Exempt vs. Nonexempt Employees: What’s the Difference?
As a business owner, you are responsible for determining an employee’s classification. They should be classified as either exempt or nonexempt. The Fair Standards Act (FLSA) has requirements that dictate and control each classification.
With that said, employers cannot “assign” classifications based on choice or preference, rather, the FLSA has stipulations that determine an employee’s classification.
Why You Should Know Which Category an Employee Falls Under
It’s important to know each employee’s category to avoid potential legal consequences and misconduct.
The same applies for new hires. Business owners need to assign job titles and descriptions that fall under the exempt or nonexempt category, and they must do so carefully.
If an employee is misclassified, the penalties can be severe. In some cases, they can be retroactive, dating back to the day the employee was hired.
When determining an employee’s classification, there are some regulations you need to follow to prevent any legal ramifications.
What is an Exempt Employee?
Exempt employees are paid a traditional salary. In other words, a predetermined sum of money issued in regular intervals throughout the year.
Employees who are exempt do not receive overtime, nor qualify for minimum wage. In this case, the term “exempt” signifies that the employee will not receive overtime pay.
What is a Nonexempt Employee?
In contrast, nonexempt employees are eligible for minimum wage and overtime. Typically, they are paid hourly for the amount of time worked during a pay period. Employees who are nonexempt are contingent on federal and state standards.
Classifying Exempt vs. Nonexempt Employees
The FLSA states that there are three basic tests employers can perform to determine an employee’s classification. These tests were specifically designed to help employers correctly determine whether an employee is exempt or nonexempt.
The Salary Basis Test
If an employee is earning more than $35,568 annually, they potentially qualify as exempt, however, this is not a guarantee.
The Salary Level Test
Employees who receive a minimum compensation, regardless of the hours they’ve worked, qualify as exempt. Again, this is not guaranteed.
The Duties Test
If an employee meets the requirements specified in tests one and two, they must complete an exempt job task. The duties of an exempt job may include:
- Exempt professional obligations
- Exempt executive obligations
- Exempt administrative obligations
For an employee to be “exempt”, they are required to meet the standards of all tests. Prior to determining an employee’s classification, the employer should consult with their legal advisor. After all, effectively applying the results of these tests can be a complicated process.
In some cases, there are exemptions to these rules by industry, pay structure, or profession. The Department of Labor can provide additional insight into these exemptions.
It’s possible to determine an employee’s classification by their salary level, salary basis, and job responsibilities.
Exempt Employees: The Pros and Cons
For the employer, hiring a candidate who classifies as exempt can demand a certain performance level while maintaining a static budget.
Having said that, exempt employees often cost more than those who are nonexempt. This is because they are expected to perform their duties with discretion and discernment.
When hiring an exempt employee, some of the most crucial benefits include:
- Eligibility benefits
- Paycheck stability
- Standard work hours
Exempt employees aren’t as flexible as nonexempt employees and they’re ineligible for overtime, regardless of the hours they work on a weekly basis.
Nonexempt Employees: The Pros and Cons
Nonexempt employees can provide more flexibility for employers. You can schedule them in accordance with your company’s needs.
While there are benefits to hiring nonexempt employees, there are a few drawbacks, one of which being overtime pay; this applies to employees who work over 40 hours a week.
Since they’re eligible for overtime, you need to monitor their hours to ensure they are receiving accurate compensation.
Conclusively, nonexempt employees have more flexibility, however, individuals who work over 40 hours per week must be paid overtime.
What to Consider When Hiring Exempt or Nonexempt Employees
During the process of creating job titles for your employees, keep in mind which classification will be more beneficial to your business. Carefully review the tasks you need completed and the type of compensation you’ll pay – salary or hourly.
A select number of jobs are legally required to be exempt. For positions that are legally modifiable to fit either category, business owners must take it upon themselves to decide which benefits their company more – flexibility or proficiency.
An hourly-wage employee who is nonexempt grants business owners the ability to adjust their weekly hours to align with the demand. For example, an employer may schedule 20 hours for one week, then 30 hours for the following week.
Although there is an additional cost, a nonexempt employee repairs the cost of labor. Overall, nonexempt employees are more suitable for temporary or hourly work.
Exempt employees, on the other hand, are better candidates for long-term positions that contain professional or administrative duties.
Employers – Get Familiar with the FLSA
The Fair Labor Standards Act is a United States labor law that establishes the right to a minimum wage and overtime pay for individuals who work more than 40 hours per week.
Familiarize yourself with the FLSA to ensure your understanding of job descriptions and their applicability of classifications. Business owners often make destructive errors when designing a job that qualifies as exempt.
This is a common mistake that could potentially lead to an employee taking legal action, and they can utilize the FLSA to support their claims. To avoid this scenario altogether, examine the primary elements of the FLSA.
You can refer to a human resources counsel to analyze job descriptions and steer your business away from legal ramifications.
Which Classification Works Best for You?
Exempt and nonexempt employees each have their own set of benefits and drawbacks. The classification that best fits your business depends on its individual needs.
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