Exempt Vs. Nonexempt Employees: What You Should Know
You have plenty to worry about as an employer—especially when it comes to paying workers.
In addition to complying with the latest employee and independent contractor classifications, you must also pay close attention to exempt and non-exempt employee status.
Failure to follow federal guidelines could result in lawsuits, tax penalties, backpay, and even a damaged reputation.
It’s true: Every year, the U.S. Department of Labor collects hundreds of millions of dollars in back wages for misclassified employees. Here’s how much they collected in the last three years:
- 2022 – $213 million
- 2023 – $212 million
- 2024 – $273 million
Much of those payments come from the most common misclassification mistakes, such as:
- Assuming all salaried employees are exempt.
- Treating assistants or junior staff as exempt despite not meeting the duties test.
- Paying under the minimum threshold.
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What Is An Exempt Employee?
An exempt employee is someone who is generally paid a fixed salary. These individuals are generally not entitled to overtime or minimum wage.
What Is A Non-Exempt Employee?
A non-exempt employee is someone who is generally paid on an hourly basis and is eligible for overtime and minimum wage protections.
What Makes Someone An Exempt Employee?
An exempt employee generally meets at least three requirements:
1. They Receive A Salary
As of January 1, 2025, the minimum salary level requirement for the exemption on the federal level is $1,128 per week or $58,656 annually. Your state may have a higher minimum threshold.
2. They’re Not Eligible for Overtime
In most cases, exempt employees are not eligible for overtime, even if they work more than 40 hours per week. They also cannot be paid less for working fewer than 40 hours per week.
3. They Perform Certain Tasks
Most exempt employees work some combination of executive, administrative, or professional duties.
- Executive: Primary duty is managing the enterprise or a department; regularly directs the work of two or more employees.
- Administrative: Primary duty is office or non-manual work related to management or general business operations; includes discretion and independent judgment.
- Professional: Primary duty requires advanced knowledge in a field of science or learning, typically acquired through prolonged study.
What Makes Someone A Non-Exempt Employee?
An exempt employee generally meets at least three requirements:
1. They Earn An Hourly Wage
A non-exempt employee earns an hourly wage of at least $7.25 (though your state minimum wage may be higher). Their paycheck generally increases or decreases depending on the number of hours worked during a single pay period.
Related Reading: 5 Benefits of Better Time & Attendance Software
2. They’re Eligible for Overtime
Non-exempt employees should receive overtime pay whenever they work more than 40 hours in a single week. That overtime pay should meet or exceed one and a half times their hourly wage for all hours worked beyond 40 hours per week.
Benefits of Having An Exempt Employee
Exempt employees may typically be more expensive than non-exempt employees, but they do have a few perks—especially when it comes to streamlining your back office accounting.
1. Greater Predictability
Exempt employees receive the same exact paycheck every single payroll. This allows your financial team to better forecast expenses and plan for the future.
2. Easier Payrolls
Because you’re cutting the same checks for each payroll run, preparing payroll is much simpler with exempt employees.
Benefits of Having A Non-Exempt Employee
While having a team of exempt employees may make accounting simpler, hiring non-exempt employees gives you greater operational flexibility.
Here are three of the biggest benefits of hiring non-exempt employees:
1. Flexibility In Costs
In general, non-exempt employees earn less per hour than exempt employees. However, their overall earnings may fluctuate with overtime pay or hours worked. As an employer, you can monitor and adjust schedules to best suit your business operational needs and financial needs.
2. Flexibility In Hiring
Non-exempt employees are easier to hire during busy seasons and furlough or layoff during non-busy seasons, granting you greater flexibility as an employer to manage seasonal shifts in your business.
3. Greater “Fairness” In Work-Life Balance
Non-exempt employees have a built-in legal perk when they sacrifice time from their personal life to spend additional time at work: overtime pay. Currently, non-exempt employees should earn at least 1.5 times their hourly wage for all hours worked beyond 40 hours in a single work week.
Learn More About Employee Classifications And Payroll
To learn more about proper employee classifications and payroll operations, contact us. Our team takes the headaches out of payroll and keeps you compliant with the DOL.