Understanding the Difference Between Exempt and Non-Exempt Employees
A strong and loyal workforce is the most important asset of any company. Dedicated employees are essential for businesses to gain and retain customers. This year might be the year you launch or expand your business, which could entail hiring employees. Before you begin this process, it is important to explore the difference between exempt and non-exempt employment status as it impacts the taxes, benefits and incentives your business will pay. Understanding the rules for both classifications will help you build a staff structure that is best for your company.
What Does Exempt Mean?
The Fair Labor Standards Act (FLSA), enacted in 1938, sets standards for exempt and non-exempt employees. The U.S. Department of Labor (DOL) oversees and regulates laws stemming from this act. This includes provisions for minimum wage, overtime, paid leave and breaks. The technical definition of exempt means to be free from an obligation or liability which, in the case of the FLSA, specifically includes overtime pay.
Employers must correctly classify their employees as exempt or non-exempt, or they run the risk of compliance violations. To determine if an employee should be classified as exempt or non-exempt, employers should consider the job duties performed and not the position title.
What is an Exempt Employee?
Exempt employees earn a salary and are not eligible for minimum wage, overtime and other protections for non-exempt employees. These employees are typically in executive, supervisory, administrative and other professional positions.
Exempt roles are not required to comply with FLSA standards. These employees are expected to complete their job duties for the agreed-upon amount of pay, no matter how much time it takes.
There is one highly unusual exception to the overtime rule for exempt employees. The exception is known as the September 2019 final rule, which went into effect in January 2020. Under this rule, employees who do not earn at least $35,568 a year must be paid overtime, even if they’re classified as exempt, such as a manager or other professional.
What is a Non-Exempt Employee?
Non-exempt employees are individuals who are eligible for the federal minimum wage and overtime pay for working more than 40 hours per week. While most non-exempt roles follow an hourly rate model, it is not uncommon for these employees to earn a salary or commission instead.
Under FLSA overtime rules, employers are responsible for paying their non-exempt employees at least time and a half of their hourly rate for every hour they work over 40 hours per week. In the case of non-exempt employees who are paid on a salary or commission basis, their hourly rate can be calculated by dividing the total pay earned by the total number of hours worked. When performing these calculations, paid leave such as vacation time, sick leave and holidays should not be included unless the employee worked on those days.
If you still have questions about exempt and non-exempt employee status and what employment type is best for your business, the following online resources may help:
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