Owning and operating a successful business in today’s economy is no easy task. In addition to the day-to-day stresses and responsibilities of simply keeping your company afloat, business owners need to understand how to categorize their employees based on federal and state labor laws and regulations. For example, understanding terms like exempt, non-exempt, and salary-hourly employees are imperative to being successful as a business owner.
By correctly classifying your employees, you can determine the compensation and overtime rules that apply to them. Your business may suffer penalties if you fail to adhere to the proper compensation and overtime standards. Thankfully, the information outlined below will go over all this and more pertaining to employment terms:
What is an Exempt Employee?
In short, exempt employees are not entitled to overtime pay per the Fair Labor Standards Act (FLSA). Instead, exempt employees receive a salary and are expected to complete the tasks assigned to them, regardless if it takes them 30 or 50 hours. Additionally, exempt employees are not entitled to the FLSA protections that are afforded to non-exempt employees. Employees must earn a salary base of less than $684 weekly or $35,568 annually to be considered exempt employees.
What is a Non-Exempt Employee?
All non-exempt employees must be paid overtime at least 1.5 times their hourly rate for any hours they work beyond the threshold of 40 hours in a given week. As the name suggests, they are not exempt from the above FLSA regulations.
The federal minimum wage is $7.25 per hour for non-exempt employees. However, some states with a higher cost of living set their minimum wages higher. A non-exempt employee can either be paid a salary, hourly wage, or work on commission. However, they are most often paid hourly. This usually includes shift workers, staff, and contractors.
What About Salary Compensation?
Employees on salary payment receive the same salary no matter how many hours they work. Salaries for exempt employees must always be paid on a salary basis. Non-exempt employees are either paid a salary based on a fixed number of hours or a fluctuating workweek.
Non-exempt salaried employees are still entitled to overtime pay in accordance with federal and state laws. A salary is a great option for a business that works regular hours that don’t typically deviate. It can be a good way to create a budget and stick to it in terms of paying employees.
How Does Hourly Pay Work?
Employees who are paid hourly are paid a set amount per each hour of work they perform. Due to the method of payment, such individuals are generally not exempt from the FLSA overtime requirements and are classified as non-exempt. In addition, computer professionals can be paid hourly, as can teachers, lawyers, and physicians who are exempt under the professional exemption. In reality, many types of jobs can fall under the hourly category.
This payment type can have many advantages for employees but can also come with drawbacks, mainly being that an hourly employee will not be compensated if they are unable to work (outside of vacation or sick paid leave days), while salary employees can miss work for personal reasons and in essence make it up by working more the next week (depending on companies regulations).
What Are The Benefits of Working with an Exempt Vs Non-Exempt Employee?
Several benefits can come with opting for exempt employees over the non-exempt variety. They are outlined in more detail below:
Benefits of Hiring Exempt Employees:
You do not have to pay overtime. So the number of hours they work for you won’t have any effect on the pay they receive.
You do not have to worry about FLSA compliance. You are also not subject to any consequences for non-compliance since employees are not subject to the act.
You can predict and schedule your business budget better because employees will work only the hours they are being paid for, even though you would pay for overtime.
Overtime can motivate employees to do more. In fact, you may not even need an extra overtime benefit, which can cost you too much.
What Are The Downsides to Employing Exempt Employees vs Non-Exempt Varieties?
Along with the benefits, there are also drawbacks of employing both exempt and non-exempt varieties of employees. The downsides are outlined below in more detail:
Downsides of Hiring Exempt Employees:
Overtime can be a motivation for employees, especially if your company regularly requires overtime activities.
Most exempt employees are skilled and highly experienced, which is a good thing generally. However, as a result of their skill level, they are more expensive both to hire and then retain.
Downsides of Hiring Non-Exempt Employees:
You must pay for overtime. If your business requires frequent over time this can become a financial burden and negatively impact your bottom line.
Failure to adhere to FLSA standards can result in some serious penalties that can further impact your business financially.
Bottom Line: Exempt and Non-exempt Employees Have Pros and Cons
Ideally, you will determine what classification best meets your individual business’s needs and preferences before you set out to hire employees.
This will help you avoid having to make significant changes once employees are hired, which can result in all sorts of additional problems and headaches. To avoid fines, ensure compatibility with all laws, and retain the right employees for the job, you need to understand what type of employee best fits your needs as a company and then go from there.