How to Classify Exempt and Non-Exempt Employees Correctly

How to Classify Exempt and Non-Exempt Employees Correctly

When your company hires a new employee, he or she will fall into the category of exempt or non-exempt in most cases. While several differences exist between the two, the biggest one is the qualification for overtime pay. Exempt employees do not receive pay for any hours worked over 40 in one week while non-exempt employees do receive payment for overtime. We discuss other differences between exempt vs. non-exempt employees below.

Exempt Employees

The Fair Labor Standards Act (FLSA) set federal regulations in place that determined which workers do and do not receive overtime pay. Additionally, several states have set independent legislation even more stringent than that of the FLSA.

To qualify as an exempt employee, employees must hold a classification of salaried instead of hourly. This means they receive a set amount per paycheck regardless of hours worked. This may be less than 40 hours per week, or it could be more. In positions that routinely require more than 40 hours a week, some companies choose to offer extra incentives in lieu of overtime pay such as more paid vacation.

Exempt employees must also perform duties in one of these broad categories:

Administrative

The work of these employees supports the main activities of the business. Common examples include administrative support, marketing, accounting, payroll, and human resources. The positions are not clerical and require the employee to exercise discretion and sound judgment to make important decisions on behalf of the company.

Executive

Someone in an executive position would supervise at least two employees. He or she has the authority to assign tasks as well as hire and fire employees.

Professional

A professional position requires a high level of skill and expertise. Some examples include architects, journalists, and lawyers.  

In addition to having primary duties in one of the above categories, exempt employees must earn a minimum of $23,660 per year. This averages out to $455 per week.

Non-Exempt Employees

The FLSA guarantees overtime pay to employees who work more than 40 hours per week. They must receive 1.5 times their usual hourly rate for all overtime hours. Additionally, non-exempt employees must receive at least the federal minimum wage for all hours worked up to 40 in a single week. As of 2019, the federal minimum wage was $7.25 per hour.

However, several states have their own regulations than trump federal-level regulations when it comes to overtime pay and minimum wage. Every business owner must know and abide by the state and/or federal regulations when it comes to employee compensation.

Contact Us for Additional Clarification or Help with Payroll

At Palmetto Payroll, we understand that keeping track of exempt vs. non-exempt employees can be challenging. We recommend that you classify each new worker when he or she formally accepts the job and proceed under the exempt or non-exempt rules from that point forward.

Like many small business owners, you may soon get to the point where payroll becomes too much to manage. You have so many other obligations to attend to and just don’t have time to keep up with all the federal and state regulations you must follow. We invite you to review our services now and schedule a consultation so we can be there for you as your company grows.