The distinction between exempt and nonexempt employees in the United States can make a huge impact on your business. Each employee’s classification determines their rights according to the Fair Labor Standards Act (FLSA), which defines exempt and nonexempt employment, and sets standards for the federal minimum wage and overtime pay, as well as youth employment record keeping.
In this guide, we’ll help you navigate the murky waters of employee classification, so you can confidently classify employees.
Exempt vs. non-exempt employees
Employee classification is important throughout the employee lifecycle, from talent acquisition to separation. The classification of your people will in large part determine your working relationship, creating expectations and boundaries that help protect both the employer and employee.
The guidelines for how to classify your workforce are set forth in the Fair Labor Standards Act (FLSA).
The Fair Labor Standards Act (FLSA)
The Fair Labor Standards Act (FLSA) is a federal law that was enacted in 1938 as part of a larger reform movement meant to improve the quality of life of American workers. Among other things, the FLSA sets workers’ minimum wage requirements and overtime provisions, curtails child labor, and mandates recordkeeping to ensure compliance.
The FLSA applies to most businesses in the U.S., including those that:
- Have two or more employees
- Have annual sales or business of $500,000 or more
- Engage in interstate commerce (including in sales and supply chains)
- Administer a hospital or facility in care of the sick, aged, mentally ill, or physically disabled
- Operate a school or educational facility (whether for-profit or not-for-profit)
- Are an activity of a public agency
The FLSA only applies to employees and doesn’t cover freelancers or independent contractors.
Now that we’ve given that background info, let’s explore the differences between exempt and nonexempt employees, and what they mean for your business.
While the FLSA provides protections for most employees in the U.S., some are exempt from certain FLSA provisions—specifically, the minimum wage and overtime requirements. However, they are still covered by the FLSA and are guaranteed a minimum salary.
To be exempt, a role must be paid on a salary basis of at least $35,568 annually ($684 per week) and fill prescribed professional duties. These include:
- Executives. To be considered an executive, an employee must manage the enterprise or one of its subdivisions. They must have at least two direct reports, and the authority to affect the employment status of other employees.
- Administrators. Under the FLSA, administrators handle office or non-manual work that directly relates to the management of operations or customers. To classify for exemption, their duties must also include using discretion and making judgments on significant matters to the enterprise.
- Professionals. To qualify for the professional exemption, an employee must earn at least $684 weekly and demonstrate advanced knowledge in a specific field or possess creative talents in areas such as art, music, or writing.
- Employees with computer-related jobs. The computer employee exemption applies to employees with computer-related jobs if they also earn at least $684 per week and primarily design, develop, modify, or analyze computer systems or programs. However, it excludes those working in hardware manufacturing or repair or who don’t perform skilled computer-related tasks.
- Outside sales. The outside sales exemption applies to employees whose main responsibility involves making sales outside of their employer's location, and it is not subject to the salary threshold requirement. However, specific job requirements may differ, such as promotional work, and delivery drivers can only qualify if their primary job duty is making sales.
Other worker types may be exempt as well, such as farm workers, seasonal employees, and those working for certain recreational organizations.
Nonexempt employees are workers who don’t meet the Fair Labor Standards Act exemption criteria. This means they’re entitled to receive at least the federal minimum wage for all hours worked, plus overtime pay at one-and-a-half times their regular rate for hours worked beyond the standard 40-hour workweek.
Employees who receive hourly wages on a weekly or biweekly basis and do not receive an annual salary are generally classified as nonexempt. While nonexempt employees, they must be paid a minimum wage of at least $7.25 per hour for all hours worked. This includes any time they’re on duty or at a prescribed place of work, and any time they are “permitted or suffered to work” (meaning their employer requires or allows them to work).
Note that if local or state laws offer a higher minimum wage or overtime pay, the employee is generally covered by the law that is most favorable to them.
Benefits and drawbacks of exempt and nonexempt status for employers
When considering whether to hire employees under exempt or nonexempt status, it’s important to weigh the benefits and drawbacks of each.
- Scheduling flexibility. Exempt employees don’t require overtime pay for working more than 40 hours per week. This gives you more flexibility in scheduling and assigning work without adding labor costs in exchange for offering predictable, steady pay.
- Ease of management. Salaried employees mean fixed labor costs, which make it easier for you to budget and manage payroll.
- Professional skills. Salaried workers tend to hold professional, managerial, or administrative roles which require specialized education or experience, making for a talented and highly skilled workforce.
- Potentially higher labor cost. You may need to pay exempt employees a higher salary to compensate for their experience and lack of overtime pay.
- Burnout potential. The lack of overtime pay can be bad for morale when employees have to work more than 40 hours per week, resulting in burnout and higher turnover.
- FLSA compliance. Ensuring that employees meet the FLSA's criteria for exempt status can be complex and time-consuming. Legal action and penalties can result if this isn’t done properly.
- Potentially lower labor cost. Paying employees by the hour can be more cost-effective in a number of ways. In general, nonexempt employees are paid less than exempt employees. You can also hire part-time employees, and manage scheduling so that overtime isn’t needed.
- More overtime. Hourly pay also means employees are allowed to work as much overtime as you need them to, which can come in handy during busy periods. Many employees want to earn overtime pay, and it affects their morale differently than long hours can affect exempt employees.
- FLSA compliance. It can be easier to ensure workers meet the FLSA's criteria for nonexempt status, since the rules are broader for nonexempt employees compared to exempt employees.
- Overtime pay. Depending on how much overtime work you need from your workforce, this can lead to higher labor costs due to the required overtime pay.
- Complicated scheduling. Avoiding unnecessary overtime work can cause difficulty in scheduling employee hours.
- Limited functions. Since nonexempt employees typically perform routine, manual tasks which don’t require specialized skills or education, they may not be able to take on other tasks or roles within the company as needed. Asking them to do so may result in needing to reclassify them.
Exemption status FAQ
Need more help deciding whether to classify your employees as exempt or nonexempt? We’ll answer some common questions about the differences between these classifications and how to determine which is appropriate for your business.
Do part-time nonexempt employees get paid overtime?
In short, yes. Part-time employees are covered by the FLSA and qualify for overtime pay requirements, just the same as full-time employees.
Regardless of an employee’s part-time or full-time agreement with your company, the FLSA’s overtime threshold for a nonexempt worker starts when the worker logs more than 40 hours in a workweek.
For example, suppose a nonexempt part-time employee usually works only 20 hours, but logs 45 hours in a week. In that case, they’re entitled to five hours of time-and-a-half pay for that longer week.
However, if a part-timer works only an extra five hours over their usual 20 hours, those 25 hours would not satisfy the overtime requirement or require overtime pay.
Can exempt employees be required to work certain hours?
Exempt employees can be asked to work any number of hours, even if it exceeds 40 hours in a week. Typically, the number of hours they work in a normal week is included in their contract, with some allowance for exemptions.
The employer and their exempt employees (or independent contractors) should agree on work schedules before committing to the relationship. However, employers must ensure they follow state and local regulations on meals, breaks, or any other state-level requirements.
Which classification is right for my business?
Whether a business should hire exempt or nonexempt employees depends on many factors, including job functions, pay, and industry standards. Following federal and state labor laws to correctly classify an employee as exempt or nonexempt is important.
Hire independent contractors on Upwork
There are many differences to consider between hiring exempt and nonexempt employees. One way to simplify hiring for you and your business is to engage independent contractors.
For your workers, getting the classifications right is essential. Whether you hire exempt employees, nonexempt employees, or independent contractors, weigh the pros and cons of each so you can make an informed decision that aligns with your goals.
If you’re interested in hiring independent contractors, head to Upwork today to find top-notch talent.
By using hiring tools like Upwork, you can easily find outstanding workers with the skills your company needs to succeed!
This article is intended for educational purposes and should not be viewed as legal or tax advice. Please consult a professional to find the solution that best fits your situation.
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