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.
To avoid misconduct and legal ramifications, it is important to know which category each new hire falls under. Joshua Gerlick, a doctoral student of nonprofit management and a Fowler Fellow at Case Western Reserve University, said that business owners must carefully design job titles and descriptions that fall clearly into either the exempt or nonexempt category.
“Misclassification of employees is costly, and penalties can be retroactive – potentially back to the beginning of an employee’s date of hire,” Gerlick told Business News Daily.
Although some regulations vary by state, there are some basic rules you must follow when determining how to classify and compensate your employees.
Exempt employees are those who are paid a regular salary, a predetermined amount of money distributed in regular intervals throughout the year. These employees do not qualify for minimum wage, nor do they receive overtime pay. “Exempt” means the employee is exempt from overtime pay. The FLSA regulates which employees are exempt and which are nonexempt.
Exempt employees do not qualify for minimum wage, and they do not receive overtime pay.
Nonexempt employees are those who are eligible for minimum wage and overtime pay calculated at 1.5 times their hourly rate of pay. They are often paid hourly for the precise amount of time worked in a pay period. Those who are nonexempt, and when they are eligible for overtime pay, is subject to federal and state standards.
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One of the main differences between exempt and nonexempt positions is compensation. Brian Cairns, CEO of ProStrategix Consulting, said that employees with exempt status must earn at least $455 per week but cannot receive payment 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 said. “This was the basis for the old classification of white-collar versus blue-collar workers.”
Overtime pay rules are set in the FLSA. The baseline is that overtime is paid at 1.5 times the rate of pay 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. The full rules for overtime can be found on the U.S. Department of Labor’s website.
Exempt employees are not eligible for overtime, while nonexempt employees are eligible for overtime pay. Specific guidance comes from the federal and state level, depending on where your business is located.
According to the FLSA, there are three basic tests you can perform to determine whether an employee should be classified as exempt or nonexempt:
“To be considered exempt, an employee must meet the requirements of all three tests,” said Gerlick. “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.”
There may be some exemptions to these rules, including by profession, industry, or pay structure. Visit the Department of Labor website, or consult a payroll professional for more information.
The U.S. Department of Labor (DOL) updated the federal overtime provisions of the FLSA in 2020. The new standards are as follows:
According to the FLSA, you can determine if an employee is exempt or nonexempt by salary level, salary basis, and job duties.
Although the employee classification of “exempt” may seem ideal for some employers, that is not the case for everyone. There are many benefits and drawbacks to hiring (and working as) an exempt employee.
Since exempt employees cannot earn overtime pay, Gerlick said that the primary benefit of hiring an exempt employee is the ability to demand a certain level of performance or output while maintaining a fixed budget. However, Gerlick warned that exempt employees typically cost more than their nonexempt counterparts, largely due to the expectation that they will use discretion and judgment in executing their duties.
Cairns said the primary benefits of exempt employees include paycheck stability, eligibility for benefits, and standard business hours. However, employees with exempt status generally have less-flexible work schedules than nonexempt employees, and they can’t be paid overtime, even if they work more than 40 hours a week.
Exempt employees are not owed overtime pay, which helps employers stay within their budget. Exempt employees are also eligible for benefits. However, they have less flexibility in their schedules, and they may work more than 40 hours a week without additional compensation.
Hiring nonexempt employees comes with its own set of benefits and drawbacks for employers and employees alike.
Hiring a nonexempt employee offers flexibility for employers, since 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.
There are a few drawbacks to hiring nonexempt employees, the primary one being overtime pay for employees who work more than 40 hours a week. You will need to accurately monitor and track employee hours to ensure that they are being accurately compensated for their time. [Read related article: What You Need to Know About the Federal Overtime Rules]
Although the most obvious benefit for nonexempt employees is the ability to work overtime and receive proper compensation for every hour worked, Cairns said there are drawbacks that nonexempt employees should know about. Since hours can vary week to week, nonexempt employees may not have a stable or consistent paycheck, their work hours may not adhere to standard business hours, and, in some states, they may not be eligible for paid vacation or sick time.
Nonexempt employees offer employers flexibility for hours worked, but those who work more than 40 hours a week are owed overtime. Employees receive accurate pay for actual hours worked, but their paychecks may fluctuate as hours worked can vary from week to week.
When creating job titles and descriptions for your employees, consider which category (exempt or nonexempt) will benefit your company the most. Review what duties you will need to be completed and what type of payment you would like to pay (salary or hourly).
Cairns said that some types of 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 said business owners must decide which is more important: flexibility or expertise.
“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,” said Gerlick. “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.”
As a rule of thumb, nonexempt employees are better suited to hourly, temporary, or seasonal work, whereas exempt employees are more suited to long-term positions with executive, administrative, or professional duties. It is important to differentiate these positions based on the actual duties and then hold your employees accountable to the set guidelines.
Gerlick said a common mistake for business owners is designing a job that qualifies as exempt, but then not allowing that employee to exercise the judgment and discretion commensurate with the job description. This mistake can be very costly to your business: If that employee decides to take 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,” said Gerlick. “Proactivity is crucial. Issues don’t typically arise until an unhappy employee files a lawsuit.”
When determining whether to hire an exempt or nonexempt employee, consider the job description, length of the job (temporary, short-term, or permanent), whether the position is part time or full time, and the type of candidate you want to hire.