Exempt vs non-exempt are worker classifications that determine whether you must pay an employee overtime pay. An employer should determine this―based on the job duties―before posting a job and hiring. Misclassification is costly, so we’ll help you understand the three tests to discern the difference between exempt vs non-exempt employees.
Federal law requires that you classify employees as exempt vs non-exempt correctly upon hire. Bambee offers affordable, on-demand human resources (HR) managers to ensure small businesses stay compliant with employment classifications and other labor laws. You also get help with creating job descriptions, internal HR policies, employee onboarding, termination, and general employer coaching and HR guidance starting just at $99 per month. Schedule a free consultation today.
Exempt vs Non-exempt Status
According to the Fair Labor Standards Act (FLSA), the exempt vs non-exempt status pertains primarily to the work an employee does, rather than to the employee’s job title. For example, if you call an hourly worker a manager when they’re doing mostly entry-level tasks, that person is considered non-exempt, and they’ll be eligible for overtime pay.
In contrast, managers are exempt typically. What are those exempt managers exempt from? They’re exempt from getting overtime pay.
- Exempt means: The employee is “exempt” from receiving overtime pay. An employee in a job with “exempt” status isn’t required to be paid overtime pay.
- Non-exempt means: The employee will receive overtime pay as required by federal and state law. Overtime pay in most states is 1.5 times the hourly rate whenever the employee works more than 40 hours in a week).
Nicholas J. Daukas, a certified expert in employment rules, adds these caveats:
“The correct question is which jobs are exempt and which jobs are non-exempt. These questions are answered by reviewing the regulations of the FLSA.
“In its basic form, the FLSA requires that workers are paid at least minimum wage for all hours worked and are paid at one and one-half the regular rate, or the overtime rate, for all hours worked over 40 in a workweek. What can trip up employers is that there are exceptions to this regulation where some jobs are “exempt” from the overtime requirement.”
Daukas goes on to say: “Once a job is classified as exempt, employers must be careful in maintaining the exempt status by not treating the job as non-exempt. There are critical rules on when an exempt position can be and cannot be “docked” or receive a reduced salary. Some of these are:
- First and last week of work
- When ordered by a court
- Full days off for vacation
- Infraction of a safety rule of major significance
- Full days off for other qualified reasons
It’s because of these complexities that we recommend having an HR manager on your team or working with an HR consultant, like Bambee. HR and hiring laws are complex and vary by state. For example, in California, a non-exempt employee must be paid overtime any time they work over eight hours in a single day. Once they work over 12 hours that day, they receive double-time pay—regardless of their weekly total hours.
3 Tests Determine Exempt vs Non-exempt Employee Status
In general, to be considered exempt from overtime, an employee must pass what’s known as the “three tests.” There are many exceptions to these tests, which is why it’s often helpful to work with an HR consultant or legal advisor to prevent mistakes. All three of these tests must be met for an employee to be exempt from overtime pay unless exclusions apply.
Here are the three tests to determine whether a job can be classified as exempt:
- Salary level test: Does the job pay enough money to be considered exempt―at least $35,568 per year?
- Salary basis test: Is the employee’s salary consistent based on a standard work schedule?
- Duties test: Are the job duties executive, administrative, or professional?
For now, let’s dive into each of these three tests to help you determine exempt vs non-exempt status before hiring your first employee.
Test 1: Salary Level Test
According to the FLSA at the time of publication, employees who are paid more than $684 per week or $35,568 per year pass the first test to be classified as exempt, meaning you don’t have to pay overtime. In contrast, employees who make less than this are considered non-exempt —meaning you must pay overtime pay. There are a few exceptions, such as teachers.
Test 2: Salary Basis Test
As long as your employee is paid consistently the same amount with very small variance, then they would pass the second test—to be considered exempt since this would make them salaried, interpreted as such by the government. However, if an employee is paid hourly with pay that varies widely based on their work schedule and the hours provided, they are to be classified as non-exempt. Again, there are exceptions, such as farmworkers and outside salespeople whose jobs may be considered exempt even when the employees are paid hourly.
Test 3: Duties Test (White Collar Exemption)
An employee who meets the salary level tests and salary basis tests is exempt only if they also perform exempt job duties considered to be executive, professional, or administrative.
Keep in mind that job titles and job descriptions alone can’t determine whether this test is met. It is the actual job tasks that matter. For example, if you give someone the job title “Director of Facilities Operations,” but they are functioning as the janitor, doing maintenance and cleaning floors, this rule would require you to classify that employee as non-exempt. This test was put in place to prevent companies from circumventing overtime rules with inflated job titles.
Executive Job Duties
Executive duties require that a person in the job role supervises two or more full-time employees. Management of employees is the primary task of the job, and the person in the job provides input on decisions affecting those team members like hiring, firing, job promotions, or work assignments. Often, this includes people managers and sometimes supervisors.
Professional Job Duties
Professional duties include jobs in “learned” and “creative” professions like doctors, lawyers, graphic designers, actors, and engineers. These professional roles are generally considered to be exempt. Professional applies to those jobs that require an advanced degree past high school.
Administrative Job Duties
Administrative duties are for jobs done while working on business support teams, like marketing, operations, accounting, or HR—in administrative functions that keep the business running. They are not the “line” team members who make widgets, the wait staff who serve customers, the service employees who install windows, or the retail clerks stocking shelves and working the register. Instead, they are the office staff members providing support to the business.
Comparison Table of Exempt vs Non-exempt Employees
Who Exempt vs Non-exempt Applies to
The exempt vs non-exempt employment status is crucial to any business that hires workers as direct-hire employees. Most businesses employ a mix of workers representing both kinds of employee classifications—exempt and non-exempt.
Here are examples of worker classifications in different industries:
- Retail & food business: These companies typically hire hourly shift workers who are paid overtime and considered non-exempt employees.
- Service business: These companies may have both hourly service employees like laborers and service techs who are paid hourly and considered non-exempt as well as office managers who book clients, supervise staff, and run payroll.
- Professional services: These firms often employ highly educated workers as well as administrative staff who may be considered exempt if they meet the three tests.
- Corporate and office firms: Most corporate entities hire executive, professional, and administrative staff who are likely exempt. However, they’ll typically also have non-exempt hourly workers like mailroom staff, maintenance workers, and receptionists.
Each industry is different, and it’s up to the employer to know the rules and classify employees into the correct status of exempt vs non-exempt to avoid fines and penalties. Any company may choose to avoid compliance concerns by classifying all their workers as non-exempt. It’s important to know that the FLSA provides exceptions—also referred to as exclusions, to the employee classification rules. Let’s look at some of those exclusions.
Exclusions to Exempt vs Non-exempt Employee Classification
Unlike most federal and state labor laws, with employment law, there are many job types with exceptions such as teachers. For example, well-compensated individuals in technical positions also work long hours and do not have any management duties. Technical roles like information technology (IT) support positions, programmers, and IT administrators are continuing to be scrutinized to determine whether they should be included as exceptions to these rules.
Current professions that are exempt regardless of the three tests are:
- Agricultural employees: These include farmworkers and migrant workers
- Movie theater employees: Ushers and concession workers, for example
- Union roles: Jobs that are governed by collective bargaining units
- Railroad workers: Those who work in the rail transportation industry
- Learned professions: These include clergy; registered nurses, but not licensed practical nurses (LPNs); accountants, but not bookkeepers; engineers; actuaries; scientists, but not technicians; and pharmacists
- Creative professionals: Those with job duties like actors, musicians, composers, writers, cartoonists, and many journalists
- Commission-based sales roles: Specifically those that work from home or away from the employer’s primary place of business selling products and services like outside sales
These exceptions cause employment law to have some grey areas. We provide a few of these special circumstances below to help illustrate. This is why we recommend working with an online legal service or a small business HR consulting firm like Bambee, especially if you’re not sure.
Industries Exempt per Special Circumstances
There are some common industries with special circumstances making their workers exempt (from overtime) under the FLSA. For each of these types of jobs, we’ve provided links to where you can find more information.
- Commission-based sales: If you have a retail store and your employees get commissions on sales, you will want to make sure that you are compliant with the FLSA around commissioned retail employees.
- Highly compensated employees: Employees who make over $107,432 year, regardless of job duties or tasks, are generally exempt by the FLSA.
- Computer professionals: Computer systems analysts, computer programmers, software engineers, and other similar roles are usually exempt from overtime if they meet certain requirements, including job duties and wage thresholds.
- Automobile dealership sales & parts workers These roles that are employed by automobile dealerships are exempt from the overtime pay provisions of the FLSA.
- Farmworkers: The FLSA covers most farm employees if they work with goods that will travel between states. However, there are a few complicated exceptions.
- Drivers, loaders, and mechanics: Motor carrier companies like bus companies also have some unique regulations under the FLSA regarding overtime.
- Seasonal and recreational employees: Establishments open fewer than seven months per year are generally exempt from the FLSA like a hockey stadium.
A great resource on all FLSA exclusions can be found on the Department of Labor (DOL) website.
3 Examples of Employee Non-Exempt Classifications
There are numerous ways to interpret whether an employee should be exempt or non-exempt. If you’re on the fence, it’s best to err on the side of non-exempt. However, those extra overtime hours can add up, especially if your administrative, executive, or professional employee logs a lot of hours after work.
Let’s look at some relatable examples to illustrate (and test your skills):
Operations Coordinator: Exempt or Non-exempt
Let’s say an operations coordinator is paid 20 hours per week at $14 an hour at a company that makes TV mounts (it is considered a manufacturing company). The job mainly deals with clients, vendors, and helping the accounting team from within the corporate office. On average weeks, the operations coordinator works 20 hours but sometimes works less or more—depending on the workload. The hours are unpredictable.
Exempt or non-exempt? The operations coordinator job role is non-exempt due to the inconsistency of pay and wages below the threshold. If they work more than 40 hours in a workweek, they are entitled to overtime. However, the employer can choose to classify this worker as either salary or hourly.
Business Development Rep: Exempt or Non-exempt
Let’s say your business development representative’s main function is inside sales, which is commission-based with a guaranteed salary of $20,000 per year. The employee in this job works full-time―about 37 hours per week―from home. They sell software for a large software company earning about $120,000 per year in compensation. This means 84% of the compensation is from commissions. Sounds exempt, right?
“Inside sales” is a unique position within the exempt versus non-exempt debate. For the most part, inside salespersons are non-exempt employees who sell to people over the phone, meaning that they do not travel or “carry a bag” and meet clients face to face. Now, if the employee was in outside sales, there is a different set of rules. For the most part, outside sales are exempt. There is no minimum pay rate required for outside sales roles. Employees in these positions often work primarily for commissions and are instead considered contractors.
Exempt or non-exempt? This job role is exempt because the employee works from home and makes a significant living, which is $120,000 per year and meets the definition of a highly compensated employee (over $107,432 per year) in spite of working as an inside sales rep.
Head Waiter: Exempt vs Non-exempt
Let’s imagine a head waiter works for a steakhouse and is supposed to work full-time at 40 hours per week or five full shifts. However, sometimes, they pick up a sixth or even seventh shift when they have time. Some weeks, the restaurant is slow, and they only work 25 hours a week, making their income unpredictable. As the head waiter, they hire and fire new staff members and set the restaurant’s staffing needs. The head waiter makes the minimum tipped wage per the state and reports cash tips at the end of each shift. They also get a $1,000 bonus each month for managing head waiter duties. The head waiter makes about $60,000 per year on average.
Exempt or non-exempt? The head waiter is non-exempt because of the wide variety of hours worked, and how inconsistent the pay is. On weeks works more than 40 hours, this worker is owed overtime on his hourly wage. The head waiter can be paid salary or hourly.
What Misclassification as Exempt Costs
For businesses that misclassify employees as exempt and fail to pay them earned overtime pay, the costs can be staggering. Recently, a small local business with about a dozen employees in my area was discovered to have misclassified their service techs and was ordered to provide double-pay (back pay) to the employees for three years as well as pay a fine in excess of 10,000.
Here are the biggest costs of misclassification:
- Fines & penalties: $1,000 to $10,000 in fines or possible incarceration
- Backpay: Backpay, often double the hourly rate, to all misclassified employees for all overtime hours worked for up to three years
- Legal costs: Hundreds of dollars an hour for consulting and documentation prep
- Brand reputation: Local customers and your own employees may retaliate
It’s silly to risk financial and reputational ruin by taking a do-it-yourself approach to employee job classification. For significantly less than the cost of just one violation, you can often work with an HR consulting firm like Bambee, or partner with an online legal service. Consider it a cost-saving, risk avoidance business investment in labor law compliance:
Here’s what one attorney told us as she shared the true cost of noncompliance:
“If a company misclassifies its employees, the ramifications are costly. There may be retroactive overtime, back pay, fines, penalties, interest, taxes, benefits, and contributions that should have been paid on the employee’s behalf originally—like, taxes, FICA [Federal Insurance Contributions Act], FUTA [Federal Unemployment Tax Act], or retirement contributions—and that’s not taking into account attorney’s fees for the employee who brought the wage and hour claim or the company’s own attorney fees to resolve the claim.
“It is much safer for a company to err on the side of caution and treat their employees as non-exempt rather than having to literally pay the price for misclassification later.”
—Amanda J. Shuman, Esq., Attorney, DangerLaw, LLC
Providers That Manage Exempt vs Non-Exempt Classifications
Businesses without the expertise of an HR manager on staff have plenty of ways to ensure labor law compliance outside the traditional HR consultant or attorney. Many of these services provide self-directed decision tools or support staff who can help you determine the best employee classification—exempt vs non-exempt employee—based on the job role.
These providers offer tools to help classify and manage exempt and non-exempt employees.
1. Scheduling Software
Scheduling software like When I Work is typically used when you have hourly workers that work in the field like carpenters or housekeepers or serve in shift-based restaurant and retail jobs. Tracking hours worked is an essential aspect of compliance when you’re managing non-exempt employees. Scheduling software tools like When I Work takes it a step further by providing you an online job board to help you find hourly workers free if you have fewer than 75 employees in one work location.
2. Time & Attendance Apps
Time and attendance apps are similar to employee scheduling software as they track employee hours worked and include additional compliance tools like managing paid and unpaid breaks. Tools like Homebase—also free for one location—include standardized job descriptions for non-exempt jobs across many industries. Homebase offers a free forever plan along with affordable paid plans that include GPS tracking
3. HR & Payroll Software
The benefit of HR and payroll software is that it often interfaces directly with scheduling and timekeeping software, reducing your risk of overtime pay errors. Affordable small business HR and payroll software like Gusto processes labor-law compliant payroll automatically. In addition, Gusto has HR experts on staff you can call when you’re not sure which job classification—exempt vs non-exempt—is best. Gusto provides a free 30-day trial.
If you haven’t considered the professional employer organization (PEO) option, you’re in for a surprise. A PEO serves as the employer of record for your staff—taking tricky compliance questions off your hands—for a monthly per-employee fee that ranges from under $100 to several hundred dollars per month depending on the services you want like employee benefits, training, and performance reviews. We went this route at Fit Small Business using TriNet as our PEO to ensure we offered the best employee experience possible.
5. HR or Legal Consultant
The standby option for those not using other providers, compliance software, or having an in-house HR expert, is to outsource that service to a third-party provider. These HR compliance advisors typically charge a monthly rate in the range of $90 to $100 per month—a small investment for peace of mind and significantly less costly than a full-time HR manager, which can run well over $50,000 per year.
Pros & Cons of Exempt vs Non-exempt Employees
When you consider the pros and cons of both employee statuses (exempt vs non-exempt), there are some benefits to each. It’s the perceived cost-saving benefits that often get an employer in trouble when they try to cut costs by classifying non-exempt employees as exempt in hopes of avoiding having to pay overtime.
Pros & Cons of Non-exempt Employee Classification
Here is a pro and con of paying employees overtime as non-exempt employees:
- Pro-Reduced risk: If you classify all employees as non-exempt and pay all employees overtime, you’ll rarely run into a compliance issue with overtime pay.
- Con-Costs more: Overtime pay is 1.5 times the regular pay rate, so it’s going to cost more to pay employees overtime. Some businesses get around this by limiting the number of hours an employee can work each week to something less than 40, such as 37.5 hours maximum per week.
Pros & Cons of Exempt Employee Classification
Here are the pros and cons of classifying employees as exempt:
- Pro-Saves money: Exempt employees receive a fixed pay rate that doesn’t include you worrying about overtime pay for hours worked more than 40 in one week.
- Pro-Payroll is easier: Exempt employees can be paid a salary. Therefore, you don’t have to track work hours or calculate overtime hours on time cards.
- Con-Risky: if you misclassify a non-exempt employee as exempt, you risk damaging your business financially.
Alternatives to Dealing With Exempt vs Non-exempt Employees
Should labor-law compliance issues like employee exempt vs non-exempt job classifications make your head spin, there are options. You could hire contractors, work with virtual assistants or contract with a temporary agency to meet your company work requirements. These options serve businesses needing specialized talent that can work remote, or who need common types of work done like accounting, IT, nursing, and administrative services.
Here are the three alternatives to hiring employees directly.
Contract or Freelance Workers
Independent contractors like gig workers and freelancers aren’t covered by FLSA rules requiring you to provide overtime pay. However, there are IRS and United States Department of Labor (DOL) rules for who can be classified as a contract worker vs an employee.
Virtual Assistant Companies
Virtual assistant (VA) companies exist to provide businesses with a contingent workforce. As the employer of record, they, not you, manage the workers’ job classifications and payroll. You merely pay an hourly or monthly service fee. VA firms offer workers—often remote or overseas—who can do jobs like answer phones, provide customer service, program software, input data, and they can fill research, marketing, or writing roles.
As long as the work can be done online, you’ll probably be able to find a VA firm offering employees who can do the job. VA firms offer work to be done as low as $1 per task or $5 per hour.
Temporary Staffing Firms
Staffing firms are typically businesses in your neighborhood or in your industry that provide workers to fill open job roles. Like a VA firm, they employ the worker on their payroll, and you merely “lease” the employee for the job. It typically costs about 30% more to work with a temp agency than if you were to hire an employee directly.
Frequently Asked Questions About Exempt vs Non-Exempt
Because there are so many variables when determining exempt vs overtime employee status, we’ve provided common questions with answers below.
Are independent contract workers exempt from overtime pay?
Independent contractors are not employees, so they’re exempt from overtime pay automatically. If your freelance contractors or gig workers are incorrectly classified, and/or you don’t have the right paperwork in place, they could be considered employees by the IRS, and thus be potentially eligible for overtime pay.
Here’s how to avoid classification issues with your independent contractors:
- Set up an agreement: An independent contractor agreement clarifies terms of the work to be performed and payment methods. It’s best to set up the agreement between you as the business and the contactor’s LLC or business name.
- Obtain a signed W-9 form: Document that the person is working for you as a 1099 contractor with your business.
- Keep tabs on their work and hours: If you’re working with an independent contractor who doesn’t have a business, monitor that they are not working excessive hours or doing the kinds of work that might cause the IRS to consider them an employee.
How can I fix missed overtime pay?
If you find an error in job classification or missed paying overtime as long as the error wasn’t intentional, you can rectify it with what’s called retroactive pay. However, you must do so as soon as the error is discovered. Keep in mind that an employee has up to two years to claim back wages. Depending on the amount, you may also want to consult your attorney.
HR experts like this one remind us how important it is to address pay issues quickly:
“It only takes one complaint to the Wage & Hour Division [WHD] to start an audit for the entire company. So, even though only one employee complained, the WHD will audit all of the company’s payroll back three years and will assess the costs as they find them.”
—Justin L. Terch, SPHR, MA, MBA, Managing Consultant, Terch & Associates Consulting LLC
How do you calculate overtime?
If your gears are now turning to figure out time and overtime for your employees, we highly recommend signing up for time tracking software. Consider using small business payroll software like Gusto that can process all types of employee pay as well as contractor (1099) payments. Working with an HR consulting firm to ensure your software systems and calculations are set up properly for your state and locality provides additional assurance.
Who can help me determine whether an employee should be exempt or non-exempt?
It’s best to assume a job role is non-exempt—eligible for overtime—unless the job passes the three tests provided by the FLSA. The job should pay at least $35,568 per year, provide consistent pay for each pay period, and fit the criteria of being executive, administrative, or professional.
How is salaried-exempt different from salaried non-exempt?
You can pay both exempt and non-exempt employees a salary to streamline your payroll process. However, the difference will be that salaried-exempt employees will be paid the same rate each pay period. In contrast, your salaried non-exempt employees will need to keep track of their hours, notifying you if they exceed the number of standard hours so that they are paid for all hours worked, including overtime hours.
What is an exempt employee?
An exempt employee means that the employee is working in a job that is exempt from receiving overtime pay. It’s not the employee that’s exempt―it’s the job they’re doing that is exempt from receiving overtime pay.
Who qualifies as an exempt employee?
People aren’t exempt or non-exempt, but jobs are—based on job duties. Therefore, individuals working in jobs that are exempt from overtime pay, such as executive supervising two or more employees;, administrative like office and support staff; and professional job roles like doctors, lawyers, and educators may be exempt from receiving overtime if they meet the criteria of a minimum amount of pay per year—$35,568 per year or higher—with a consistent salary and standard hours.
What is the difference between an exempt and non-exempt employee?
The basic difference is that a person in an exempt job will not receive overtime pay for hours worked more than 40 per week—think team managers, accountants, and degreed professionals—typically white-collar jobs. In contrast, an employee in a non-exempt job will be eligible to receive overtime pay. These may be restaurant employees, service workers, line staff, laborers, and other kinds of blue-collar jobs.
Timothy G. Wideman, an HR professor from Doane University, shares his insights with a real-life example below:
“The most common types of employees who fall under the exemption have so-called “white-collar” jobs such as managers, administrators, executives, various professional employees like pharmacists or accountants, computer professionals, and outside sales employees. Folks in those white-collar positions are almost universally paid a salary instead of receiving an hourly, rate of pay, and that’s another identifying distinction between the two categories of employees.”
Can you require an exempt employee to work more than 40 hours?
Yes and no. It’s not a good practice to keep track of the work hours of an exempt employee because that level of “supervision” may result in the job itself being considered non-exempt. Exempt employees should be compensated based on the work they do and what they accomplish rather than the number of hours they spend in the office.
However, let’s say the job requires them to work over the weekend to complete a year-end audit, stay late for a business event, check email on the weekends, or meet clients off-site after hours, then yes, you should expect that they’ll do that work even if it requires them to work more than 40 hours a week.
Getting your employee job classifications correct is crucial to ensure you’re paying your workers fairly and to abide by federal labor laws. Before classifying a job as exempt from overtime, it’s best to have solid job descriptions in place documenting the kinds of tasks the worker does. Furthermore, ensure that any job you’ve determined to be exempt can pass the salary level of at least $684 per week and salary basis test, meaning consistent pay and hours.
To ensure you have classified employees as exempt vs non-exempt correctly, Bambee offers an affordable HR audit function in addition to on-demand HR managers to cover your business compliance with labor and tax laws. You also get help with creating internal HR policies, employee onboarding, and termination, and general employer coaching and guidance, starting just at $99 per month. Schedule a free consultation today.