Exempt & Nonexempt Employees: What the Difference is & How to Classify Them

Knowing and understanding the difference between exempt and nonexempt employees helps you ensure that you’re in compliance with labor laws and will keep you out of legal trouble. Plus, it’ll help you avoid confusing payroll or scheduling issues, and you’ll ensure your employees are given appropriate hours, overtime, and benefits.

Not sure exactly what the main differences are between exempt and nonexempt employees? We’ll walk you through how to properly classify workers and discuss specific labor laws that are important to comply with, including on the state level. That way, you can both protect your small business and make sure you treat your employees fairly.

Key takeaways

• What an exempt employee is
• Pros and cons of exempt employees
• What a nonexempt employee is
• Pros and cons of nonexempt employees
• How to classify exempt vs nonexempt employees
• State laws about exempt and nonexempt employees
• Classifying employees at your business
  

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What is an exempt employee?

An exempt employee is someone who doesn’t have to abide by the overtime pay requirements set by the Fair Labor Standards Act (FLSA) and doesn’t qualify for a guaranteed minimum wage.

Exempt employees usually receive salaries and carry out tasks that are considered “exempt” from overtime pay. That’s because their salaries are above levels set by the FLSA and meet other requirements for exemption. So, if they work over 40 hours per week, they don’t receive extra compensation. They’re also disqualified from certain labor law protections, like meal and rest breaks. Exempt employees are generally classified as executive, administrative, professional, or outside sales employees, like lawyers, doctors, teachers, and architects.

To be considered exempt, staff members must meet specific criteria, like performing exempt job duties and earning a minimum salary of $684 per week (according to 2023 data). These employees typically have more flexibility in their schedules and aren’t required to follow the same time tracking requirements as nonexempt employees, who often follow a pre-set hourly schedule.

Pros of exempt employees

There are several pros associated with hiring exempt workers, like no overtime pay requirements, higher skill levels, and higher employee satisfaction. More detailed advantages include the fact that they:

• Aren’t entitled to overtime pay, which can help the company find ways to reduce labor costs.
• Are generally more experienced and skilled than nonexempt employees due to higher education or additional training, which can lead to higher productivity and better work quality.
• Have more flexibility in their professional schedules, so they should be capable of working more efficiently and managing their time better.
• Often have more autonomy and decision-making authority, which can lead to less micromanaging on your end and give you more time to focus on other aspects of your business.
• Are typically paid more than nonexempt employees, which means they have higher workplace satisfaction and feel more loyal to your business. This can also help with employee retention.

Cons of exempt employees

While exempt workers have their upsides, there are also many downsides to consider, like burnout, potential legal liability, and communication risks. Some more detailed disadvantages associated with hiring exempt employees include the fact that they:

• Are paid a fixed salary, regardless of the hours they work. This means that even if an employee works less than 40 hours per week or has several unproductive hours, you’re still required to pay them the same amount.
• Aren’t paid overtime, so they can experience issues with work-life balance, employee burnout, and resentment if they have to work extensive hours.
  
• May be more difficult when it comes to accountability and communication as they’re typically given more independence.
• Aren’t subject to the same labor law protections as nonexempt employees, which can lead to legal trouble if you mistakenly classify them incorrectly.

What is a nonexempt employee?

A nonexempt employee is a staff member who’s entitled to overtime pay and minimum wage protections under the Fair Labor Standards Act (FLSA). Nonexempt employees are typically paid hourly and have to earn federal minimum wage or higher. They’re also entitled to an overtime pay rate of at least one and one-half times their regular pay rate for all the hours they work over the 40-hour threshold within a workweek.

Nonexempt employees are generally classified as manual laborers, with the exception of a few administrative or clerical roles. They’re subject to specific labor law protections, including meal and rest breaks. It’s essential that your small business keeps accurate records of nonexempt employees’ logged hours and pay since failure to do so can cause serious legal headaches.

Using a tool like Homebase to track your nonexempt staff’s hours and run payroll is a great way to avoid these issues. That’s because Homebase payroll has the ability to calculate wages and taxes for you, and it automatically sends the correct payments to employees, the state, and the Internal Revenue Service (IRS).

Pros of nonexempt employees

There are several pros for small business owners and managers that hire nonexempt employees, like their likelihood to accept overtime shifts, more job flexibility, and easier classification. Let’s break down some of their advantages in more detail. They:

• Are typically paid hourly, which means you can easily adjust staff schedules to match business needs — like during peak periods or slower times — so you’ll only have to pay for the labor you need. Homebase scheduling makes this a breeze and can help you optimize employee timetables for peak hours.
• Are more likely to accept overtime shifts because they’re paid extra for time over 40 hours per week. This can help you manage staffing needs during busy times without needing to hire more staff or taking on other excessive labor costs.
• Are often easier to classify than exempt employees, who must meet a specific set of criteria that can be difficult to determine. Nonexempt workers are typically classified based on their hourly rate and the number of hours they work, which is easier to manage.
• Have roles that are easier to hire for if you’re dealing with turnover or need to add more staff members to your team since they’re usually less skilled than exempt employees.
• Have more job role flexibility on average than exempt employees because they can be trained to perform a variety of tasks, which is helpful when you’re trying to manage staffing needs. Exempt employees are often more specialized and can’t bounce from task to task as easily.

Cons of nonexempt employees

Nonexempt employees can come with some challenges — none of which aren’t manageable. However, small business owners and managers will have to consider factors like organizing schedules, tracking labor costs, and possibly having team members with formal qualifications or experience. For instance, nonexempt employees:

• Can make it more difficult to manage labor costs if you don’t take care when scheduling. That is, if you pay employees by the hour and don’t know how to predict your busy or slow times, you’ll end up overpaying for labor or negatively impacting your customer experience due to understaffing. Homebase’s scheduling tool can help you build, share, and optimize schedules to keep your team on track and avoid these issues.
• Might cause labor costs to add up quickly if you don’t look into methods to reduce overtime pay and frequently ask them to come into work early or stay late.
• Could require more supervision than exempt employees, depending on the tasks they’re responsible for and the qualifications and/or experience they have. This has the potential to be time-consuming for managers with large teams.
• Might be less committed to their jobs as hourly work is sometimes reviewed as more temporary. This can result in higher turnover rates and lower productivity, which can be costly for your business.

What’s the difference between exempt and nonexempt employees?

Exempt employees are paid a salaried amount and aren’t entitled to overtime pay, and their labor is considered to be higher skilled. Nonexempt employees are paid hourly and are entitled to overtime pay, and their labor is considered manual or less skilled.

For example, Mandeep and Peter both work for a restaurant chain, but Mandeep is an upper-level manager and Peter is a line cook. Mandeep’s role is salaried and requires higher qualifications and more specialized experience and skills than Peter’s does, so it’s classified as exempt. Peter, on the other hand, is paid an hourly wage and doesn’t need any specific experience or higher education for his job, so it’s considered nonexempt.

How to classify exempt vs. nonexempt employees

In the United States, the FLSA decides how to classify exempt vs nonexempt employees. To figure out if your workers should be considered exempt or nonexempt, take these factors into consideration:

• Salary: Are you paying employees a fixed amount each week regardless of how many hours they work, or do you pay them by the hour?
• Salary level: Do you pay employees at least $684 per week, or do you pay them less than that?
• Job duties: Are your employees’ job duties consistent with the requirements for exemption status, like administrative, professional, and executive jobs? Or would it be more accurate to classify them as manual labor?

An employee must make a salaried amount of at least $684 per week and carry out job duties that require specialized education to be considered exempt. If staff members don’t match all three main criteria — salary, salary level, and job duties — then they’re not considered exempt.

Small business owners and managers need to carefully classify employees as exempt or nonexempt to ensure FLSA compliance, as doing so incorrectly can result in legal and financial consequences. If you’re not sure how to classify your workers, reach out to legal counsel or an HR professional for help. Homebase’s HR and compliance tool can also provide expert guidance and help your business stay compliant.

State laws about exempt and nonexempt employees

While the FLSA has set some federal standards for exempt and nonexempt employees, it’s important to remember that the laws vary from state to state. You should always check to ensure your business is complying with the rules and regulations of your specific location. A few notable state laws regarding exempt and nonexempt employees include:

Alaska

The state increased its minimum wage for 2023 to $10.85 per hour, and its new minimum pay rate to have an employee be considered exempt is $868 per week or twice the minimum wage for a 40-hour work week.

California

California has some of the most extensive wage and hour laws in the United States. The state has its own overtime laws, which require employers to pay overtime to nonexempt employees who work more than eight hours per day and 40 hours per week. California also has strict rules regarding meal and rest breaks for nonexempt staff.

Colorado

The Colorado Overtime & Minimum Pay Standards Order (COMPS) increased the minimum pay rate to qualify for exemption to $961.54 per week. Additionally, the pay rate for exempt employees must always be equal to or higher than minimum wage, regardless of how many hours they work.

Colorado’s Healthy Families and Workplaces Act (HFWA) requires employers to provide paid sick leave to employees, including part-time and seasonal workers. The same law also covers provisions related to retaliation and enforcement.

Kansas

In Kansas, depending on a business’s annual revenue, employees are only entitled to overtime pay after working 46 hours a week rather than 40.

New York

New York’s exemption status requirements vary by county, and employees in New York City are required to make significantly more than those in the rest of the state to be considered exempt.

Additionally, New York has its own minimum wage and overtime laws, which are more in-depth than federal standards. The state also has unique rules regarding tip credits for certain employees, as well as requirements for paid family leave.

Washington

In 2020, Washington implemented new standards for exempt employees that require them to earn 1.25 times the new minimum wage rate to qualify as exempt. Additionally, the state established salary thresholds based on business size.

For 2023, the Washington salary thresholds are:

• 1.75x minimum wage ($1,101.80 weekly or $57,293.60 annually) for organizations with 50 employees or less
• 2x minimum wage ($1,259.20 weekly or $65,478.40 annually) for organizations over 50 employees

Remember: Laws and regulations are always changing. If you’re not sure what labor regulations apply to your business area, tools like Homebase HR can help. Our platform will alert you if local laws shift in a way that affects how you classify or manage your employees automatically.

Classifying your small business employees

Classifying employees as exempt or nonexempt and paying them correctly is one of your most important responsibilities as a small business manager or owner. It keeps you out of legal trouble and has a significant impact on everything from employee scheduling to labor costs. However, as your small business evolves and grows to the point of needing to hire more staff, it can be tough to juggle payroll and employee classification along with your other duties.

Thankfully, tools like Homebase make it easy to stay FLSA compliant and avoid common downfalls associated with nonexempt employees. Our platform can help you automatically classify employees, calculate wages and taxes, and send out error-free payments to workers, the state, and the IRS. Plus, our scheduling feature makes organizing nonexempt employees a breeze.

Get started with Homebase today, and never worry about incorrectly classifying employees again.

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Frequently asked questions about exempt and nonexempt employees

What does it mean for an employee to go from nonexempt to exempt?

When an employee goes from nonexempt to exempt, it means they’re no longer subject to FLSA laws or entitled to overtime pay. Additionally, you’ll likely pay them a salary instead of an hourly wage.

Is it better to be a nonexempt employee or an exempt employee?

Both nonexempt and exempt employees have their pros and cons. People’s preferences depend on job duties, responsibilities, and likes and dislikes.

Pros of exempt employees include no overtime pay requirements, broader and more specialized skill sets, and higher employee satisfaction, and cons include burnout, potential legal liability, and communication risks. Pros of nonexempt employees include a likelihood to accept overtime shifts, more job flexibility, and easier classification, and cons include difficulties managing schedules, labor costs, and more limited skill sets.

How does overtime pay work with exempt vs. nonexempt employees?

Exempt employees aren’t entitled to overtime pay since they receive a salaried amount regardless of how many hours they work. The FLSA requires that all nonexempt employees get overtime pay for all the time they work that exceeds 40 hours in a workweek.

Can you be salaried and nonexempt?

It is possible to be both salaried and nonexempt. If your job duties meet the criteria for nonexempt employees under the FLSA, you’ll still be entitled to overtime pay and other protections even if you’re paid a salary. However, this can vary depending on where you live, so double-check your state labor laws to be sure.

Do nonexempt employees have to clock in and out?

Yes, nonexempt employees are required to clock in and out and follow time clock rules for hourly employees. This is crucial for employers to comply with wage and hour laws, especially for nonexempt employees who are eligible for overtime pay. A tool like Homebase’s free time clock makes punching in and out of shifts super easy.