Exempt vs Non-Exempt Employees: How to Classify Your Employees

Employers must be clear on their exempt and non-exempt employees as this greatly changes the benefits, compensation and regulations around their working hours. Failure to comply can result in hefty penalties, and similar consequences from the Fair Labour Standards Authority (FLSA).

Work classification can be a source for confusion for many employers, which can result in non-compliance. Classifying your employees correctly can make a dramatic difference to your payroll.

What is the Difference Between Exempt and Non-Exempt Employees?

There is a key difference between exempt and non-exempt employees. It’s helpful for employers to understand the correct way to classify their employees.

· Exempt Employees

An exempt employee describes a professional in a higher paid role, otherwise an executive. This applies to certain industries and roles (such as sales), and to those who are exempt from minimum wage and overtime requirements. This means they work until tasks are completed, rather than working within defined hours.

· Non-Exempt Employees

Non-exempt employees must be paid minimum wage and should receive one-and-a-half times pay for anything worked over 40 hours a week.

Who can be an Exempt Employee?

The laws and regulations affecting employment may vary from state to state, and these may have criteria. Firstly, a qualifying employee must earn over the minimum threshold of $35,586 per annum (or $684 per week) to be exempt.

Typically, these positions are ‘white-collar,’ or describe skilled professionals, although exceptions may apply.

Employees often perform one of the following roles:

• STEM – Systems analyst, software engineer, computer programmer or similar.
• Salesperson – Making sales or obtaining contracts and working away from the place of business.
• Administrative – Primary duties include matters of significance, and office-based and non-manual.
• Executive – Primary duty of managing a business, department, or subdivision, with authority to employ or terminate.
• Professional – Specialised work and requires advanced knowledge.

How Do I Compensate an Exempt vs Non-Exempt Employee?

For non-exempt employees, compensation can seem simple, especially as pay is dependent on hours worked. Non-exempt employees simply need to provide a timesheet, or other evidence of hours worked.

Exempt employees, however, must be compensated by a salary rather than a conventional hourly rate of pay. Whilst this can vary from state to state, it is a requirement that employers acknowledge a minimum equivalent weekly salary of $684.

To demonstrate, a brief overview of the laws in two different states – Texas and Oregon – is explored below:

Exempt Employees in Texas:

In Texas, as well as the federal level exemptions, there are some more specific rules.

In Texas, workers can be classed as exempt for overtime only. This means they must be paid the minimum wage for the work they do, but aren’t required to be compensated at a higher rate for hours over the minimum work week. At a federal level wage, any manual work isn’t classified as non-exempt.

In Texas, certain workers can be classed as exempt for overtime only, including:

• railroad workers
• truck drivers
• some agricultural workers
• some seafood workers

The full list of those roles exempt from overtime only can be found here.

There are many stipulations for each area, and lawsuits for overtime pay are frequent in Texas. It is worth using a payroll company to assist in correctly compensating your workforce to ensure ongoing compliance.

Exempt Employees in Oregon

In Oregon, roles typically have higher minimum wages. Employees in Oregon receive no less than the minimum wage of $13.25 per hour within the Portland urban growth boundary, $12 per hour standard, and $11.50 per hour in nonurban counties (as of July 1, 2020) and will continue to increase each year through 2022. Federal minimum wage is only $7.25 per hour and this has not increased since 2009 (as at September 2019).

This does not, however, apply to exempt employees.

Misclassification of Employees

To misclassify an employee either way can result in large amounts of back pay, investigation at state or federal level as well as potential legal action.

If you misclassify your employees as exempt, you could face damage pay for:

• Historic breaks that weren’t provided
• Unpaid overtime
• Interest
• Any other damages, such as state legislated vacation or other paid time off

If you misclassify your employees as non-exempt, you will have to pay:

• The correct wage historically to the point they became exempt
• Damages relating to underpayment

The issue of employee classification, if not properly prioritised, can undermine your operation and open your business to unnecessary penalties and costs. When delivering a smooth payroll provision, especially so that your employees are paid correctly and on time, it helps to partner with an expert like IRIS FMP. Get in touch to find out more.