How to Classify Employees as Exempt vs Nonexempt

Understanding how to classify your employees is part of ensuring proper compensation for your organization’s workforce. They can only fall under two general classifications: exempt and nonexempt.

These two have key differences, especially in matters regarding eligibility requirements, employment benefits, working hours, minimum wage, etc. Knowing how to navigate this particularly broad topic benefits your company’s growth and success.

Now, how exactly do you classify employees as exempt vs nonexempt? Follow this guide to find out.

What is a salary exempt employee?

An exempt employee or a salary exempt employee is an employee who's not covered by the minimum wage and overtime pay requirements under the Fair Labor Standards Act (FLSA).

They typically earn a monthly salary regardless of the number of hours they worked throughout the whole pay period. That being said, they are also not eligible to be paid extra for working overtime.

These employees usually perform duties and responsibilities involving professional, computer-related, administrative, outside sales, or executive tasks. Some of the most common examples of exempt employees are listed below:

• Lawyers

• HR Managers

• Graphic designers

• Writers

• CEO

Requirements for exempt employees

Now, what qualifies as an exempt employee? To answer this question easily, we can break it down into three major requirements specified by the FLSA:

• Salary threshold: One main advantage of these employees is that they are entitled to receive a salary or a monthly base payment, rather than an hourly wage regardless of the number of hours they complete. According to the FLSA, this salary should be higher than the minimum threshold they declared.

• Total earnings: They must earn the salary threshold set by the FLSA. Keep in mind that this threshold changes every year, so organizations need to stay updated to observe proper compensation for their employees. Effective July 1, 2024, employees must earn $844 per week or a total of $43,888 per year to be considered exempt.

• Work responsibilities: They generally perform professional duties and responsibilities for the company that require a higher level of skills and expertise. They are also expected to work beyond regular hours if needed, depending on the circumstances.

Gaining access to the latest and most recent minimum wage data across the United States is beneficial to organizations wanting to pay their employees right. Compensation Software provides a comprehensive database where companies can easily track, discover, and forecast data changes relevant to minimum wage.

What is a nonexempt employee?

Nonexempt employees, on the other hand, are covered by the minimum wage and overtime pay requirements by the FLSA. This means that they are entitled to earn at least the federal minimum wage for every hour worked.

Moreover, companies are required to pay overtime to these employees who work beyond the limits set by the company (e.g. 40 hours per week).

They typically perform non-management responsibilities in manufacturing, maintenance, construction, and other similar jobs. Some examples of nonexempt employees are listed below:

• Carpenters

• Electricians

• Retail associates

• Mechanics

• Laborers

Overtime rule for nonexempt employees

One main difference between exempt and nonexempt is the overtime rule by FLSA. As we have mentioned earlier, nonexempt employees are eligible to receive overtime pay once they exceed the number of work hours per week.

This enables them to receive no less than a time and a half pay or 50% more than the regular pay for every hour exceeding the work hour limits. To understand this concept better, let’s have an example:

Let's say that an electrician or other similarly skilled worker is employed full-time in Company ABC. He earns an hourly rate of $20 per hour at a standard workweek of 40 hours. If he worked overtime for 8 hours, his overtime pay should be calculated as follows:

• 1.5 x $20/hour x 8 hours = $240

Ensuring that your employees are paid fairly and according to competitive salaries is essential to win the war for talent. Compensation Software gives you the crucial insights you need to easily balance internal pay equity and external competitiveness.

Exempt vs nonexempt: Pros and cons

Each of these two classifications have their respective advantages and disadvantages. Knowing these pros and cons gives companies a better insight into providing proper compensation to their employees. Let’s have a closer look:

Exempt employees

Advantages

• Fixed salary: They can enjoy a fixed monthly base pay rate regardless of the number of hours worked. This means that they can rely on a more stable and consistent source of income compared to nonexempt employees.

• Work-life balance: Since they are not required to log a specific number of hours per week, these employees tend to have better control and flexibility over their work schedules.

• Better career development: Salaried employees generally have professional and higher-level skills, enabling them to handle complex tasks and responsibilities. This unlocks multiple opportunities for career growth and development.

Disadvantages

• No overtime pay: Some roles or job positions may be required to work longer hours or be available outside regular office hours to accomplish urgent tasks or meet certain deadlines.

• Stress and burnout: The burden of handling crucial responsibilities and working extra hours without pay could take a toll on an employee’s mental health.

Nonexempt employees

Advantages

• Overtime pays: Knowing that you will be properly compensated for exerting extra effort and working beyond regular work hours can boost not only an employee’s motivation but expected income as well. This draws positive energy into the workplace and can even improve a team’s performance and productivity.

• Better job security: These employees may enjoy better job security and tenure thanks to labor laws that protect them like the Fair Labor Standards Act.

Disadvantages

• Lower base salary: These employees receive the federal minimum wage, which is generally lower compared to the salary of exempt employees.

• Limited career development: Since they don’t handle authoritative and decision-making tasks, they may struggle to unlock better career opportunities and advancements in the long run.

How to classify employees as exempt vs nonexempt: Steps

Not knowing how to properly classify employees as exempt and nonexempt can put a company in unwanted scenarios and face financial and legal consequences that will certainly incur damages.

To prevent these from happening, here are essential steps to follow:

1. Step 1: Determine the type of work

   Take time to find out the employee's nature of work. Is he involved in roles pertaining to professional, computer-related, administrative, outside sales, or executive tasks? If the answer is yes, then he is most likely an exempt employee. Otherwise, he's considered nonexempt.

2. Step 2: Perform the job duties test

   Confirm if the employee's specific job duties involve management and decision-making responsibilities. If that's the case, then the employee is considered to be exempt.

3. Step 3: Review the salary basis

   Another way to properly classify and determine the exempt status of an employee is by reviewing the basis of his salary. If the employee is set to receive a fixed or predetermined salary regardless of the quality and quantity of work rendered, then he is an exempt employee.

4. Step 4: Identify the salary level

   Highly compensated employees such as those earning a minimum salary of $844 per week or a total of $43,888 per year are considered exempt. Those who are earning below those figures are classified as nonexempt employees.

5. Step 5: Review state-specific laws and regulations

   Some states may impose higher salary thresholds, additional requirements, or stricter rules for exemption. So, make sure to review specific state and local jurisdictions as they may affect the exempt status of employees.

6. Step 6: Observe proper documentation

   Documenting and keeping a record of your findings will be beneficial to the company in the long run. This will allow you to save time and energy to avoid confusion and redundant processes of classifying employees.

Learning how to properly classify exempt and nonexempt employees is important for organizations to maintain compliance with labor laws, avoid costly penalties, and formulate proper compensation packages to attract top talents. To help you make pay decisions with confidence, utilizing the Compensation Software is key. This solution deals with the entire compensation process, helping you classify and price jobs with unparalleled accuracy and compliance with labor laws.