Understanding the difference between exempt and nonexempt employees can be confusing. For employers, clearly classifying an employee as either/or is important to do as early as possible in the hiring process to avoid any claims and lawsuits.
Hourly Vs. Salary
The terms, “Exempt” and “Nonexempt” are often substituted by “Hourly” and “Salary.” Unfortunately, these terms are not interchangeable and should not be substituted as ways to classify. Why? Read on.
Nonexempt Vs. Exempt
The Fair Labor Standards Act (FLSA) is a law that protects employees from unfair and uncompliant treatment in the workplace, including standards on minimum wage, leave of absences, overtime, record keeping, hours worked, and more. The FLSA also divides the classification of employees into two different categories, dependent on how these employees get paid and what type of work they do.
Please note – this is a federal statute and various states may have additional requirements regarding OT and how much a salaried employee must be paid. Please check your state employee laws for further information.
Category one: Nonexempt Employee
A nonexempt employee is defined as an employee that is not exempt from FLSA Requirements. Employees in this category must be paid at least the federal minimum wage for each hour worked and given overtime pay (time and a half) of their hourly rate for any hours worked over 40 hours a week.
If nonexempt employees are treated as exempt employees, or whose “off-the-clock” hours are not properly recorded and compensated, they may file FLSA overtime claims with the U.S. Department of Labor against their employer.
Nonexempt employees can be paid on a salary basis, and that does not make them exempt. Therefore, using the term “hourly” to describe a nonexempt employee is not entirely descriptive. (However, majority of workers who are nonexempt work at an hourly wage).
Category two: Exempt Employee
Exempt employees are not granted protections under the FLSA and are not entitled to overtime pay. Certain jobs are considered exempt under the law, including but not limited to, outside sales staff and airline employees. An individual may be classified as an exempt employee if he/she meets the following three criteria:
Exempt Job Duties Test
Even if the employee meets the salary requirements (level and basis) for exempt status, he/she must also meet the Duties Test, which concerns the type of work an employee performs. Exempt employees typically perform high-level duties with respect to the company’s overall operations. The FLSA further breaks down the job duties test into three categories: Executive, Professional, and Administrative.
This category includes individuals who carry the job functions of lawyers, teachers, architects, registered nurses, and any work requiring advanced education or training.
This category includes human resource staff, public relations professionals, and those in payroll and accounting professions.
Consequences of Misclassification
Always keep in mind the differences between exempt and nonexempt status during your hiring process! Misclassification of nonexempt employees often leads to owing backpay for overtime work that was wrongfully unpaid. Other expenses such as payment of unpaid back taxes, interests and fines on those taxes, other statutory penalties, as well as attorney fees if claims are made against you may also be owed. Please remember to check with laws specific to your state as they may differ.
The sooner you identify the proper classification of your employees, the better!
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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.