Exempt vs. Non-Exempt Employees: What Are the Differences?
For business owners and HR professionals, few regulatory distinctions are as confusing as the distinction between exempt and non-exempt employees. Getting this wrong wouldn’t just be a paperwork error; it would be a compliance violation that could lead to costly lawsuits, back-pay audits, and fines from the Department of Labour (DOL).
This blog breaks down the legal definitions, salary thresholds, and duty requirements to help you classify your workforce correctly.
What does “exempt” mean?
An exempt employee is a worker who is literally exempt from specific provisions of the FLSA (Fair Labour Standards Act). Most notably, they are not entitled to overtime pay, regardless of how many hours they work in a given week.
To be classified as exempt, an employee generally must meet three specific criteria:
- Salary basis: They are paid a predetermined, fixed salary that is not subject to reduction based on the quality or quantity of work.
- Salary level: They earn at least the minimum salary threshold set by the DOL.
- Duties test: Their primary job duties involve executive, administrative, or professional responsibilities (high-level decision-making).
Key takeaway: Being "salaried" does not automatically make an employee exempt. They must also meet the duties test.
What does “non-exempt” mean?
A non-exempt employee is protected by all FLSA provisions. This means they are entitled to earn at least the federal minimum wage and must be paid overtime (1.5 times their regular rate of pay) for any hours worked beyond 40 in a workweek.
Non-exempt employees are typically paid hourly, but they can be salaried. However, even if a non-exempt employee receives a salary, they are still owed overtime if they work more than 40 hours.
- Payment method: Usually hourly (but can be salaried).
- Protection: Covered by FLSA minimum wage and overtime rules.
- Work type: Often involves more routine, supervised, or physical tasks, though this is a generalisation.
Key takeaway: Paying a non-exempt employee a "salary" does not disqualify them from overtime pay. Unlike exempt employees, you must track actual hours worked for non-exempt staff and pay time-and-a-half for anything over 40 hours, regardless of their payment method.
Exempt vs non-exempt: Side-by-side comparison
Here is a quick reference to distinguish between the exempt and non-exempt employees.
Overtime rules explained
The most significant operational difference between these two groups is overtime. This distinction directly affects payroll budgeting and requires employers to maintain time-tracking systems to ensure non-exempt staff are properly compensated.
For non-exempt employees
The FLSA requires that any non-exempt employee who works more than 40 hours in a fixed, recurring 7-day workweek be compensated at a rate of 1.5 times their regular rate of pay.
- Example: If a non-exempt employee earns $20/hour and works 50 hours, they get $20 for the first 40 hours and $30 for the remaining 10 hours.
- State laws: Some states (like California) have daily overtime rules (e.g., overtime after 8 hours in a day), which supersede federal law if they are more generous to the employee.
For exempt employees
Exempt employees are paid a salary to perform specific duties rather than for the number of hours they spend at a desk. Consequently, they are not entitled to overtime pay, even if they work more than 40 hours per week. The expectation is that they will work as many hours as necessary to complete their assigned tasks.
Fixed compensation: Whether an exempt employee works 35 hours during a slow week or 60 hours during a crunch period, their gross pay remains exactly the same.
The "salary basis" rule: This arrangement works both ways. Employers generally cannot deduct pay if an exempt employee works fewer hours in a day (e.g., leaving early for a doctor's appointment). Reducing pay for partial-day absences can violate the "salary basis" rule, effectively converting the employee to non-exempt status and triggering retroactive overtime liability.
Salary thresholds & job duties
To classify an employee as exempt, you cannot simply rely on their job title or the fact that they receive a paycheck every two weeks. You must strictly apply the FLSA's two-pronged approach: the salary threshold and the duties test.
1. The salary threshold
As of last year's DOL update (effective Jan 1, 2025), the standard salary level for exempt employees increased significantly. Employees generally must earn at least $1,128 per week (equivalent to $58,656 per year) to qualify as exempt.
Note: If an employee earns less than this amount, they are automatically non-exempt, regardless of their job title or duties.
2. The duties test
The employee’s primary duty must fit one of the DOL’s (Department of Labour) exemption categories:
- Executive: Manages the enterprise or a department; directs the work of at least two full-time employees; has authority to hire/fire.
- Administrative: Performs office/non-manual work directly related to management/business operations; exercises discretion and independent judgment on significant matters.
- Professional: Work requires advanced knowledge (usually a degree) in a field of science or learning (e.g., doctors, lawyers, engineers, architects).
- Computer employee: Systems analysts, programmers, software engineers (high-level technical work).
- Outside sales: Primary duty is making sales away from the employer’s place of business.
Common classification mistakes
Determining the correct status for every employee is a complex process where the details matter. And even well-intentioned companies can make these common classification mistakes:
The "salaried" trap
Assuming that because you pay someone a salary, they are automatically exempt is a frequent error. If they perform non-exempt duties or earn below the current federal salary threshold, they are legally considered non-exempt and must be paid overtime.
- Job title vs. reality
Giving someone a title like "office manager" when their actual tasks are clerical (answering phones, filing) rather than managerial will not protect you during an audit. The DOL looks at what the employee actually does day-to-day, not what you call them or what is written in an outdated job description.
- Deducting exempt pay
Improperly deducting pay from an exempt employee for partial-day absences is a major compliance risk. If you reduce their pay for arriving two hours late, you risk jeopardising their exempt status by treating them like an hourly worker, which can invalidate their exemption entirely.
- Misunderstanding "comp time"
Offering non-exempt employees "comp time" (future time off) instead of overtime pay is a common practice that is often non-compliant. In the private sector, this is generally illegal; overtime must be paid in cash at the proper rate in the pay period it was earned.
Legal risks of misclassification
Misclassifying a non-exempt employee as exempt is one of the most expensive mistakes a business can make. Consequences include:
- Back pay: You will owe up to two years of unpaid overtime wages for unintentional errors. If the court determines the violation was "willful," the lookback period extends to three years, significantly increasing the payout.
- Liquidated damages: The court may double the amount of back pay owed as a mandatory penalty. This means that if you owe an employee $10,000 in back wages, you may have to pay them an additional $10,000 in liquidated damages, for a total of $20,000.
- Legal fees: In FLSA lawsuits, the losing employer is typically required to pay the employee’s attorney's fees and court costs, in addition to its own defence costs. These fees can easily exceed the wages actually owed to the employee.
- Tax penalties: Reclassification triggers necessary adjustments to payroll taxes, unemployment insurance, and workers' compensation premiums. This can lead to potential fines and interest charges from both the IRS and state tax authorities for failure to withhold the correct amounts initially.
FAQs
Q: Can I change an employee from exempt to non-exempt?
A: Yes. You can reclassify an employee to non-exempt at any time. However, changing them from non-exempt to exempt requires them to strictly meet the salary and duties tests.
Q: Do non-exempt employees have to be paid hourly?
A: No. You can pay a non-exempt employee a salary, but you must still track their hours and pay overtime if they work over 40 hours.
Q: Are bonuses included in the salary threshold?
A: Nondiscretionary bonuses and incentive payments (including commissions) may satisfy up to 10% of the standard salary level.
Summary for employers
Navigating the divide between exempt and non-exempt statuses requires ongoing maintenance to avoid costly compliance pitfalls. To stay compliant, employers should proactively review all job descriptions to ensure they accurately reflect current duties and audit current salaries against the 2025 thresholds ($58,656/year).
It is also crucial to strictly track hours for any employees who fall into a "grey area" or have been reclassified as non-exempt to prevent inadvertent wage violations. Finally, when in doubt, consult legal counsel; the cost of a preemptive consultation is far lower than the potential cost of a lawsuit or government audit.