As an employer or human resources manager, you have a legal duty to properly classify each and every employee that you hire. This means determining whether or not they are exempt vs non-exempt employees under FLSA guidelines. Failure to do so can result in hefty fees and penalties. However, this is not always as easy as it sounds, especially if your employees fall within particular thresholds or perform multiple duties.
If you are confused about the difference between exempt vs non-exempt employees, as many employers are, then you have come to the right place. We are going to look at definitions of the two types of employment classification and explain what factors you need to consider so that you know how to classify the employees that you are hiring. We will also discuss the advantages and disadvantages of both employment types and share examples to help you understand the difference.
Table of Contents
Table of Contents
What is employee classification?
As an employer, there are a number of classifications you need to keep in mind when you hire a new employee. It’s important to understand how employment classification works so that you avoid any potential misunderstandings or legal disputes.
The first level of employee classification is simple: is an employee full-time, part-time, temporary, or seasonal? This is more of an internal classification (there are no federal definitions) and it will depend on the hours an employee works, how long you expect them to work at your company, and the duties they perform.
Make sure you define clear guidelines for these employment classifications, document them in your handbook, and apply them consistently throughout your company. You should also conduct regular internal audits to make sure all employees are classified as they should be in your employee records (here’s a free HR audit checklist to get you started in case you don’t already have one).
The second level of employee classification is a little more complicated: are your employees exempt or non-exempt?
This form of classification is regulated by the FLSA (Fair Labor Standard Act), so it is vital that you understand the difference and correctly classify your entire workforce. If you don’t, then you run the risk of being investigated by official authorities which can be stressful, costly, and time-consuming.
Types of employee classifications
Before we look at the rules for exempt vs non-exempt employees, let’s take a look at the first level of employee classification: how you classify your employees internally according to hours worked, job duties, and the expected duration of their employment contract.
These types of employment classifications don’t have a strict definition according to federal or state laws in the US. You are free to establish your own definitions within reason, provided that, once defined, you apply the same policy throughout your organization.
Employee classifications: definitions
- Full-time employees: permanent employees who you usually hire to work an average of 40 hours per week on an ongoing basis. You pay these employees a salary and you may have to provide them with certain benefits. For example, if you hire 50+ full-time employees, you must offer health care coverage (health insurance) to these employees and their dependents.
- Part-time employees: permanent employees who you hire to work fewer than 40 hours per week. You will usually pay these employees on an hourly basis, and you are not obligated to provide them with additional benefits such as healthcare.
- Temporary employees: employees who you hire for a short period of time, usually somewhere between six months to one or two years. This might be for a specific project or to boost productivity during busy times. Temporary employees can be full-time or part-time.
- Interns: also hired for a short period of time (a few months at best) and positions can be paid, partially paid, or unpaid. Interns are generally high school or college students looking to gain their first work experience.
- Seasonal workers: temporary employees that you hire to cover seasonal increases in work (such as Christmas or summer months).
- Contingent workers: independent contractors, freelancers, consultants, or any other type of worker who you do not hire via an employment contract. These are individuals who you collaborate with on specific projects and tasks. As they are separate entities, you are not responsible for paying them any employment benefits.
Exempt vs non-exempt employees
According to the Fair Labor Standards Act, there are two types of employees. The primary difference between exempt and non-exempt employees relates to their eligibility for overtime:
- Exempt employees: An employee who you class as being exempt from the overtime provisions of the Fair Labor Standards Act (FLSA), such as executive, professional, and administrative roles.
- Non-exempt employees: An employee who you do not class as being exempt from the overtime provisions of the Fair Labor Standards Act (FLSA) and who you, therefore, must pay overtime when they work over their contracted hours.
To determine if your employees should be classified as exempt or non-exempt, you need to consider the following factors:
- How much you pay them
- The type of work you have contracted them to do
- The specific responsibilities and job duties that you assign to them
Aside from the rules for exempt vs non-exempt employees detailed in the FLSA, there might also be laws in your state that impact the criteria you use to classify your employees. For example, California has additional requirements in order to qualify as exempt, as we will see later in this guide.
Rules for exempt vs non-exempt employees
The rules for exempt vs non-exempt employees are established by US federal employment laws. You need to make sure you are clear about all the guidelines so that you correctly classify all your employees and pay them overtime when legally required to do so.
Let’s take a look at the rules for exempt vs non-exempt employees in a bit more detail.
Employees are considered non-exempt unless they qualify for an exemption under federal and/or state law. We will look at what qualifies as an exemption in the next section. However, generally speaking, you should classify an employee as being non-exempt if you:
- Pay them less than $35,568 per year
- Pay by the hour
- Do not contract them to perform exempt job duties (detailed in the next section)
Under federal law, you must pay minimum wage plus overtime for any hours non-exempt employees work over their established schedule. For example, if you usually pay a non-exempt employee for 10 hours of work per week but they work 12, they are entitled to an additional two hours of pay. You must also pay overtime at 1.5 times an exempt employee’s regular pay rate if they work more than 40 hours a week. There may also be additional overtime laws in your state that go beyond these FLSA guidelines, for example, if you live in California. Make sure you check your local regulations to ensure compliance.
The Fair Labor Standards Act does not protect exempt workers from overtime. This is because they are considered salaried workers and you contract them for the job they do rather than the number of hours it takes them to do it. And this means that you are not obligated to pay them overtime if they work over their contracted hours in a given week.
Generally speaking, you should classify an employee as being non-exempt if you:
- Pay them more than the FLSA exempt minimum ($35,568 annually, although this may vary by state)
- Pay on a salary basis
- Contract them to perform exempt job duties (such as executive duties, administrative duties, outside sales duties, or learned/creative/computer professional duties)
Exempt status is best if you are hiring office workers because there is no limit to the hours that an employee can work in a given pay period for the salary you pay them. However, you must make sure that the job they are performing meets all the above criteria.
How to classify exempt vs. non-exempt employees
When it comes to employee classification, you need to make sure you establish clear processes for identifying exempt and non-exempt employees. Aside from your legal obligation, it will also have an effect on a number of your internal processes. For example, it will impact how you process payroll, how you manage unpaid time off and PTO requests, the method you use to track employee hours (such as using an Excel timesheet to comply with FLSA timekeeping requirements for non-exempt employees) and the various criteria you use for different leave of absence types.
According to the FLSA, there are three basic tests you can perform to determine whether an employee should be classified as exempt or nonexempt:
- Salary level test: Are you paying an employee more than $35,568 per year?
- Salary basis test: Do you offer them a guaranteed minimum compensation amount, regardless of the hours they actually work?
- Duties test: Have you contracted them to perform an exempt job duty? (Professional duties that require specialized education; executive duties such as supervising a team; or administrative duties such as supporting operations for significant matters that require the use of discretion and judgment)
There may be some exemptions to these rules, depending on an employee’s profession or your company’s industry or pay structure. Visit the Department of Labor website for more information. There are also certain states, like California, that impose additional requirements to qualify for exempt status.
Employee classification California
California’s overtime exemptions are similar to those established by the federal Fair Labor Standards Act (FLSA). However, there are several important differences that you need to be aware of if your company is based in the Sunshine State.
Under the FLSA, you must pay your non-exempt employees 1.5 times their regular rate for all hours worked over forty hours in a single workweek. This is also true in California, but there are additional requirements that you must follow in order to comply with California employment laws.
California laws entitle virtually all hourly employees to overtime pay. For example, California Labor Code section 510 outlines that employers must pay the following rate of overtime for any non-exempt employee that works over:
- Eight hours in a workday: Time and a half (1.5x standard pay)
- Forty hours in a workweek: Time and a half
- Twelve hours in a workday: Double pay (2x standard pay)
- Eight hours on the seventh consecutive day in a workweek: Double pay
California also has its own rules for distinguishing between exempt vs non-exempt employees. In order to classify an employee as being exempt from overtime pay, you must:
- Pay them a salary that is twice the minimum wage for full-time employment in California.
- Contract them to work primarily (more than 50% of the time) in an executive, administrative, or professional capacity.
If one of your employees meets these requirements, then you are not obligated to pay them overtime.
Exempt vs non-exempt employees: advantages and disadvantages
When it comes to exempt vs non-exempt employees, there are advantages and disadvantages to hiring both categories of employees.
Let’s take a look at some of the most obvious pros and cons of each employee classification.
Advantages exempt employees
- You pay them a set pay rate. This means you don’t have to calculate overtime if an employee works more than 40 hours in a week.
- Employees feel more secure if they receive the same pay each pay period.
- Exempt employees tend to be more qualified and experienced which is a great asset for your business. If you’re looking for highly skilled employees, then hiring exempt employees is the best strategy.
Disadvantages exempt employees
- Exempt employees are less likely to be as motivated to work after-hours since they get paid a fixed amount.
- If you misclassify a non-exempt employee as exempt, you risk causing financial harm to your company.
- You can’t deduct pay for hours not worked. This makes it difficult to manage employees who might be working fewer hours than contracted.
Advantages non-exempt employees
- If you only hire non-exempt employees and pay all employees overtime, there is little risk of overtime non-compliance.
- Unlike exempt employees, you can pay your non-exempt employees on an hourly or a salaried basis. This gives you much more flexibility with your wage structure.
- Offering overtime can be a great incentive to get your employees to work longer hours.
Disadvantages non-exempt employees
- If non-exempt employees repeatedly work longer hours, then it can get quite expensive. It’s important to identify when overtime is really required.
- Non-exempt employees tend to be less experienced. Plus, they require supervision so they are less likely to be able to work autonomously and use their initiative.
Employee classification examples
Here are a few examples of exempt vs non-exempt employees to help you understand where your employees might fall.
Exempt employees examples
As we already discussed, the FLSA recognizes three main categories of exempt workers: executive, professional and administrative.
Put simply, this means that if your employees perform relatively high-level work, then they are likely to be exempt employees. And this means that you have no obligation to pay them overtime. Remember, though, it’s all about the tasks they perform, not their job title. Make sure you conduct a thorough job analysis for each employee before classifying their employment status.
Here are some examples of exempt employees based on this classification:
- Administrative employees who provide support services to production and operations staff. This includes your HR team, accounting, legal, public relations, compliance, finance, payroll and other related roles.
- Executive staff, including your CEO, managers, supervisors and other employees who play a decision-making role in your organization.
- Professional employees, including doctors, lawyers, licensed engineers, registered nurses, dentists, architects, teachers and other roles that require advanced education.
- Creative professionals, including writers, actors, musicians, journalists, artists and composers.
- Externals sales reps and marketers.
- IT-related positions, including computer programmers, software engineers and systems analysts.
Non-exempt employees examples
Finally, when it comes to distinguishing between exempt vs non-exempt employees, a clear indicator is whether you pay them by the hour. For example, this might include servers, retail staff, and customer service representatives, among other roles. Basically, any position that takes direction from supervisors and does not have an established work schedule.
If you hire any non-exempt employees, then make sure you pay them overtime when they work additional hours. That way you can rest assured that you are legally compliant. And this is the best way to create the right environment to build a happy and productive workforce.