Employees can be classified into two main categories when hired, either as exempt or nonexempt employees. The key difference between exempt and nonexempt employees has to do with overtime pay, and failing to classify employees correctly can result in noncompliance penalties that can be costly. In this guide, we’ll provide a detailed overview of exempt vs. nonexempt employees, covering key differences, whether salaries and part-time employees are considered exempt or nonexempt, fines and violations for misclassifying employees, and more.
Key Differences Between an Exempt and Nonexempt Employee
When you hire an employee, it’s important to ensure they’re classified correctly when they’re hired. That’s because exempt vs. nonexempt employees are treated differently under the Fair Labor Standards Act (FLSA). The FLSA is a federal law in the United States that established various labor standards to protect workers, with key provisions like setting a federal minimum wage, entitling certain workers to overtime pay, establishing child labor restrictions, and implementing recordkeeping requirements. To regulate overtime pay and minimum wage, the FLSA created two employee classifications: exempt and nonexempt employees. Let’s take a deeper look at the key differences below.
What Is an Exempt Employee?
An exempt employee is a classification under the Fair Labor Standards Act, which exempts certain types of workers from certain provisions, such as those related to minimum wage, overtime pay, and other protections that non-exempt employees enjoy. To be classified as an exempt employee, the Department of Labor created a duties test outlining the criteria to be met. This duties test states that an exempt employee must earn a salary above a certain threshold, which is set at $35,568 per year or $684 per week, and work in an administrative, computer, executive, outside sales or professional field.
So, are salaried employees exempt? In most cases, yes, as long as they earn a salary above a specified level and work in an executive, administrative, professional, computer or outside sales role.
What Is a Nonexempt Employee?
A nonexempt employee is another classification under the FLSA that entitles these classified workers to certain protections provided by the FLSA. These protections include provisions like:
- Minimum wage: Nonexempt employees must earn at least the federal minimum wage or their applicable state minimum wage, whichever is higher.
- Overtime pay: Nonexempt employees are eligible for overtime pay for any hours worked over a 40-hour workweek. In most cases, overtime pay is set to the rate of one-and-a-half times their regular pay rate.
- Recordkeeping: Employers must maintain accurate records that record nonexempt employee’s hours worked, wages earned and other relevant information.
To be classified as a nonexempt employee, workers must meet the criteria for exemption under the FLSA. For many, you might be wondering, “Are part-time employees exempt or nonexempt?” While it may seem part-time employees are nonexempt, they can be classified as either. Hours worked isn’t a factor considered when classifying an employee. If a part-time employee meets the criteria for exempt employees, they can be classified as exempt.
Salary vs. Hourly Pay
When classifying exempt vs. nonexempt employees, the wages they earn, whether through a salary or hourly pay, may influence the requirements a business has to follow. Organizations with nonexempt employees must follow strict recordkeeping requirements, such as tracking time and attendance and ensuring payroll records are accurate and up to date.
Salaried Nonexempt Employees
Not every salaried employee will be classified as an exempt employee. One of the key deciding factors of whether an employee is exempt or not has to do with wages earned. If a salaried employee doesn’t pass the duties test, where they’re required to earn at least $35,568 per year (or $684 per week), they must be classified as a nonexempt employee.
Employee Misclassification Can Result in Fines
The Fair Labor Standards Act imposes serious consequences on employers who fail to accurately classify employees. Failing to comply with FLSA regulations can result in hefty fines that not only impact your bottom line but can also tarnish your reputation. Ensuring compliance through the accurate classification of employees is essential. Below are some fines and other penalties an employer can face for misclassifying exempt vs. nonexempt employees.
Wage Law Violations
There are various wage law violations an employer may be subject to for the misclassification of exempt and nonexempt employees. For example, classifying an employee as exempt when they fail to meet the required minimum salary or they’re in a role that does not pass the duties test can result in a misclassification and various fines. Misclassifying nonexempt employees or violating wage laws by failing to pay overtime compensation for hours worked over 40 hours or meeting the federal or state minimum wage can result in fines. Under the FLSA, failing to pay minimum wage can result in civil penalties of up to $1,000 for each violation.
Additionally, each state has its own wage law violations. When looking at CA exempt vs. nonexempt employees, for example, California requires nonexempt workers to have meal and rest breaks, with one unpaid 30-minute break if an employee works more than five hours in one day. Failing to provide meal and rest breaks can result in penalties and fines.
Tax Withholding Violations
Misclassifying employees can also result in tax withholding violations, resulting in penalties and fines. Incorrectly classifying an employee as exempt can lead to tax withholding errors, as exempt employees may have different tax treatment compared to nonexempt employees, particularly payroll taxes like Social Security and Medicare taxes. Enlisting the help of tax withholding compliance solutions can help ensure employees are accurately classified and the appropriate taxes are withheld.
I-9 Violations
While the misclassification of employees might not directly lead to I-9 violations, as exempt and nonexempt status relates more to wage and hour laws rather than employment eligibility, failing to maintain I-9 Forms when onboarding an exempt or nonexempt employee can lead to I-9 violations. Form I-9 is used to determine the work authorization status of employees, ensuring employers employ workers who are eligible to work in the United States. Maintaining accurate records is crucial, and I-9 administration services can reduce errors like missing data and ensure federal compliance.
Unemployment Insurance Shortfalls
Misclassifying employees can also result in unemployment insurance shortfalls. For example, if an exempt employee is misclassified, their unemployment benefits could be impacted because their employer may not have been paying their employees the required unemployment insurance taxes. Unemployment management services can assist with a wide range of unemployment-related issues, from remaining compliant with regulatory changes to recovering overpayments and receiving hearings administration.
Other Potential Consequences
You can face various other potential consequences if you fail to classify exempt vs. nonexempt employees correctly. Along with legal consequences like penalties and fines and the potential of imprisonment, you may face financial consequences like back pay and overtime compensation and paying liquidated damages. Other consequences include reputational damage, impact on employee relations, and the potential for government audits and investigations.
Hire an Employer Services Company You Can Trust
Enlisting the help of an employer services company like Experian Employer Services can help maintain compliance throughout the employee life cycle, especially when it comes to managing exempt and nonexempt employees. Learn how our services can improve compliance and your bottom line by contacting us today.