Learn about exempt and nonexempt employees

Understanding and correctly classifying employees as exempt or nonexempt is a critical responsibility for employers. Proper classification is essential to ensure compliance with the Fair Labor Standards Act (FLSA), which governs crucial aspects of labor such as minimum wage, overtime pay, and recordkeeping requirements. Misclassification can lead to significant legal and financial repercussions, including hefty fines, backpay liabilities, and potential lawsuits. Accurate classification helps maintain fair labor practices and ensures that employees receive the compensation and protections they are entitled to. This blog will delve into the nuanced definitions, provide real-world examples, and detail regulations surrounding exempt and nonexempt employees. By understanding these classifications, your organization can better navigate the complexities of labor law, promote fair workplace practices, and avoid the pitfalls of non-compliance.

What is an Exempt Employee?

An exempt employee is not entitled to overtime pay under the FLSA. Exempt employees are typically paid on a salary basis and must perform specific job duties under categories such as executive, administrative, or professional roles. To qualify as exempt, an employee must meet both the salary threshold set by the FLSA, which is currently $844 per week, and the duties test provided by the Department of Labor (DOL) that involves managing others, exercising discretion and independent judgment, or possessing advanced knowledge in a field of science or learning.

What does “exempt” mean?

In its raw form, “exempt” means “free or released from some liability or requirement to which others are subject.” In the context of employee classification, “exempt” is utilized to indicate that an exempt employee is not subject to certain legal obligations, such as overtime pay, under the FLSA.

What is an example of an Exempt Employee?

Although not limited to, here are some common examples of exempt employees:

• Executives: CEOs and managers who direct the operations of a business or a significant department.
• Administrative Employees: Managers or financial analysts who perform non-manual work related to business operations.
• Professionals: Doctors, lawyers, and teachers engaged in work requiring advanced knowledge.
• Computer Employees: Software engineers and systems analysts who perform high-level tasks.
• Outside Sales Employees: Sales personnel who regularly work away from the employer’s place of business selling products or services.

What is a nonexempt employee?

A nonexempt employee is entitled to FLSA requirements, including the federal minimum wage and overtime pay. Nonexempt employees typically earn hourly wages, but they may sometimes be paid a salary. The FLSA requires nonexempt employees to be paid at least the federal minimum wage for hours worked and to be paid at least one and a half (1.5) times their regular rate for hours worked beyond 40 in a workweek. State and local law may dictate otherwise, so it is of the utmost importance to always review your organization’s state and local guidance.

What is an example of a nonexempt employee?

Although not limited to, here are some common examples of nonexempt employees:

• Retail Workers: Cashiers and sales associates who typically work hourly shifts.
• Hospitality Staff: Waitstaff and hotel clerks who often work irregular hours.
• Administrative Assistants: They perform clerical tasks and support roles within an organization.
• Customer Service Representatives: CSRs who handle customer inquiries and issues.
• Manufacturing Workers: Assembly line workers and machine operators who work in production.

Wage and labor laws

Labor laws provide the legal guidelines for employers to pay their employees, including wage and hour laws. The DOL oversees and regulates these laws under the FLSA, which include provisions for minimum wage, overtime, paid leave, and breaks. Some state and local jurisdictions have their own wage and hour laws, in which the DOL states that employers must apply the minimum wage or overtime rate most favorable to the employee. One of the most widely known and referenced labor laws concerning exempt and nonexempt employees is overtime pay. We will take a deeper dive into the prior and most updated FLSA overtime regulations at the posting date of this blog post.

FLSA Overtime rule

The revised Final Rule on overtime was introduced in the spring 2024, a gradual adjustment to the salary threshold determining overtime eligibility. Before the Final Rule, exempt employees were considered exempt from receiving overtime pay because they:

• make at least twice the minimum wage in their area;
• are paid on a salary basis of not less than $684 per week

Under the new Final Rule, the salary threshold will change in phases:

• Beginning July 1, 2024, The annual salary-level threshold for salaried employees will rise from $35,568 annually ($684 per week) to $43,888 annually ($844 per week). The highly compensated employee’s total annual compensation level will also increase from its current $107,432 per year to $132,964 per year.
• Come January 1, 2025, this threshold will further increase to $58,656 annually ($1,128 per week), an increase of nearly 65 percent. For highly compensated employees, the threshold will increase to $151,164 per year.
• Starting July 1, 2027, salary thresholds will update every three years, by applying up-to-date wage data to determine new salary levels.

Based on DOL projections, around four million workers will feel the effects of the Final Rule within its initial year of implementation. Of these, one million employees will be affected by the July 2024 adjustment, while the remaining three million will experience the impact of the elevated salary threshold starting January 1, 2025. Developing a strategy for implementing reclassification status will be top of mind for many organizations to maintain compliance.

Consequences of exempt vs. nonexempt misclassification

Incorrectly classifying an employee can result in fines and penalties, including payment for back wages. To avoid the expensive consequences of employee misclassification, your organization can consider the following best practices:

• Review and understand the rules and regulations outlined by the FLSA regarding exempt vs. nonexempt classifications.
• Explore the laws of your state, as several states have their own regulations around this subject.
• Consistently review, update, and use job descriptions to ensure employees performing similar duties are classified consistently.
• Avoid missing key actions by having a process in place for correctly classifying your employees.

Classifying employees correctly and adhering to the applicable federal, state, and local laws and regulations can pose challenges. To avoid common mistakes resulting in misclassification, organizations should ensure they have the right process in place. Doing the extra work upfront may help you remain compliant and avoid time-consuming and costly penalties.

Simplify your employee classification with TCP Software

Determining an employee’s exempt or nonexempt status may not always be cut-and-dry. Additionally, state or local rules must be followed for overtime or minimum wage compensation. Failure to pay overtime to incorrectly classified employees can open your organization to litigation and costly penalties. TCP’s time and attendance solution, TimeClock Plus, can offer support and in this complex area of employment regulation by making it easier to classify employees accordingly.

With TimeClock Plus, employers can monitor which employees are in or close to overtime thresholds. Organizations can also accurately calculate overtime pay, no matter how complex your rules (including federal and state rules for overtime), for accurate and compliant payroll.

TCP also helps organizations start at the source of overtime: employee scheduling. TCP simplifies workforce scheduling with Humanity, a dynamic employee schedule solution that provides AI-powered forecasting, automated scheduling, and a mobile app that employees love, so employers can avoid unnecessary overtime.

Learn more about how TCP can help you overcome costly scheduling obstacles and develop the best approach for your organization by downloading our eBook or speaking to an expert. For the most updated FLSA rules and regulations and how they may apply to your organization and industry, download our eBook about the new Final Rule.

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