Business News Daily provides resources, advice and product reviews to drive business growth. Our mission is to equip business owners with the knowledge and confidence to make informed decisions. As part of that, we recommend products and services for their success.
We collaborate with business-to-business vendors, connecting them with potential buyers. In some cases, we earn commissions when sales are made through our referrals. These financial relationships support our content but do not dictate our recommendations. Our editorial team independently evaluates products based on thousands of hours of research. We are committed to providing trustworthy advice for businesses. Learn more about our full process and see who our partners are here.
Exempt vs. Nonexempt: What Is the Difference?
An employee's salary level, salary basis and job duties determine whether they're exempt or nonexempt.
Table of Contents
It is an employer’s responsibility to accurately determine whether an employee should be classified as exempt or nonexempt. An employee’s classification as exempt or nonexempt is not a matter of preference or choice ― the Fair Labor Standards Act (FLSA) has stipulations that determine and regulate each classification.
Although some regulations vary by state, you must follow some essential rules when determining how to classify and compensate your employees.
What are exempt employees?
Exempt employees are paid a regular salary, a predetermined amount of money distributed regularly throughout the year. Because salaried employees aren’t paid hourly, their earnings aren’t calculated based on the minimum hourly wage. However, salaried employees must make over a specific threshold in each state to be considered “exempt.”
Unlike hourly workers, exempt employees don’t receive overtime pay for working additional hours in the week. “Exempt” means the employee is exempt from overtime pay requirements. The FLSA regulates which employees are exempt and which are nonexempt.
>>Learn More: Hourly to Salary Calculator
What are nonexempt employees?
Nonexempt employees are entitled to a minimum hourly wage and overtime pay calculated at 1.5 times their hourly pay rate. They are often paid hourly for the precise time worked in a pay period. An employee’s nonexempt status and eligibility for overtime pay are subject to state and federal standards.
>>Read About: Salary to Hourly Calculator
Overtime pay: Exempt vs. nonexempt employees
One of the primary differences between exempt and nonexempt positions is their compensation structure. Under federal guidelines, employees with exempt status must earn at least $684 weekly. That amount may be higher in certain states with a higher cost of living (and minimum wage).
Brian Cairns, founder of ProStrategix Consulting, says employees with exempt status aren’t entitled to a higher pay rate for overtime. Nonexempt employees must earn at least minimum wage and are eligible for overtime pay.
“Overtime is paid at time and a half once a nonexempt employee works more than 40 hours a week or on specific holidays,” Cairns explained. “This was the basis for the old classification of white-collar vs. blue-collar workers.”
Overtime pay rules are set in the FLSA. The baseline is that overtime is paid at 1.5 times the pay rate for every hour worked above 40 hours in a 168-hour consecutive workweek.
As of 2020, employers can pay bonuses to nonexempt employees on top of their regular pay. Visit the United States Department of Labor (DOL) overtime pay webpage to learn more.
How to classify exempt vs. nonexempt employees
According to the FLSA’s exempt vs nonexempt information, three fundamental tests can help you determine whether an employee should be classified as exempt or nonexempt:
- Salary level test: An employee must earn more than $35,568 per year ($684 per week) to qualify as exempt.
- Salary basis test: An employee must receive a guaranteed minimum compensation, regardless of the time worked, to qualify as exempt.
- Duties test: An employee who meets the exemption requirements of tests one and two must also perform an exempt job duty, which can be one or more of the following:
- Exempt executive duties: The employee supervises two or more other employees as a regular part of their job.
- Exempt professional duties: The employee performs intellectual activities that require specialized education and the use of discretion and judgment.
- Exempt administrative duties: The employee performs support operations for significant matters that require the use of discretion and judgment.
“To be considered exempt, an employee must meet the requirements of all three tests,” explained Joshua Gerlick, a doctoral student of nonprofit management and a Fowler Fellow at Case Western Reserve University. “However, the application of these tests is often complicated and a business owner should consult with their legal advisor to determine specific applicability to a specific job function.”
In September 2023, the DOL proposed revisions to the FSLA’s rules surrounding overtime and minimum wage requirements for executive, administrative and professional workers. The proposed changes include the following:
- Increasing the minimum salary requirements for exempt employee status to $1,059 per week or $55,068 per year.
- Increasing the compensation requirement for what’s classified as highly compensated employees to $143,988 per year.
- Introducing a process for automatically adjusting salary thresholds every four years to align with current wage data.
While these changes have not yet gone into effect, employers should keep an eye on them to remain compliant.
Pros and cons of exempt employees
Although the “exempt” employee classification may seem ideal for some employers, this is not the case for everyone. There are benefits and drawbacks to hiring (and working as) an exempt employee.
Employer considerations with exempt employees
- Pro: Exempt employees ensure high-level output while maintaining a fixed budget.
- Con: Exempt employees typically cost more than their nonexempt counterparts, primarily because they’re expected to use discretion and judgment in executing their duties.
Employee considerations with exempt status
- Pro: Exempt employees benefit from paycheck stability, benefit eligibility and standard business hours.
- Con: Employees with exempt status generally have less flexible work schedules than nonexempt employees, depending on their job duties. They may also work over 40 hours a week without receiving extra pay for their efforts.
Pros and cons of nonexempt employees
While hiring nonexempt employees may make more sense for some workplaces, it could also bring unique drawbacks. Consider the following advantages and disadvantages.
Employer considerations with nonexempt employees
- Pro: Hiring a nonexempt employee offers flexibility for employers because there is no minimum requirement for how many hours they should work each week. You can pay a nonexempt employee an hourly rate (minimum wage or higher) and schedule them based on your company’s needs.
- Con: Employers must deal with federal overtime rules when hiring nonexempt employees. You will likely need to implement a time and attendance system to accurately monitor and track employee hours to ensure they’re fairly compensated for their time.
Employee considerations with nonexempt status
- Pro: Nonexempt employees can work overtime and receive proper compensation for every hour worked.
- Cons: Since hours can vary from week to week, nonexempt employees may not have a stable or consistent paycheck. Their work hours may not adhere to standard business hours. In some states, they may not be entitled to paid vacation or sick time.
When to hire exempt or nonexempt employees
According to Cairns, some jobs are legally required to be exempt and can only be hired as such. However, for positions that can be modified to fit one category or the other, Gerlick says business owners must decide which is more important: flexibility or expertise. Review the necessary duties a position entails and the type of payment you’d prefer (salary or hourly).
“Hiring an hourly wage employee whose duties are nonexempt gives owners the option to adjust working hours according to demand ― perhaps scheduling 15 hours for one week and 35 hours the week thereafter,” Gerlick explained. “Despite the added cost, hiring a salaried employee whose duties are exempt fixes the labor cost regardless of the required time for the employee to accomplish a given objective.”
Consider the following when deciding between exempt and nonexempt classifications:
- Nonexempt employees: As a rule of thumb, nonexempt employees are better suited to hourly, temporary or seasonal work.
- Exempt employees: In contrast, exempt employees are more suited to long-term positions with executive, administrative or professional duties. Employers must differentiate these positions based on their duties.
Business owners often make the mistake of designing a job that qualifies as exempt but not allowing the employee to exercise the judgment and discretion commensurate with the position’s description. This mistake can be costly: If the employee takes legal action, they can use the FLSA to support their claims against you.
“If employers are unfamiliar with the particulars of the FLSA, they should retain competent human resources counsel to review job descriptions and occasionally audit job duties to ensure the applicability of existing classifications,” Gerlick advised. “Proactivity is crucial. Issues don’t typically arise until an unhappy employee files a lawsuit.”
The importance of classifying employees correctly
According to Gerlick, it’s crucial for business owners to carefully design job titles and job descriptions that fall clearly into either the exempt or nonexempt category to avoid misconduct and legal ramifications.
“Misclassification of employees is costly and penalties can be retroactive ― potentially back to the beginning of an employee’s date of hire,” Gerlick cautioned.
While there’s no legal obligation to designate employees as exempt, miscategorizing a nonexempt employee could have severe consequences. You may owe employees retro pay for overtime hours going back up to three years. You could also face a $1,000 fine per violation. Misclassified employees may likewise choose to take you to civil court.
