Sunday, June 6, 2021

The Beginners Guide to Exempt vs Non-exempt Employees

There are two types of employees in the US—exempt and non-exempt. Failure to correctly classify employees can lead to serious compliance issues and fines for a business.

If you’re struggling to understand the difference between exempt and non-exempt employees, you’ve come to the right place.

This guide contains everything you need to know about classifying your employees so you can pay them properly and remain compliant.

What Are Exempt and Non-Exempt Employees?

All employers must classify employees as either exempt or non-exempt. The classification typically depends on:

  • How much an employee is paid
  • How an employee is paid (salary vs. hourly wages)
  • The type of work an employee does

The term “exempt” refers to overtime, and it’s the easiest way to understand the difference between these two classifications. Exempt employees are paid a salary and not entitled to overtime. Non-exempt employees are paid hourly wages and entitled to overtime pay.

The Basics of Exempt vs. Non-Exempt Employees

While the basic concepts of exempt and non-exempt employees are straightforward, you need to understand many other factors. The following section will break down the core components of exempt vs. non-exempt employees.

Fair Labor Standards Act (FLSA)

The Fair Labor Standards Act (FLSA) is a US labor law originally published in 1938. It defines the federal minimum wage, overtime rules, child labor rules, and other labor standards to protect employees and how they’re paid.

According to FLSA, employees in the United States must be paid a minimum of $7.25 per hour. This is known as the federal minimum wage, and an employee can be paid this or any number above it.

Non-exempt employees who work over 40 hours in a week are entitled to overtime pay at a rate of at least one and a half times their regular pay. FLSA defines the workweek as seven consecutive 24-hour periods. The workweek may start at any hour or day of the week, so long as it’s fixed and regularly recurring for 168 consecutive hours.

Let’s say a non-exempt employee, John, gets paid $8 per hour and works 50 hours this week. He’ll get paid $8 per hour for the first 40 hours and $12 per hour for the remaining 10, grossing $440 for the week.

Contrary to popular belief, FLSA does not mandate overtime pay on weekends or holidays unless the hours worked on those days are above 40 hours in that workweek.

Exempt Employees

Three requirements must be met to classify an employee as exempt:

  • Paid on a salary basis instead of an hourly basis
  • Earn the minimum FLSA salary of at least $684 per week or $35,568 per year
  • Perform specific job duties

If an employee is considered exempt, their pay remains the same regardless of the number of hours they work. Let’s say Steve is an exempt employee who works 35 hours in one week and 60 hours in the following week—his salary is the same for both weeks, and he’s not entitled to overtime pay.

The tricky part about classifying an employee as exempt is the final qualification listed above—specific job duties. Only certain roles and responsibilities qualify for an exemption.

Here’s a closer look at the job duties that fall into this category:

  • Executive Exemption — Executives must have a primary role of managing an enterprise or a subdivision within the enterprise. This person must regularly instruct at least two other full-time employees and have the authority to hire, fire, promote, advance, or change the status of other employees.
  • Administrative Exemption — Administrators must perform office or non-manual work directly related to general business operations or management. Part of this employee’s primary job must include independent judgment and discretion.
  • Professional Exemption — The professional exemption is segmented into two categories, learned professionals and creative professionals. Learned professionals must perform work based on advanced knowledge. Creative professionals must have a primary job duty related to talent, imagination, or invention.
  • Computer Employee Exemption — Non-salaried computer employees paid at least $27.63 per hour can still qualify for the exemption. The employee’s primary duties must be related to hardware, software, system functions, design, development, analysis, documentation, or testing of computers or operating systems.
  • Outside Sales Exemption — An outside sales employee is defined by obtaining contracts or orders from clients or customers while regularly away from the employer’s place of business.
  • Highly Compensated Employees — Office employees performing non-manual labor paid total annual compensation of at least $107,432 qualify for this exemption as long as they perform duties related to executive, administrative, or professional roles.

For a full explanation and additional fact sheets about these roles for exempt employees, visit this resource from the US Department of Labor Wage and Hour Division.

Non-Exempt Employees

Non-exempt employees are eligible for overtime pay. Generally speaking, these employees are paid by the hour as opposed to working on a salary basis.

FLSA mandates any time worked over 40 hours in a workweek must be paid at one and half times the regular pay rate.

How can you determine if an employee is non-exempt? The easiest way is to look at the qualifying standards for an exempt employee listed in the previous section. If the employee doesn’t meet all of the criteria, they are non-exempt.

Certain types of jobs automatically fall into the non-exempt category, even if the employee meets some standards for exemption.

FLSA exemptions only apply to “white-collar” employees. Manual laborers and “blue-collar” employees are non-exempt. FLSA defines blue-collar as any worker who performs duties with their hands using physical skill or energy.

Jobs like construction, electricians, carpenters, artisans, maintenance, plumbers, and similar laborers are non-exempt. These positions are entitled to federal minimum wages and overtime pay, regardless of how much they are paid each week or year.

Police officers, firefighters, paramedics, and first responders all fall into the non-exempt category as well. This includes correctional officers, park rangers, ambulance personnel, investigators, and more.

Some employees that fall into the non-exempt category might not qualify for overtime based on FLSA law. Examples include commissioned sales employees, drivers, farmworkers, and seasonal employees.

Let’s say you run a retail operation and offer a commission to your sales staff. If more than half the worker’s pay comes from the commission and averages at least one and a half times the minimum wage requirements for each hour worked, the employee may be exempt from overtime.

For a complete list of commonly used exemptions, visit this resource from the US Department of Labor.

State Laws and Collective Bargaining Agreements

FLSA is a federal law that provides minimum standards for exempt and non-exempt employees. While these standards may be exceeded by local laws or collective bargaining, they cannot be waived or reduced.

For example, California law mandates employers with 25 or fewer employees to pay $13 per hour and businesses with 26 or more employees to pay $14 per hour, at a minimum. Even though the federal minimum wage is $7.25 per hour, businesses in California must abide by state labor laws.

Sticking with California, certain counties or cities impose minimum wage requirements as well. In San Francisco, the minimum wage is $16.07 per hour, increasing to $16.32 per hour in July 2021.

If there are conflicting laws between different government sources, businesses must follow whichever standard is the most beneficial to employees.

Under FLSA, some farmworkers are not eligible for overtime. But in states like New York, local labor laws require employers to pay farmworkers an overtime rate for all hours worked above 60 within a calendar week.

So while FLSA is a starting point for determining exempt and non-exempt classification, you always need to check with local labor departments to ensure compliance.

3 Tools to Improve Exempt vs. Non-Exempt Employees

There are tons of great tools on the market to help you manage your exempt and non-exempt employees alike. The following three options are my favorite:

#1 — Deputy

If you’re managing non-exempt employees, Deputy is a must-have tool. The software is branded as an all-in-one solution for employee scheduling and timesheets, but its functionality goes above and beyond those basic use cases. That’s why 250,000+ companies worldwide rely on Deputy.

The software has built-in tools to help you reduce wage costs, like the ability to compare labor hours against profits. You’ll also benefit from Deputy’s automatic wage compliance features to ensure compliance with all local, state, and federal laws. You can even limit how many hours each employee works per week to cut down on overtime costs. Plans start at just $2.50 per user per month.

#2 — Gusto

Gusto has quickly become one of the best payroll and HR solutions on the market today. It’s easy to use and helps businesses remain compliant whether they have exempt or non-exempt employees on the payroll.

Basic packages start at $45 per month, but I strongly recommend Gusto’s Concierge plan, starting at $161 per month. This premium-level offering gives you access to certified HR professionals to make sure your business is compliant with labor laws. The added fee is justifiable if you compare it to the potential costs of a fine or lawsuit.

#3 — Namely

As previously mentioned, labor laws as they pertain to exempt and non-exempt employees vary by state. So if you’re running a larger operation with employees working in multiple jurisdictions, it can be tough to keep track of these regulations.

Fortunately, Namely has a built-in HR compliance database feature that includes a state comparison tool. So you can have a firm grasp on how to handle different employee classifications across state lines. Namely also has tools for time and attendance tracking, payroll, benefits administration, and more. Request a demo and free quote to get started.

3 Tips For Exempt vs. Non-Exempt Employees

As you’re determining whether or not to classify an employee as exempt or non-exempt, there are a few best practices you should keep in mind.

Tip #1: Non-Exempt Employees Offer More Flexibility For Businesses

With a non-exempt employee, employers and managers have more flexibility with how the worker can be used. There aren’t any minimum requirements for how many hours they need to work each week, so you can change their schedule based on demand.

You’ll still need to pay minimum wages and pay overtime, but you can easily avoid overtime if you’re closely monitoring schedules and hours worked.

Generally speaking, non-exempt employees are better for hourly, temporary, or seasonal positions.

Tip #2: Keep Exemption Rules in Mind When Writing Job Descriptions

As you’re hiring new staff and determining primary roles, you need to be thinking about whether or not the position qualifies as exempt or non-exempt.

Executive, administrative, and other professional roles automatically qualify for exemption, assuming the position meets other qualifying pay criteria.

You likely wouldn’t hire a CFO or CMO and pay them by the hour as a non-exempt employee. Those are commonly salaried roles and should be paid accordingly.

Tip #3: Understand the Drawbacks of Each Classification

Many employers think it’s just easier to hire exempt employees because they get paid a salary and don’t qualify for overtime. While this might be simple to understand, it doesn’t necessarily translate to performance.

An exempt employee doesn’t have much motivation to work beyond the minimum requirements. Whether they work 20 hours or 60 hours, they’ll get the same pay.

To motivate an exempt employee, you may need to offer bonuses, commission, stock options, or other types of compensation to ensure they’re not slacking on the job.

Non-exempt employees run the risk of your payroll getting out of control. If management or HR isn’t monitoring hours and scheduling shifts appropriately, you could be paying a ton of overtime.

What to Do Next

Now that you have a firm grasp on the difference between exempt and non-exempt employees, it’s time to get everything organized in your HR database. The easiest way to manage this is by using HR software. It will make your life easier and help you avoid compliance issues.

For those of you with lots of non-exempt employees, you should also be using a solid time and attendance system. This can help you track hours, schedule shifts, and make sure overtime costs aren’t getting out of control.

from Quick Sprout