Take a closer look at the differences between exempt and nonexempt employees, and what you need to know to ensure that you're classifying them correctly.
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Exempt vs. Nonexempt Employees: What's the Difference?
July 01, 2024
Take a closer look at the differences between exempt and nonexempt employees, and what you need to know to ensure that you're classifying them correctly.
Blog Post
- Reviewed by Paylocity's Compliance & Government Relations Team
Out of all the different ways to classify employees, exempt vs. non-exempt is the broadest - and perhaps least self-descriptive.
The main difference between exempt and nonexempt employees in the U.S. has to do with how they're paid and whether they're eligible for overtime pay. There are also tax implications and misclassification penalties to consider when complying with federal and state wage and hour laws.
Fortunately, there are few tests based on minimum wage and timekeeping requirements employers can use when determining if someone's job qualifies as exempt or nonexempt.
Today we'll take a closer look at the differences between exempt and nonexempt employees, and what you need to know to ensure you're classifying employees correctly.
Note: The below information was last updated July 1, 2024. It is not intended as legal or tax advice.
Key Takeaways
- Exempt employees usually hold administrative, professional, or executive positions. They’re “exempt” from the Fair Labor Standards Act's (FLSA) overtime regulations and, therefore, not entitled to overtime pay.
- Nonexempt employees are typically paid hourly and perform more manual or technical duties. They’re “not exempt” from FLSA overtime regulations and, therefore, entitled to overtime pay for any hours worked beyond 40 in a work week (i.e., seven consecutive 24-hour periods.)
- There are three tests (Salary basis, Salary level, and Job duties) for classifying an employee as exempt or nonexempt, and while it’s possible to reclassify an employee to either status, misclassifying one can be very costly.
- In addition to the Fair Labor Standards Act (FLSA), some states have their own wage and hour laws impacting both exempt and nonexempt employees.
What is an Exempt Employee?
An exempt employee is someone whose job isn't governed by the Fair Labor Standards Act’s (FLSA) requirements on minimum wage and overtime pay. Exempt employees are paid a regular salary, distributed in equal amounts at the end of every pay period, but don't qualify for minimum wage.
Certain criteria must be met for an employee to be classified as exempt from FLSA wage and overtime standards. For example, they must be paid at least a certain amount (currently $844 per week or $43,888 per year), and their job duties must primarily involve work that meets one of the FLSA's exemption criteria.
Heads Up!
On April 23, 2024, the Department of Labor (DOL) published a final rule that significantly amends the FLSA's exemption thresholds.
- The total annual compensation threshold for a highly compensated employee (HCE) is now $132,964.
- The minimum salary threshold will increase to $1,128 per week ($58,656 annually) on January 1, 2025.
- A new process will automatically update these threshold amounts every three years to keep pace with dynamic changes in the labor market.
Refer to our Compliance Alert and the DOL's FAQ page for more information.
Examples of Exempt Employees
Under the FLSA, the most commonly exempt employees have job duties that are considered professional, administrative, pertaining to computers, or outside sales. However, the full list of potentially exempt jobs includes several other roles.
Some examples of jobs that could be classified as exempt include:
- Office manager
- Lawyer
- Marketing associate
- Graphic designer
- Teacher
- Sales manager
- Software engineer
Pros and Cons of Being an Exempt Employee
| Pros | Cons |
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In summary, employers can more easily stay within their budgets by hiring exempt employees, who aren’t owed overtime pay. For employees, exempt workers are eligible for benefits and enjoy paycheck stability.
Tax Implications for Exempt Employees
Because exempt employees receive a fixed salary each pay period, their earnings are considered regular income and are subject to federal income tax, as well as state and local income tax, where applicable. Exempt employees may also be eligible for pre-tax benefits, such as health insurance, retirement plans, and flexible spending accounts, which can reduce their taxable income, potentially lowering their tax liability.
It's worth noting that employers are responsible for withholding taxes from an employee's paycheck and remitting them to the appropriate government agencies, including federal income tax, Social Security tax, and Medicare tax. The amount of taxes withheld will depend on the employee's salary, as well as the information they provide on their W-4 form.
What Is a Nonexempt Employee?
A nonexempt employee is “not exempt” from FLSA provisions, so they are eligible for minimum wage and overtime pay.
Examples of Nonexempt Employees
Nonexempt employees are commonly manual laborers, or “blue-collar” workers, though any role can technically be nonexempt if an employer chooses.
Some examples of jobs that are commonly classified as nonexempt include:
- Carpenter
- Electrician
- Retail worker
- Food server
- Mechanic
- Construction worker
Pros and Cons of Being a Nonexempt Employee
| Pros | Cons |
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In summary, nonexempt employees are owed overtime for hours worked beyond 40 in a week, but they offer employers flexibility in labor as needed. Employees receive accurate pay, but it likely varies week to week depending on the hours worked.
Wage and Hours Laws
The FLSA governs federal minimum wage, overtime, recordkeeping, and youth employment for employees working in both the private and public sectors.
- Overtime for nonexempt employees: Some state and local jurisdictions have their own wage and hour laws, and employers must apply the minimum wage or overtime rate that is most favorable to the employee. Non-exempt employees must be paid no less than time and a half their regular pay rate for each hour over 40 in a workweek.
- Overtime eligibility: Exempt employees, who are paid a salary and meet certain criteria, aren't required to be paid overtime. The DOL has established guidelines to determine who is eligible for overtime pay.
How to Classify Exempt vs. Nonexempt Employees
There are three tests used to determine whether a worker’s role qualifies to be an exempt employee:
- Salary basis: Verifies an employee is being paid a fixed amount each week regardless of number of hours worked.
- Salary level: Confirms an employee is being paid at least $684 per week.
- Job duties: Ensures an employee’s job duties are consistent with exemption status, such as administrative, professional, and executive jobs.
Consequences for Misclassifying Employees
Misclassifying employees is one of the most common payroll errors and one of the costliest.
Ultimately, employers are responsible for defending a role's exempt status if it's ever challenged, and any misclassifications could be subject to legal action. For example, an employee could file a complaint with the DOL or file a lawsuit against the employer for unpaid wages, overtime, or other benefits they were entitled to as a result of being misclassified. The DOL can then assess penalties for reparations on the employee’s behalf.
Misclassifying employees can also damage a company's reputation. A high-profile lawsuit would lead to negative publicity and harm the company's relationships with its employees, customers, and the public.
Can you re-classify an employee from exempt to nonexempt?
Yes, it is possible to re-classify an employee from exempt to nonexempt — or the other way around. In fact, it's not uncommon for employers to re-evaluate employee classifications and make changes as necessary to comply with wage and hour laws.
To reclassify an employee from nonexempt to exempt status, the employer must ensure that the employee's job duties and salary meet the requirements for one of the FLSA exemptions, such as the EAP exemptions. The employee's job duties must primarily involve managerial, professional, or administrative tasks, and they must be paid a salary that meets the minimum threshold set by the FLSA.
However, it's important for employers to handle the reclassification process carefully and fairly. Employers should communicate with the affected employee(s) and explain the reasons for the reclassification. Employers should also make sure that the employee's new pay rate and other benefits are adjusted accordingly.
State Laws and Nuances
In addition to federal regulations, some states have unique wage and hours laws that affect exempt, nonexempt, or both categories of employees.
| State | Unique Wage and Hour Laws |
|---|---|
| Alaska | Due to an increase in the state’s minimum wage rate, the new minimum pay rate to qualify for exemption is $938.40 weekly, which is twice the state's minimum wage for a 40-hour workweek. |
| California | California’s minimum wage rate increased on January 1, 2024, so employees must now earn an annual salary of no less than $66,560 (i.e., $1,280 per week) to qualify for exemption. Unless the employee works in computer software, as they have a unique wage rate ($55.58 hourly, $9,646.96 monthly, or $115,763.35 annually) to qualify for exemption eligibility. |
| Colorado |
The Colorado Overtime & Minimum Pay Standards Order (COMPS) increased the minimum pay rate to qualify for exemption to $1,057.69 per week for 2024. Highly technical computer employees must also earn this rate, paid weekly or hourly at $31.41 per hour, to qualify. Additionally, an exempt employee’s pay rate must always meet or exceed both the federal and state minimum wage rates, regardless of the number of hours worked. |
| Maine | Employees in Maine must earn $816.35 per week. The employee’s duties determine whether the employee is exempt or non-exempt, not whether they are paid by salary. |
| New York | Executive and administrative employees in New York must be paid at least 75 times the state’s minimum wage to be exempt from overtime pay. If upstate employees earn $1,065 per week, they may also be considered exempt. This is a state where “professional” employees (as defined by a job duties test) do not have a minimum pay rate to qualify for exemption. |
| Washington |
Effective July 1, 2020, salaried Washington employees must earn 1.25 times the new minimum wage rate to qualify as exempt. Thereafter, each January 1 through 2028, employees must earn certain salary thresholds based on the size of their employer. The current rates for 2024 are:
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Exempt vs. Nonexempt Frequently Asked Questions
Is it better to be exempt or non-exempt?
Whether it's better to be exempt or non-exempt depends on individual circumstances and preferences. Some employees may prefer the stability of a set salary and benefits, while others may prefer the opportunity to earn more money through overtime pay. Ultimately, it's important for employees to understand their job duties and compensation structure to make an informed decision.
Can highly compensated employees (HCEs) ever be eligible for overtime pay?
The Supreme Court has held that HCEs are eligible for overtime payment if their compensation is calculated solely on a daily basis. A daily rate worker does not qualify as salary exempt simply because their daily pay rate is above the minimum amount to qualify for exemption from FLSA requirements.
Employees paid on a daily or hourly basis may still qualify for exemption from overtime pay, so long as an employer also provides a guaranteed weekly amount approximating what an employee usually earns in addition to the other requirements.
Can a part-time employee be exempt?
Yes, the number of hours worked isn't a criteria for determining classification, so if a part-time employee satisfies the three tests for exemption (salary basis, salary level, and job duties), then they’re classified as exempt.
Are independent contractors exempt or nonexempt?
Independent contractors may be considered "exempt,” as they aren’t covered by the FLSA — however, exempt and nonexempt statuses generally apply to employees. Independent contractors aren't employees.
What is the white-collar exemption?
The white-collar exemption is another way to refer to the job duties test for determining employee exemption. If an employee’s role is executive, administrative, or professional — usually office worker or “white collar” positions — the employee is exempt from overtime protections.
Stay Organized With Better HR Software
Managing a mix of exempt and nonexempt workers adds complexity to routine HR and payroll tasks for organizations of all sizes. Payroll software can help simplify the process by organizing employee data and ensuring accurate and timely payment. It can also help companies comply with tax and labor laws, avoid financial penalties, and improve employee satisfaction.
Even better, payroll software can provide valuable insights and analytics that inform decision-making and drive business growth. By choosing Paylocity as your payroll provider, you can access these benefits and more. Request a demo today to learn more about Paylocity and its potential as a payroll service for your organization.
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