Michael Lodge, NCPM, CRTP - When I am consulting to clients on payroll issues the subject of exempt and non-exempt employees comes up in the conversation. As a business you are required to classify your employee into the correct classification. Many payroll problems develop when employees or independent contractors are classified incorrectly. If you are in California the EDD will come after you, they are probably one of the most aggressive taxing agencies in the United States. So let's have a discussion on classification of exempt and non-exempt employees.
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Exempt and non-exempt employees are worker classifications established by the Fair Labor Standards Act that determine if you must pay an employee overtime pay.
Exempt employee: An employee who, based on job duties and salary, is “exempt” from receiving overtime pay.
Non-exempt employee: An employee who, based on job duties and salary, 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 over 40 hours in a workweek.)
When determining exempt vs non-exempt, you need to consider three tests: salary level (with $684 per week the dividing line), salary basis (consistency of pay and hours), and duties (job tasks). For example, an hourly worker doing mostly entry-level tasks is generally considered non-exempt and eligible for overtime pay, whereas salaried managers overseeing the work of others are exempt and not eligible for overtime.
Comparing Exempt vs Non-Exempt Employees
Understanding the differences between exempt and non-exempt is important for your business. Misclassification of your employees and failure to pay them earned overtime pay may subject you to penalties (up to $10,000 in fines or incarceration) and backpay (often double the hourly rate) to all misclassified employees for all overtime hours worked for up to three years. That’s not to mention hundreds of dollars an hour for consulting and documentation prep and damage to your brand reputation.
It’s unwise 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.
3 Tests to Determine Exempt vs Non-Exempt Employee Status
To be considered exempt from overtime, according to the Fair Labor Standards Act (FLSA), an employee must pass three tests—Salary Level, Salary Basis, and Duties. All three of these tests must be met for an employee to be exempt from overtime pay unless exclusions apply.
Salary Level Test: An employee must be paid a minimum of $35,568 per year to be considered exempt.
Salary Basis Test: The employee must be paid a consistent salary based on a standard work schedule.
Duties Test: The employee’s job duties must be executive, administrative, or professional.
If the answer to all three of these is yes, then the job is likely considered exempt, and overtime pay will not be required.
Employees who are paid more than $684 per week or $35,568 per year pass the salary level test to be classified as exempt and ineligible for overtime pay. In contrast, employees who make less than this are considered non-exempt. There are a few exceptions, such as teachers.
Federal law requires that you classify employees as exempt vs non-exempt correctly upon hire.
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. Current professions that are exempt regardless of the three tests are:
Agricultural employees
Union roles
Railroad workers
Learned professions (such as clergy, RNs, and engineers)
Creative professionals (such as actors and writers)
Commission-based sales roles
Highly compensated employees ($107,432+ a year)
Computer professionals
Automobile dealership sales and parts workers
Drivers, loaders, and mechanics
Seasonal and recreational employees
For more detail on these exceptions, see our article on exemptions from minimum wage and overtime rules.
Bottom Line
When it comes to exempt vs non-exempt employee job classifications, it is crucial to ensure you’re paying your workers fairly and abiding 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.
