrative, professional, computer or outside sales role.

Even so, some employees may have a mixture of these responsibilities, so their classification could ultimately come down to the tasks they primarily and regularly perform.

What are examples of exempt job roles?

Beyond the $684 weekly income threshold, the FLSA categorizes employees by their specific roles. We’ve briefly covered what those designations are. Now, let’s dive into the specific responsibilities that help determine a worker’s FLSA classification.

Executive

Executive employees are those whose primary function is to manage a business, subdivision or department. This means they should regularly direct the work of at least two or more full-time (or full-time equivalent) employees. Executive employees are also defined by their ability to fire, hire, promote or otherwise move members of their team.

Administrative

Similar to executive employees, administrative employees perform nonmanual work that directly supports management or regular business operations. These employees also have the ability to exercise independent judgement without explicit approval from a manager. Administrative roles include:

• executive assistants
• HR pros
• paralegals and legal assistants
• recruitment coordinators
• and more

Professional

Beyond the salary requirement, professional employees perform work that requires advanced knowledge and is intellectual. This applies to positions involved with science, learning or creativity.

Computer

The computer exemption applies to any employee who serves as a:

• systems analyst
• computer programmer
• IT specialist
• software engineer
• or other similarly skilled worker in the computer field

Their duties involve consulting with users to determine software and hardware specification, as well as the design, testing and implementation of tech.

Outside sales

An outside sales employee’s role is focused on making sales or obtaining contracts for services and facilities that will be paid by a client or customer. The “outside” portion of this category relates to how these employees are regularly away — or outside — of their employer’s regular place of business. For example, a regional sales manager in Seattle who works for a New York-based company would have an outside sales position.

State laws that affect exempt and nonexempt employees

Though the FLSA is a federal law, certain state laws can supersede it. For example, many states require a minimum wage that exceeds the federal rule of $7.25 per hour. Additionally, a state may mandate overtime for every employee who works more than 40 hours a week, regardless of their FLSA exemption status.

Rights of exempt employees

Even an employee who is exempt under the FLSA may still benefit from certain protection under state law.

Minimum wage

It’s rare minimum wage comes into play for exempt employees, but again, certain states maintain a wage requirement that can far exceed federal guidance. For example, Washington state has a minimum wage of $16.28 — over double the federal government’s minimum wage.

Overtime pay

In general, an exempt employee will not qualify for overtime pay. However, certain businesses may offer overtime voluntarily to attract or retain key talent.

Rights of nonexempt employees

Remember, the FLSA effectively sets a minimum threshold for what certain employees should earn. Here are the major ways the law relates covered workers.

Minimum wage

Nonexempt employees must earn at least the federal minimum hourly wage of $7.25 an hour. Keep in mind if a state proposes a higher requirement, a company in the private sector follows that rule instead. And states that have a lower minimum wage than the federal figure — like Georgia and Wyoming — must still adhere to the FLSA’s requirement.

Overtime pay

The FLSA entitles covered employees to overtime pay at a rate of their hourly wage and a half for each hour worked over 40. In California, however, nonexempt employees may earn double their regular rate for each hour worked in excess of 12 each day.

How do businesses avoid employee misclassification?

FLSA misclassification isn’t just a simple mistake. Beyond potentially exploiting an individual and depriving them of overtime hours and a minimum wage, misclassification can also spur federal investigations and fines of $1,000 or more for each wrongly categorized employee.

To avoid misclassification and the subsequent penalties, employers shouldn’t:

• assume anyone who earns a salary is exempt
• cite infrequent responsibilities or occasional tasks as evidence that an employee is exempt from the FLSA
• consider workers as executive, administrative, professional, computer or outside sales without a clear understanding of the Department of Labor’s definitions
• neglect state law, even if employee classifications are technically compliant with the FLSA (states often have their own wage and overtime laws, too)

Exempt vs. nonexempt: FAQ

What is a salaried exempt employee?

A salaried exempt employee is an employee who earns above the FLSA’s minimum weekly pay threshold and, thus, isn’t covered under that law’s minimum wage and overtime requirements.

What is a salaried nonexempt employee?

A salaried nonexempt employee is a worker who — despite earning a salary — is still affected by the FLSA. This means an employee’s salary accurately reflects all hours they work, and that their pay reflects at least the federal minimum hourly wage.

Can you change employee classification?

Yes, employers can change an employee’s classification status, provided it doesn’t violate the FLSA. For example, a company may switch their exempt employees to nonexempt, but this will also require the company to track all employee hours worked and ensure they receive overtime pay when applicable.

What are white-collar exemptions?

White-collar exemptions is a blanket term that covers three of the other common exemptions, which are:

• executive
• professional
• administrative

In most cases, an employee with a white-collar exemption will earn a salary of more than $684 per week and perform nonmanual work, usually in an office.

Are independent contractors exempt or nonexempt?

Independent contractors are technically self-employed and aren’t covered by the FLSA. Businesses should avoid labeling employees independent contractors in an attempt to skirt federal regulations.

Which is better: Exempt or nonexempt?

Since employees don’t get to choose their classification, the better between FLSA exempt and nonexempt is really in the eye of the beholder. A company with primarily exempt employees may enjoy not having to pay overtime but could still endure a larger payroll expense since each of their exempt employees must exceed the weekly salary threshold. On the other hand, nonexempt employees have an opportunity to earn overtime pay.

As far as an organization should be considered, the question isn’t really about which classification is better, but which classification is compliant.

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