group of employees standing in group
From overtime pay to tax liabilities, there are several important rules that need to be adhered to depending on each employee's classification. — Getty Images/fizkes

Have you heard of exempt and non-exempt employees, but were unsure of the difference between the two? Whether or not you’ve hired exempt and non-exempt employees, your business will need to follow certain HR and reporting policies and practices to ensure you’re in compliance. Here are the differences between exempt and non-exempt employees as well as general guidelines around overtime, rights and benefits.

[Read: 4 Important Steps to Hiring a New Employee]

Defining exempt and non-exempt employees

Exempt and non-exempt employees are defined as follows:

Exempt employees

Exempt employees are expected to devote the number of hours necessary to complete their tasks, no matter if those tasks require 35 hours or 55 hours per week. And according to The Balance Careers, exempt employees are, at the most basic level, paid a salary (not an hourly wage) and are not entitled to overtime pay.

When it comes to determining if an employee is exempt or non-exempt, the tasks performed on the job rather than the job title alone are what will help make that distinction. According to the Fair Labor Standards Act (FLSA), exempt employees perform executive, administrative or professional duties.

Many states have their own sets of wage requirements and laws, and employers must abide by federal, state and FLSA laws to remain compliant to the laws regarding other worker classifications. Those classifications include interns, independent contractors, temporary employees, volunteers, workers in training and foreign workers.

Non-exempt employees

The Balance Careers site states that non-exempt employees are entitled to overtime pay through the FLSA; however, some states have expanded their overtime pay guidelines. To ensure you’re in compliance with the right guidelines and requirements, check out the Department of Labor rules for your location regarding overtime, rights and benefits, and tax liabilities.

When it comes to determining if an employee is exempt or non-exempt, the tasks performed on the job rather than the job title alone are what will help make that distinction.

Major differences between exempt vs. non-exempt employees

The four major areas where exempt and non-exempt employees differ are as follows:

Overtime

The biggest difference between exempt and non-exempt employees is eligibility for paid overtime. If an employee is considered exempt, employers are not required to pay them overtime. The FLSA requires that employers must pay at least minimum wage for up to 40 hours in a workweek and overtime pay for any additional time unless the employee is an exempt employee.

For non-exempt employees, employers are required to pay one and a half times the employee’s regular rate of pay when they work more than 40 hours in a pay week. Most employees must be paid the federal minimum wage ($7.25 as of 2019) for regular time and at least time and a half for any hours worked over the standard 40 hours. The Balance Careers outlined the new rules governing overtime pay for non-exempt workers going into effect January 1, 2020:

  • The “standard salary level” will be raised from $455 per week to $684 per week, which equates to an annual salary of $35,568 for full-year workers.
  • The annual compensation requirement for “highly compensated employees” will increase from $100,000 per year to $107,432 per year.
  • Employers will be able to use non-discretionary bonuses and incentive payments, including commissions, paid at least annually, to satisfy up to 10% of the standard salary level.

Rights and benefits

According to Monster.com, non-exempt employees generally have more protection than exempt employees under federal law. Most employers, however, treat their exempt and non-exempt employees the same when it comes to ensuring the following:

  • The right to a safe and healthful work environment.
  • The right to equal employment opportunities.
  • Eligibility for the rights provided under the Family and Medical Leave Act (FMLA) and child labor laws.

Tax liabilities

When it comes to tax liabilities, there is no difference in how exempt and non-exempt employees are taxed, other than distinguishing the tax bracket they fall into based on their income levels. For both categories, all pay is “earned income” and therefore taxable to the wage earner based upon their tax bracket.

[Read: Ready to Start Collecting Sales Tax? Here's What You Need to Know]

Unemployment implications

Unemployment benefits vary according to each state’s regulations; however, both exempt and non-exempt employees can collect unemployment benefits.

Whether you hire exempt or non-exempt employees, business owners and entrepreneurs should speak with an HR or tax professional to clarify their obligations for both employment types, especially regarding overtime guidelines and the rights and benefits each employment category is entitled to.

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Published December 11, 2019