Understanding the difference between exempt and non-exempt employees is key to paying them the amount that they are entitled to. Businesses that pay overtime classify their employees as either exempt or non-exempt. Employees classified as the former are paid a a minimum of $455 as a salary and are not entitled to be paid for overtime. Those classified as the latter, however, are entitled to receive overtime pay, usually at a rate of 50% more than their regular rate. They are paid either a salary or an hourly wage.
It’s crucial for you to know the difference because if you fail to properly pay the overtime that your employees are entitled to, you are putting yourself at risk for a lawsuit. Employers need to be informed about the rights of their employees with regard to overtime pay, employee status, working hours, and minimum wage as outlined in the Fair Labor Standards Act. So if you do not yet completely understand the difference between exempt and non-exempt employees, it’s about time you find out.
Exempt Employees vs Non-Exempt Employees
Employees are classified as exempt or non-exempt depending on three things: their job duties, the basis of their salary, and their income level. Neither employee classification is higher than the other – it just depends on the needs of each employee. Some people prefer non-exempt positions so they know that they are getting paid for the excess time they put in at work. Some prefer exempt positions so that they have the flexibility of a job with a regular salary.
1 – Job Duties
The positions considered as exempt from overtime are usually executive, supervisory, or professional. The employee’s job title does not make as much of a difference as the duties that they must perform. Let’s take a closer look.
Executives are employees who have the authority to search for, hire, and fire employees. They are able to delegate work to a minimum of two employees in lower roles and take responsibility for planning the work, the process, and the schedules.
People in administrative positions are responsible for administrative tasks – human resources, accounting, and marketing, for instance. The nature of their work involves being discrete and making decisions with regard to important matters within the organization.
Employment positions that are considered professional are those that involve work that is intellectual and skilled. Take, for instance, engineers, lawyers, and even copywriters. People in artistic fields such as animators or producers who require academic training are also considered professionals. Some professionals are considered exempt and some are considered non-exempt, but generally, the more independence and responsibility that the employee carries, the less likely they are to be considered non-exempt. It’s best to take some time to learn whether or not your employees are governed under other labor laws such as truck drivers under the Motor Carriers Act. In such cases, FLSA regulations do not apply.
2 – Salary Level
The salary level of the employee plays a part in whether or not they are considered exempt. Employees who are paid downwards of $23,600 per year are non-exempt, while those who earn more than $100,000 are just about always considered exempt. Those in the middle may go either way depending on other factors.
3 – Salary Basis
Finally, the salary basis is used to consider whether or not an employee is exempt. If an employee receives a guaranteed amount of money regardless of how much they work? If so, they are paid a salary and are usually considered exempt from overtime. They are usually expected to complete their work no matter how long it takes. The point is to get their job done, not work a certain number of hours. Although that is usually the case, it is not always the case. Some salaried employees are considered non-exempt if they meet the other criteria.
Does this make a difference when it comes to taxes?
Exempt and non-exempt employees are taxed in the same manner. They may be under different tax brackets depending on how much they earn each year, but there is otherwise no difference. The amount you paid them is still considered to be “earned income.”
As an employer, it’s important for you to pay your employees correctly. Otherwise, you may find yourself dealing with penalties, fines, and back wages. Spend some time going over FLSA regulations and make sure that you know how each employee is classified. If their position changes, you need to reevaluate and make sure that you change their classification if necessary.
The FLSA requires that employers keep careful records of hours worked by their non-exempt employees. You can make it easier for yourself by using a time-tracking app such as Timeero. This will allow you to keep track of overtime correctly and accurately so you know that you are paying your employees the amount that they are entitled to.