Exempt vs. Nonexempt

Exempt and nonexempt workers: You’ve likely seen these terms when filling out application, noticed them in job postings and heard them used in conversation. But if you’re like most people, the difference between the two categories is fuzzy at best. Do you even know what exempt workers are exempt from?

Let’s start at the beginning. The Fair Labor Standards Act (FLSA) requires that employers classify jobs as either exempt or non-exempt. Non-exempt employees are covered by FLSA rules and regulations, and exempt employees are not.

Different Compensation Structures. Exempt positions are excluded from minimum wage, overtime regulations, and other rights and protections afforded nonexempt workers. Employers must pay a salary rather than an hourly wage for a position for it to be exempt. Typically, only executive, supervisory, professional or outside sales positions are exempt positions.

Nonexempt employees, as the term implies, are not exempt from FLSA requirements. Employees who fall within this category must be paid at least the federal minimum wage for each hour worked and given overtime pay of not less than one and a half times their hourly rate for any hours worked beyond 40 each week.

Tax Liability Differences. Aside from the various tax brackets into which we all fall, based on our level of income, there is no difference in how exempt and nonexempt employees are taxed. For both categories of workers, all pay is “earned income” and therefore taxable to the wage earner based upon tax bracket. Income is income; it doesn’t matter if it’s earned by the hour or as an annual salary.

Overtime Implications. Exempt employees are generally expected to devote the number of hours necessary to complete their respective tasks, regardless of whether that requires 35 hours per week or 55 hours per week. Their compensation doesn’t change based on actual hours expended. Exempt employees aren’t paid extra for putting in more than 40 hours per week; they’re paid for getting the job done. On the other hand, nonexempt employees must be paid overtime if they work more than 40 hours per workweek, so it often behooves employers to keep nonexempt employees’ hours down.

Workers’ Rights and Benefits Implications? Generally speaking, nonexempt employees receive more protection under federal law than exempt employees. However, most employers treat their exempt and nonexempt employees in a similar manner. The primary pieces of federal legislation that apply to the workplace are the right to a safe and healthful work environment, the right to equal employment opportunities, and the rights provided under the Family and Medical Leave Act as well as federal child labor laws. These laws apply to exempt and nonexempt workers alike.

Unemployment Implications. Although unemployment benefits vary from state to state, generally both exempt and nonexempt employees can collect unemployment benefits. But to be sure just what benefits include, you should check with your state’s Department of Labor.

So Which Is Better? That depends on you. Some workers would rather be employed in nonexempt positions to ensure they’re paid for every hour they work. Others prefer the latitude that comes with salaried positions. For example, most nonexempt employees are going to be held to a more stringent standard regarding things like casual time. Exempt employees can ordinarily spend a reasonable amount of time around the watercooler without incurring the boss’s wrath; nonexempt employees’ time tends be more closely monitored, and designated breaks are only allowed at certain times during the workday.

Generally, exempt employees are paid more than nonexempt employees, because they are expected to complete tasks regardless of the hours required to do them. If staying late or coming in early is required to do the job, exempt employees are frequently expected to do just that. Non-exempt employees typically only work the prescribed number of hours.

This article is intended to be a primer on this issue, but HR laws and regulations can be enormously complex. For more information, visit the Department of Labor’s Web page that addresses these issues.

Paul W. Barada

Leave accrual and time reporting:

The Fair Labor Standards Act (FLSA) requires that non-exempt employees be paid time and a half for time worked over 40 hours in a work week. Among other things, it classifies exempt and non-exempt positions (that is, exempt from the overtime provisions of FLSA) by the types of duties the employee performs and salary threshold.

Employees in exempt positions are paid to do a particular job, not by the number of hours it takes. Employees in non-exempt positions are paid by the hour to do specific duties. As a result, employers account for non-exempt employees’ time in a more systematic fashion. Please consult the appropriate union contract or Personnel Policies for Staff regarding specific application of overtime.

What is the difference between exempt and non-exempt positions for time-keeping purposes?
Employees in non-exempt positions accrue vacation leave and sick leave depending on percentage of appointment and time worked, and/or duration of appointment. They can earn overtime and may be paid for it or take compensatory time. Time off and time worked are recorded to the nearest quarter hour.

Employees in exempt positions also accrue vacation and sick leave; however, they do not earn overtime or compensatory time. Time off and time worked are recorded in whole-day increments for purposes of pay. A “whole day” may be less than eight hours if an employee’s appointment is less than 100% time.


Docking Exempt Employees’ Time:

By definition, exempt workers are paid by salary, which means that they get the same amount of pay per week regardless of how many hours they work in a week. Deducting pay from an exempt employee for absences of less than one day is illegal. You can, however, “dock” an exempt employee’s pay for an absence of a whole day.

If an exempt employee calls in sick and plans on being out for the entire day, you can “dock” his or her pay for the whole day and make up for the loss from a sick or vacation leave plan, if you offer those kinds of benefits.

If you do dock an exempt employee for any reason, other than for a major safety violation, that employee loses their exempt status for that pay period, not just that week. If that occurs, then you will have to pay any overtime to that employee that may be due for that pay period. If you make a habit of “docking” exempt employees for absences of less than one day, you risk losing the exemption completely, which could make you liable for back overtime pay over a longer period of time.

Effective August 23, 2004, the Department of Labor expanded the permitted reasons for docking an exempt employee’s pay to include serious conduct violations, such as sexual harassment or violence in the workplace. The new rules also provide that if an employer makes an improper deduction from an exempt employee’s pay, the employee’s exempt status will remain intact if the employer has a clearly communicated policy, including a complaint mechanism, prohibiting improper pay deductions, reimburses the employee for the improper deduction, and makes a good faith commitment to comply with the rules in the future.


Overtime for exempt employees:

Does the Department of Labor permit employers to compensate exempt salaried employees for overtime on an hourly basis without losing their exempt status? Is this practice permissible? We have chosen to do this to retain good employees.

An employer may choose to pay overtime to FLSA exempt employees. There are no government regulations for this pay practice. The company should, however, document the business case for such a pay practice and establish an internal policy that covers purpose, eligibility, events that trigger overtime pay, etc.

Because the practice is not regulated, employers have flexibility on how they implement an overtime plan for exempt employees. Most organizations don’t start exempt overtime pay immediately after 40 hours worked. Many begin after 45 or sometimes 50 hours per week. Also, employers vary on whether they pay time-and-a-half, straight time, special bonuses, or compensatory time off.

Before putting a plan or policy in place, consult with your General Counsel or outside legal advisor to assure that you’re not doing something that could create legal problems.

Bill Coleman


2 thoughts on “Exempt vs. Nonexempt

  1. Can sick leave and vacation time be different for salaried vs. hourly employees????

  2. Thanks for the great article here.

    Are there any organizations fighting for stronger protections for exempt employees? I’m sure that there are many people working 60 to 80-hour weeks for $35-50k or less. It seems to have become standard for managers to ask employees to come in early and stay very very late during busy periods without offering the flexibility implied by exempt status to take time to rest during less busy work weeks. Right now there seems to be no recourse for employees whose managers abuse the exempt system.

    Thanks again!

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