Exempt vs. nonexempt employees: What’s the difference?

So, you want to be a great boss to your new team members but aren’t sure how payroll responsibilities differ when hiring an exempt vs. nonexempt employee.

What exactly do exempt and nonexempt mean, and how will this affect your ability to pay your employees?

These terms refer to the classification of workers under the Fair Labor Standards Act (FLSA)—a federal law that sets minimum wage and overtime requirements for most employees in the United States.

We’ll break down the differences of each employee type, teach you about the importance of classification, and showcase the pros and cons of both compensation types.

What is an exempt employee?

An exempt employee doesn't receive overtime pay or qualify for minimum wage. 

To be considered exempt, an employee must: 

• Be paid a salary
• Earn at least $684 per week or $35,568 annually
• Pass the job duty test by working in an approved position

Although exempt employers don't have to pay exempt employees overtime, they can offer extra pay through a compensation benefits package. 

Here are the job types that can qualify an exempt employee:

• Executive: manages a business or a recognized department or subdivision within the company and has the authority to hire or fire employees
• Learned professional: holds a certification, degree, or advanced knowledge in the fields of learning or science, such as engineering, law, or medicine
• Administrative: performs office work that supports business operations of their employer
• Computer: works as a computer programmer, systems analyst, software engineer or similar field
• Outside sales: makes sales or getting orders or contracts for services and performs their primary duties outside of the company’s place of business

During the hiring process, be upfront with your exempt employees about the fact they don’t qualify for overtime wages. This is usually the function of human resources and will help prevent any misunderstandings or disputes about wages that may come up in the future.

What is a nonexempt employee?

Without exception, a nonexempt employee must be paid at least minimum wage in the country and state of their employment. 

This type of employee should also:

• Be paid by the hour 
• Receive overtime over a 40-hour workweek
• Be paid time-and-a-half for overtime

Although nonexempt employees are typically paid by the hour, they can also receive a salary or commission as long as they are paid overtime. 

These employees also have rights and protections under the FLSA, such as breaks, meal periods, and recordkeeping requirements.

Salary vs. hourly pay

Exempt employees are usually paid a salary, which means they receive a fixed amount of money per year, although the number of hours they work can vary. They are expected to complete their job responsibilities, regardless of the hours required to get the job done.

Understanding your employees’ compensation type can help you navigate payroll and time tracking with ease: 

• Payroll: you’ll be able to set up a recurring payment in the form of a salary for exempt employees

• Time tracking: you’ll be able to track the hours your nonexempt employees work and know once they qualify for overtime

Nonexempt employees are usually paid an hourly wage, which means they receive a set amount of money for each hour they work. Nonexempt employees typically have set hours and shifts to track how many hours they work.

How to classify exempt vs. nonexempt employees

Complying with federal labor regulations is important for all companies, but especially for small businesses. One of the most violated labor regulations among new businesses is the classification of employees as exempt or nonexempt.

Employers must classify their employees correctly according to these FLSA or risk facing penalties, fines, and lawsuits. Generally, there are three factors in determining your employee's classification:

• Income level: minimum wage payments can potentially equate to a nonexempt employee while exempt employees earn at least $684 a week
• Income basis: fixed pay periods, regardless of hours worked, qualify an exempt employee while fluctuating hourly pay equates to non exemption
• Job duties: exempt employees must pass the job duties test while nonexempt employees can work in a variety of positions

Employees who are unsure about their classification should consult with their human resources department or an employment lawyer.

Nonexempt vs. exempt employee pros and cons

Hiring an exempt employee doesn’t come without issues. For example, exempt employees may have to work longer and harder than nonexempt employees without extra compensation. Here are the pros and cons of being an exempt employee:

Although nonexempt employees qualify for overtime, their base pay is often much lower than exempt employees. Here are some of the pros and cons of this type of compensation:

When to hire exempt or nonexempt employees

The best employee type for your small business depends on your budget, available positions, and working hours. 

Consider hiring exempt employees if:

• The position falls into an approved job category
• The work requires more than 40 hours a week
• You can provide a consistent salary

If those working conditions do not match your available positions, then a nonexempt employee may be more appropriate. 

Consider hiring nonexempt employees if:

• The position will have inconsistent working hours
• The work requires less than 40 hours a week
• You can afford occasional overtime costs

Some small businesses may opt for a mix of exempt and nonexempt employees to balance their needs and goals with their budget and working hours.

Keeping your employees happy and productive

Now that you know the differences between exempt and nonexempt employees, which type of worker will you hire for your next open position?

Staying on top of every employee’s accounting needs is a great way to build trust and confidence in their relationship with their employer. 

Consider utilizing accounting software that helps you pay your employees on time and at the correct rate, regardless of their position.