What is an exempt employee?

An exempt employee is someone who is not covered by certain labor laws that apply to hourly workers. This means they do not get overtime pay for working more than 40 hours a week and are generally not subject to minimum wage rules. 

Instead, exempt employee rules mention that employees receive a regular salary and are in roles that need specialized skills or responsibilities.

Exempt meaning

The term "exempt" means that employees do not receive overtime pay and are not covered by the minimum wage requirements set by the FLSA. Exempt employees usually have a fixed salary, regardless of how many hours they work each week.

Examples of exempt employees

• General manager
• Business executives
• Executive assistant 
• Human resource manager
• Lawyer
• Software engineer 
• IT specialists
• Marketing associate
• Accountants
• Teacher
• Sales employees and managers

Tax implications for exempt employees

As an exempt employee, you earn a regular salary that falls under federal income tax, as well as any applicable state law and local taxes. You may also qualify for benefits that are deducted before tax, like health insurance and retirement plans, which can reduce your taxable income.

Your employer handles the tax withholding and submits it to the government based on the information you provide on your W-4 form.

What is a non-exempt employee?

Non-exempt employees are individuals protected by wage laws. Employers should pay them at least the federal minimum wage and provide overtime pay for hours worked beyond 40 per week.

Non-exempt employees can be hourly workers, salaried employees, or paid by commission.

Non-exempt meaning

Non-exempt means that FLSA rules cover employees. They should receive minimum wage and overtime pay if they work more than 40 hours a week.

Examples of non-exempt employees

• Electricians
• Cooks
• Food servers
• Carpenters
• Retail workers (e.g., cashiers)
• Receptionist
• Call center agents
• Mechanics
• Plumbers

Tax implications for non-exempt employees

Non-exempt employees pay taxes based on their total income, including overtime pay. The  Internal Revenue Service (IRS) taxes overtime hours at the same rate as regular income.

Both exempt (salaried) and non-exempt (hourly) employees are subject to the same tax rules based on their income levels.

Wage and labor laws for exempt vs non-exempt employees

Wage and labor laws determine how employees are classified and compensated. The FLSA outlines national regulations concerning pay standards, overtime eligibility, documentation practices, and rules for employing minors.

Some states and local areas have laws that can offer higher wages or different overtime rules. Therefore, business owners can choose to follow the law that benefits their employees the most.

Overtime for exempt employees

Exempt employees generally do not receive overtime pay. The U.S. Department of Labor (DOL) defines exempt employees as those who meet specific criteria, including a salary threshold, job titles, and job duties.

For example, most exempt professional employees are paid a salary and perform executive, administrative, or professional tasks. 

However, the FLSA’s new rule states that if an exempt employee earns less than $35,568 per year (or $684 weekly), they should get overtime pay, despite their job duties.

Overtime for non-exempt employees

The FLSA entitles non-exempt employees to receive overtime pay. You should pay them at least one and a half times their regular hourly rate for any hours worked over 40 in a week. 

If a non-exempt employee’s pay isn’t hourly, you calculate their hourly rate by dividing their total weekly compensation by the number of hours worked.

Plus, note that paid leave, such as vacation or sick days, does not count toward the 40 hours for overtime provisions or calculations unless the employee worked on those days.

Comparison: exempt vs non-exempt employee

Exempt employees receive a fixed salary, while non-exempt employees are usually paid hourly or based on other pay structures and receive overtime pay. 

Here are a few more differences between exempt vs non-exempt employees:

How to classify employees as exempt or non-exempt

To classify employees, you need to understand the key differences between exempt and non-exempt status.

Exempt employees generally hold executive, administrative, or professional roles and receive a fixed salary. Non-exempt employees are paid on an hourly basis and the eligibility for overtime pay for any hours worked beyond 40 in a week.

Moreover, you can use the FLSA guidelines as a starting point – it requires that exempt employees earn at least $684 per week. Even if an employee receives a salary, the classification as non-exempt can apply if they earn less than this amount or if their primary duty doesn't meet the FLSA exemption criteria.

Consequences for misclassification

Misclassifying employees can lead to serious consequences. If you label an employee as exempt when they are non-exempt, you could face fines, penalties, and lawsuits for unpaid overtime. 

Additionally, you'll incur costs to correct your employee classification and may need to compensate employees for any missed overtime pay.

Can you reclassify an employee?

Yes, you can reclassify employees. A reclassified employee might feel unhappy if they lose benefits like overtime pay or if they perceive a change in their job status.

Before reclassifying, explain the reasons and make sure employees understand that the change complies with the law and is not a reflection of their performance. Clear communication can help maintain morale and avoid misunderstandings.

FAQs about exempt vs non-exempt employees 

Is it better to be exempt or non-exempt? 

The choice between exempt and non-exempt status varies based on individual preferences and job responsibilities. Exempt employees benefit from a fixed salary and greater independence in their roles, while non-exempt employees receive overtime compensation and often have a more structured work schedule.

Can highly compensated employees (HCEs) ever be eligible for overtime pay?

Employees classified as highly compensated may qualify for overtime pay if their earnings are calculated on a daily rate instead of a salaried basis. The crucial consideration is not just the total compensation but also fulfilling the specific exemption requirements, such as receiving a guaranteed weekly payment and performing certain job duties.

Can a part-time employee be exempt?

Yes, employers can classify part-time employees as exempt if they meet all exemption criteria. The classification depends on job responsibilities and compensation structure, not the number of hours worked.

Are independent contractors exempt or nonexempt? 

Independent contractors are neither exempt nor nonexempt, as these classifications apply to employees under the FLSA. The FLSA does not cover independent contractors and is outside of these employment classifications.

What is the white-collar exemption?

White-collar exemption refers to the exemption for administrative employees, executive employees, or professional roles, typically office-based or managerial positions. This exemption permits employers to categorize these employees as exempt from overtime pay if they meet certain salary thresholds and job criteria.

Conclusion: Streamline your finances with Rho

Understanding the differences between exempt and non-exempt workers helps companies and employees stay compliant with the law. 

By merging exempt and non-exempt employee policies, you may contribute to a positive employee experience while also keeping a clean slate. If you don't have a classification process in place, Rho can help!

With Rho’s capabilities, finance teams can create and assign specific approval rules for reimbursements, such as requiring receipts for expenses over a certain amount or detailed transaction breakdowns.

This streamlines reimbursement processing reduces the time spent chasing documentation, and ensures more efficient and compliant expense management. 

Curious about how this can help your organization? Book a call with a Rho expert today!

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Rho is a fintech company, not a bank. Checking and card services provided by Webster Bank, N.A., member FDIC; savings account services provided by American Deposit Management Co. and its partner banks.

Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.

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