Exempt vs. non-exempt employees: Everything you need to know

If you’re hiring workers for your business, it’s critical to understand the difference between exempt and non-exempt employees. This understanding can help you stay on the right side of labor laws and ensure you pay your employees appropriately. If you misclassify employees, the penalties can be steep and enduring. Here’s a closer look at exempt and non-exempt employees and what the two classifications mean for your small business.

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What does it mean to be an exempt employee?

Exempt employees are typically salaried workers acting in executive, administrative, creative and professional roles. Some computer-based positions are also exempt, such as computer analysts or programmers. Exempt employees are not subject to overtime requirements, meaning you don’t have to pay them more if they work over 40 hours per week.

While the Fair Labor Standards Act (FLSA) does not cover exempt employees, businesses can’t classify all employees as exempt to avoid overtime costs. The employee must earn more than a specific minimum wage per week and fall within a list of job classifications published by the United States Department of Labor (DOL).

To qualify as an exempt employee, the employee must earn the same salary regardless of quantity or quality of work and earn a minimum of $684 weekly or the hourly or annual equivalent. The minimum hourly wage is $27.63. That’s an annual salary of $35,568 per year.

Jobs classified as exempt by definition

According to DOL regulations, the following employee types can be classified as exempt, assuming their pay also meets the minimum salary requirements.

• Executive: Exempt executives are employees who work in a managerial capacity at the organizational, department or subdivision level. They also direct the work of at least two other full-time employees and have the authority to hire or fire employees.
• Administrative: Exempt administrative employees are workers who generally work in an office environment, support the business’s general operations and can make impactful decisions using their own discretion and independent judgment.
• Professional: To qualify as an exempt professional employee, a worker must handle tasks requiring advanced topic knowledge. Their work is primarily intellectual, where they’re consistently using discretion or judgment. These jobs typically require advanced education in a scientific or learning field, such as is needed to become a practicing medical doctor.
• Creative professional employee: An exempt creative employee must perform work that requires innovative, imaginative, original talent in a creative or artistic field.
• Computer employee: An exempt computer employee is a skilled worker, such as a computer programmer, computer systems analyst or software engineer. 
• Outside sales: Exempt outside sales employees generally work away from the company’s offices, obtaining orders for the company’s products or services.
• Highly compensated employees: These exempt employees perform non-manual work, earning at least $107,432 or more annually and generally fall into executive, administrative or professional employment categories.

What is a non-exempt employee?

Non-exempt employees are workers who don’t meet the definition of an exempt employee. Non-exempt workers are usually hourly workers who earn overtime when they work beyond a standard 40-hour workweek. They’re also covered by the minimum wage provisions within the FLSA and must be paid at least the federal minimum wage of $7.25 an hour.

FLSA exemptions don’t apply to workers considered “blue collar,” meaning they perform manual labor or repetitive operations with their hands. Police, firefighters, paramedics and first responders must also be treated as non-exempt employees.

FLSA wage and hour laws

If an employee is non-exempt and protected by the FLSA, the following minimum wage and hourly working laws apply:

• The FLSA minimum wage is $7.25 per hour. A higher minimum wage may apply depending on the worker’s state or city.
• Overtime pay is required once a worker reaches 40 hours in a consecutive seven-day period. Overtime pay must equal one and one-half times the worker’s regular hourly pay rate. There’s no limit to the hours that can be worked for workers who are 16 years of age or older, but they must be paid more for work beyond 40 hours in a given week.
• Employers must display an official poster explaining FLSA protections and maintain a recordkeeping system for hours worked.

The FLSA also includes laws specifically for minors. Child labor laws generally forbid employing young workers in jobs that may be dangerous, and state laws often specify the number of hours per week, days of the week and hours per day a minor between the ages of 14 to 16 years old may work.

Tests to determine exempt vs. non-exempt employees

If you’re looking for a quick test to determine whether an employee is exempt or non-exempt, you’ll need to consider the worker’s compensation and typical duties.

To be classified as exempt, an employee must meet these minimum requirements:

• The employee must earn a minimum salary of at least $684 per week or $455 minimum for certain teaching positions.
• The employee must earn the same amount regardless of the number of hours worked.
• The employee must be responsible for “white collar” job duties, namely executive, administrative, professional, creative or computer duties or teaching at an educational institution.

Note: On September 8, 2023, the Department of Labor proposed a rule to increase the FSLA’s annual salary threshold for exempt employees to $55,068. As such, the above threshold is subject to change based on the outcome of this proposed rule. 

Consequences of misclassification

Trying to skirt paying more by classifying non-eligible employees as exempt is not a good idea. For each violation, employers are subject to fines up to $1,000, plus the worker can claim up to three years of back overtime pay. In addition, if the employee sues the company, the employer must pay court costs and lawyer fees.

The employer may also be subject to a $10,000 criminal penalty if violations are deemed willful. A second willful violation may result in a prison sentence.

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OnPay

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Monthly fee

$40 per month plus $6 per employee

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Rippling

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Via Rippling’s website

Monthly fee

$35 per month + $8 per user

Direct deposit

Yes

3

Gusto

Learn More

Via Gusto’s website

Monthly fee

Starting at $40 plus $6 per month per employee

Direct deposit

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4

SurePayroll

Learn More

Via SurePayroll’s website

Monthly fee

$29.99 per month plus $5 per employee

Direct deposit

Yes

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