Exempt vs. nonexempt employees: Understanding the difference

Learn the differences between exempt vs nonexempt employees

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Labor law is often a complex matter for businesses, with a full roster of local, state, and federal regulations by which they must abide—whether in the United States or abroad. Compliance is even more challenging for companies with staff around the globe, as it requires extra care to ensure they steer clear of legal pitfalls.

In the U.S., companies must clearly understand the differences between exempt versus nonexempt employees as outlined by the Fair Labor Standards Act (FLSA) to ensure they meet their legal obligations. Learning about correct employee classification helps you comply with labor laws such as overtime pay and minimum wage to maintain standards and avoid potential fines or lawsuits.

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What is an exempt employee?

Exempt employees in the U.S. typically earn a set salary, handle tasks that demand high-level judgment and expertise, and work a standard 40-hour week (they might work longer hours in certain weeks, but they’re unable to claim overtime). They often hold managerial roles, make decisions using specialized knowledge, develop strategies, and supervise staff, and they’re usually less closely monitored than employees who earn an hourly wage.

As of 2024, the federal minimum weekly salary for exempt employees in the United States is $684, but the amount varies by state (California's minimum is $1,280, while Colorado's is $1,507).

The FLSA categorizes exempt employees under three main groups:

  • Executive exemption: These individuals manage a department within a business, oversee at least two employees, and are involved in hiring and retention.
  • Professional exemption: These are individuals with degrees, qualifications, or experience in professional fields where they would apply their knowledge and judgment.
  • Administrative exemption: These employees perform office work related to management or general business operations, with high levels of discretion over decision-making.

What is a nonexempt employee?

Nonexempt employees in the U.S. typically earn hourly wages, and their schedules, including overtime and breaks, are closely monitored to ensure proper compensation. Typical roles include customer-facing jobs like cashiers and servers, technical and trade positions such as mechanics and carpenters, and manual labor jobs in settings like warehouses.

The FLSA also sets critical standards for nonexempt employees in the U.S., including state-specific minimum wages, overtime pay rules, and record-keeping requirements to ensure fair labor practices.

Exempt and nonexempt employees: Key differences

Determining the difference between exempt and nonexempt employees involves understanding several factors, including their eligibility for overtime pay, the nature of their job duties, and their salary levels.

How employers calculate pay

Exempt employees earn a fixed salary regardless of hours worked, ensuring stable pay even with varying weekly hours. Nonexempt employees, paid hourly, see their earnings reflect actual hours worked, including eligibility for overtime beyond the standard workweek.

Employers must pay nonexempt workers at least the federal minimum wage, which, since 2009, has been $7.25, and overtime at a rate of time-and-a-half for hours worked beyond 40 in a week. Unlike their exempt counterparts, nonexempt employees typically record their work hours by clocking in and out at the start and end of their shifts. 

Job duties

Exempt employees typically have roles that require specialized skills or managerial duties, often involving more complex, less defined tasks. In contrast, nonexempt workers usually perform tasks with specific responsibilities under direct supervision.

Flexibility

Exempt employees typically enjoy more work schedule flexibility since their pay isn't tied to the number of hours worked, allowing them to manage how and when they fulfill their duties. This flexibility can lead to improved work-life balance for many.

Professional development

Exempt roles often provide a more straightforward path for career progression within a company, offering greater visibility to top management and more chances to step into leadership positions or further one's career development.

Consequences of misclassifying exempt and nonexempt employees

Business owners and managers must correctly classify all staff in the category that best suits their individual roles. Failing to do so can lead to significant financial and legal consequences and tarnish a company’s reputation.

Financial consequences

Misclassifying an employee as exempt instead of nonexempt can lead to the employer owing back pay for overtime, possibly with interest. Correcting such errors requires adjusting payroll and employment records, which can be a hefty administrative task, potentially affecting benefits and tax withholdings. The Department of Labor also imposes hefty fines on businesses that misclassify employees.

Legal consequences

Multiple misclassified employees might unite to file a class-action lawsuit, seeking back pay, interest, penalties, and retroactive benefits like pension contributions and healthcare. This could also significantly impact a company financially and administratively.

Reputational consequences

Misclassifying employees can erode trust and morale within the workplace. Employees might view mistakes as attempts to bypass labor laws, fostering a hostile work environment. High-profile cases could attract bad publicity across social media and employee review sites, harming the company's reputation. This negative image could make it difficult to attract and retain skilled workers and might lead to customer backlash against businesses perceived as unfair.

Ensure compliance and avoid costly mistakes

The consequences for misclassifying employees can be severe. Some tips to minimize the risk include:

  • Conducting regular audits to review job roles, duties, and compensation of each employee
  • Staying up to date with changes in federal, state and local labor laws
  • Training HR and management teams on how to correctly classify employees
  • Consulting with legal experts specializing in labor law to ensure compliance 

Many organizations turn to global hiring and payroll solutions like Oyster to expand their team across borders while ensuring payroll compliance across countries.

Oyster is a comprehensive global employment platform designed for businesses to hire international talent and manage payroll across over 180 countries, supporting more than 140 currencies. It streamlines payroll, benefits, and tax processes while ensuring compliance with local regulations, all from one integrated solution. Companies can easily integrate Oyster with their current ERP and expense management systems, facilitating a quick and efficient setup.

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About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.

How do you classify exempt and nonexempt employees?

Companies classify employees based on the Fair Labor Standards Act (FLSA) criteria, focusing on job duties, salary level, and decision-making authority. Exempt positions typically require specialized skills or managerial responsibilities, while nonexempt roles normally feature more manual and repetitive work and are eligible for overtime pay.

Can you require exempt employees to work certain hours?

Yes, employers have the authority to dictate specific working hours for exempt employees within the bounds of fairness and labor law. While exempt roles often have schedule flexibility, business requirements can dictate certain hours.

Are independent contractors exempt or nonexempt?

Neither. Independent contractors do not qualify as employees and are exempt from the FLSA's regulations. Their work is guided by the specific terms of their contracts rather than the employment laws that categorize employee roles.

Can a part-time employee be exempt?

Part-time employees qualify for exempt status if they meet specific criteria such as performing executive, professional, or administrative duties and earning at least the FLSA's minimum salary requirement. The role's nature and salary, not the number of hours worked, determine whether employees are exempt or nonexempt.

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