It might not be terminology you’d hear at the water cooler, but there are two basic types of employees in the workplace—exempt employees and non-exempt employees. What’s the difference? The main thing to understand is that “exempt” means exemption from being paid overtime. However, it’s helpful to have a deeper understanding of what distinguishes an exempt, from a non-exempt employee and what these classifications mean for you and your organization. We’ve combined the best resources on the subject to provide you the most comprehensive guide to understanding the differences in employment statuses.
What is an exempt employee?
An exempt employee is an individual who is exempt from overtime pay. Exempt status is determined by the Fair Labor Standards Act (FLSA); if the employee meets the specific criteria for the exemption—often because they are an executive, administrative, computer, or outside sales employee—then they are not covered by the FLSA and are considered an exempt employee.
Some criteria for exempt status are (as of January 2020):
- Employees are paid a salary (not hourly pay)
- Employees earn at least $684 per week or $35,568 annually (up from $455 per week or $23,660 annually)
- Employees are paid a salary for any week they work
Exempt employees must be paid on a salary basis. There are limited exceptions to this rule. It is up to employer discretion whether to pay for hours worked overtime. Exempt employees that are consistently asked to work overtime may ask to negotiate a raise to compensate for their time. In other cases, employers might create an employee benefits package or offer a spot bonus in lieu of overtime pay.
Types of exempt employees:
The following are examples of an exempt employee as determined by the FLSA and U.S. Department of Labor:
- Executive: CEO, managers, supervisors
- Administrative: human resources, accounting, legal, public relations, compliance, finance
- Outside sales: salespeople, marketers
- Computer: software engineers, programmers, system analysts
- Creative professionals: writers, actors, musicians, artists.
- Professionals: doctors, lawyers, engineers, nurses, teachers.
In addition to the above examples of exempt employees, there are other types of employment that may be exempt from overtime pay such as commissioned employees of retail or service establishments; employees of railroads and air carriers, taxi drivers; announcers, news editors, and chief engineers of broadcasting stations; domestic service workers living at employer’s residence; employees of motion picture theaters; and farmworkers.
What is a non-exempt employee?
A non-exempt employee is an employee that is covered by the FLSA, and therefore qualifies for overtime pay for all hours worked beyond 40 in a work week. The FLSA guarantees that non-exempt employees are paid one and one-half times their normal pay rate for overtime hours. Non-exempt employees can be paid on salary, hourly, or on another basis.
Note: As with exempt employees, you will need to consult the state labor laws where the employee is working to determine the additional requirements.
Types of non-exempt employees
Examples of non-exempt employees include:
- Contractors
- Freelancers
- Interns
- Tipped employees (e.g.: waiters)
- Retail Associates
Non-exempt employees are guaranteed an hourly wage and overtime pay under the FLSA. They must earn at least the federal or state minimum wage for every hour worked.
What qualifies as an exempt employee?
Factors used to determine if an employee is considered exempt include:
- Amount of wages is earned
- Type of work
- Specific responsibilities and job duties
The U.S. Department of Labor updated their terms of requirement in 2020. For your convenience, we’ve included them below:
Executive exemption: For the executive exemption, employees must have a primary duty of managing the enterprise or a department or subdivision of the enterprise. They must customarily and regularly direct the work of at least two employees, and must have the authority to hire or fire, or have authority to make suggestions and recommendations as to the hiring, firing, or changing the status of other employees. Common executive employee roles include CEO, managers, supervisors, and other decision-makers in the company.
Professional exemption: For the professional exemption, employees must have a primary duty of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by prolonged, specialized, intellectual instruction and study, or must specialize in a few other similarly, highly specialized fields, such as teaching, computer analytics, and engineering. Common professional roles include doctors, lawyers, licensed engineers, registered nurses, dentists, architects, teachers and other roles that require advanced education. This can also include creative professionals, such as writers, actors, musicians, journalists, artists and composers.
Administrative exemption: For the administrative exemption, employees must have a primary duty of performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and their primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. Common administrative roles include employees in human resources, accounting, legal, public relations, compliance, finance, payroll and other related roles.
Computer exemption: For the computer exemption, employees must be employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field with job responsibilities that meet the criteria for exemption. Common roles include computer programmers, software engineers and systems analysts.
Outside sales exemption: For the outside sales exemption, employees must have a primary duty of making sales or obtaining orders or contracts. The work must be conducted away from an employer’s place or places of business. This typically applies to all salespeople and marketers.
Highly compensated exemption: Highly compensated employees may be exempt if they perform office or non-manual work and earn an annual salary of $107,432 or higher. To qualify, they must perform at least one of the duties of an exempt executive, administrative, or professional employee.
As you can see, an employee’s exempt or non-exempt status is not determined based on the job title alone. It includes the tasks performed on the job that determine exempt vs. non-exempt employment status. Sometimes, employees must meet certain employment tests regarding their job duties and responsibilities.
Note: It’s important to pay attention to how the state laws where your employee works impact their exempt or non-exempt status. In addition to the Federal Act, many states have their own set of wage requirements and laws, and employers must abide by both federal and state law to stay compliant. For example, California has additional requirements for qualifying as an exempt employee.
Is it better to be an exempt or non-exempt employee?
There are benefits to both exempt and non-exempt employment. As an exempt employee, you have much more flexibility with your time. Employers are often more interested in you completing your work rather than the time it takes to do so. This offers more flexibility and benefits such as longer lunch breaks, paid time off, working remote, etc.
As a non-exempt employee, you have the benefit of being compensated for all your time, particularly if you work overtime. However, you likely won’t be making as much as a salaried exempt employee and won’t have the flexibility of exempt employee status.
For the employer, there are also benefits to both forms of employment. For non-exempt employees, you are guaranteed to pay them only for the hours worked. For exempt employees, there may be hours you pay for where they are not working, such as for lunch breaks or time off. Exempt employees require more from an organization’s budget than non-exempt employees, however, they are often more experienced and can take on more responsibility. There will likely be times when an exempt employee works more than a 40-hour workweek during crunch times for the company. During times like these, it is valuable to have exempt employees who can power through the busy season without the additional requirement of overtime pay.
In the end, it’s up to you. As an employee, you can decide which mode of employment fits your lifestyle, and as an employer, you can decide which type of employee is best suited to the work you need done. Now, you’re equipped with the right information to make that decision on your next opportunity or offer.
