Exempt vs. Nonexempt: What's the Difference?

Minimum wage and overtime requirements are established by federal law, under the Fair Labor Standards Act (FLSA). That said, the FLSA has evolved over the years, and what was true at the time of its passage in 1938 differs from what currently stands today.

Even so, one requirement remains the same: Employers must accurately classify their employees according to the style of work they perform. If an employer fails to do so, he or she risks being found guilty of compliance violations.

Being compliant with the FLSA doesn’t only refer to upholding the law on a federal level. It also means abiding by state and local laws.

What does it mean for an employee to be exempt?

If an employee is exempt, employers are not required by law to extend overtime pay to them. However, exempt employees are eligible for benefits and bonuses if you, as an employer, choose to compensate them in that way.

What about nonexempt employees?

Workers who are recognized as nonexempt employees usually receive either hourly wages or salaried pay, depending on the nature of their employment. Nonexempt employees are entitled to not only minimum wage but also overtime pay when they log more than 40 hours in a given workweek. Keep in mind that the workweek is defined as any seven consecutive 24-hour periods. 

What governs minimum wage and overtime rules?

Minimum wage and overtime rules are established by the FLSA. It also sets forth recordkeeping requirements and youth employment standards for workers in both private and public sectors.

Now, some states and local jurisdictions have their own wage and hour laws. If that’s the case in your area, then the FLSA states that you should apply the minimum wage rate or overtime pay that is more favorable to the employee.

How to calculate hourly rates for nonexempt employees

You are required by law to pay nonexempt employees no less than time-and-a-half of their regular pay rate for every hour that they work beyond 40 hours per workweek. If you are not sure how to calculate the hourly rate of overtime pay, simply divide each employee’s total compensation by the number of hours he or she worked. Just don’t include vacation time or sick days in your calculations.

Know the financial limits

For an employee to qualify as an exempt worker, he or she must be paid a salary and earn at least $684 per week — or $35,568 annually. However, upcoming changes could adjust these values to $1,059 per week — or $55,000 annually.

Additionally, these changes could raise the current limit of $107,432 for well-paid employees to $143,988. Ultimately, these figures reflect changes in the labor market, and if all goes as planned, these rates will continue to be updated on a three-year basis.

Keep in mind that pay rates do not determine whether employees are exempt or nonexempt. At the same time, pay rates do dictate workplace timekeeping policies.

For hourly workers, you must have a system for tracking their time and attendance rates to ensure the accuracy of payroll. That said, for salaried employees, timekeeping is far less important unless these workers are further compensated or incentivized for meeting additional goals.

What to do if you need to reclassify employees

There are times when the reclassification of employees is necessary. Just keep in mind that this process can be tricky. For instance, a nonexempt employee who is reclassified as an exempt worker might grapple with the change of no longer being eligible to receive overtime pay.

Similarly, an exempt employee who is reclassified as a nonexempt worker might feel as though they have less prestige in the workplace. Before you reclassify anyone, make sure you explain to each employee how his or her situation will change due to the implications of the law.

Stress to them that the adjustments have nothing to do with their being in the wrong. Instead, introduce them to the FLSA and make use of open communication to prevent a reduction in their overall morale while focusing on the perks of reclassification.

You can also refer to the Department of Labor’s Fair Pay Fact Sheets for help explaining an exempt versus nonexempt status to employees. If need be, reach out to an attorney who is well versed in employment law for guidance.