Defining Terms: Exempt, Non-Exempt, Salary, Hourly

Owning and operating a successful business in today’s economy is no easy task. In addition to the stresses and responsibilities that come from staying in the black financially, business owners also need to know the positions of their employees and the FLSA classification to which they belong. For example, understanding terms like exempt, non-exempt, salary, and hourly 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 on the topic of 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 of 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. Additionally, the roles performed by these employees must pass the Department of Labor’s FLSA Duties Tests.

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 weekly. 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 at a higher rate. 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 from structuring exempt roles into your staffing plan. 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 have the freedom to create employee engagement and retention programs as you see fit. Program terms are totally up to you.

Benefits of Hiring Non-Exempt Employees:

• 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 Employees?

Along with the benefits, there are also drawbacks to employing both exempt and non-exempt varieties of employees. The downsides are outlined below in more detail:

Downsides of Hiring Exempt Employees:

• The inability to earn overtime can be a demotivater 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 by law. If your business requires frequent overtime or commonly struggles, with staffing 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.

How do I Determine the Classification of Roles within My Company?

Luckily, the Department of Labor provides many resources you can use to determine the FLSA classification of roles within your company. Utilizing the FLSA’s Duties Tests and Salary Threshold Tests, you can accurately determine the FLSA classification of a given role.

Bottom Line: Exempt and Non-Exempt Employees Have Pros and Cons

By determining what FLSA classification applies to the roles within your company, you can be prepared to lawfully hire employees before you begin recruiting.

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.