There are a number of terms in the employment world you must learn to understand in order to navigate in it. If you want to offer the best deals to your employees or you want to sign a good employment contract that doesn’t include surprises, one of the most crucial terms to understand are the concepts of exempt and non-exempt workers.

The terms are only separated by a prefix but it could mean a big difference in what you take home from the work you do. So, let’s look at what exempt and non-exempt employees are all about and what the difference means to you and your employment contract.

IT ALL BOILS DOWN TO OVERTIME

Before examining the concept in more detail, the most crucial thing to understand about the two concepts is their difference in overtime payments. The most significant variation is that as an exempt worker, you won’t be entitled to receive paid overtime – hence the name. If you are a non-exempt worker, then you will be entitled to normal paid overtime.

The details of the paid overtime will naturally depend on your country and state legislation. Who determines whether you are an exempt or non-exempt worker will also depend on the legislation. As you’ll see later, there are restrictions on who receives paid overtime and who doesn’t.

So let’s examine the concepts closer to understand what the differences are.

EXEMPT EMPLOYEES

Let’s start with exempt employees because they are the workers who are exempt from overtime payment. If an employee is deemed exempt, the employer won’t be required to pay them overtime. It will essentially be the employer’s discretion whether they pay for overtime hours or not. Therefore, exempt workers might receive overtime payments; they just aren’t legally qualified to receive them automatically.

In some situations, employers might choose to provide other benefits to the employee. These could be extra perks like better healthcare options, free lunches, ability to work from home and so on.

Aside from being exempt from overtime payments and regulations, exempt employees are often also not entitled to the minimum wage. This is because exempt employees are paid a salary rather than an hourly wage – instead of the contract outlining that you need to work an X amount of hours and you’ll receive $10 an hour, the exempt worker’s contract will state the hours or tasks part of the job and the monthly salary –$2,500/month, for example.

When determining whether an employee is exempt or not there are three conditions that must be met. If these three conditions are met, then the employee can be classed as exempt and not receive minimum wage or overtime pay.

  • Job duties
  • Salary level
  • Salary basis

The jobs typically part of the exempt group are known as the ‘white collar exemptions’. This term refers to job groups that perform tasks as:

  • Executives – Typically any employee that supervises two or more employees and who has the power to hire, fire or assign work tasks.
  • Administrators – The most common examples of exempt administrative workers include operational staff such as HR, accounting and marketing professionals.
  • Professionals – These are employees who engage in intense intellectual work and include job titles such as art and creative professions, as well lawyers, engineers and computer professionals.

There are further job duty qualifications to determine whether the employee is exempt or not. For example, if you are an administrator but you only manage two independent contractors, you wouldn’t qualify. These detailed job duties can be found from the Fair Labor Standards Act (FLSA). Some other examples include the movie theatre and recreational park employees, airline personnel and seamen, for instance.

The second qualifying factor deals with the salary. An exempt employee must receive a fixed salary. A fixed salary would mean the salary couldn’t reduce depending on the quality or quantity of the work the person performs. So, regardless of the number of days or hours the person works, the salary must remain constant – with a few exceptions.

Finally, the exempt employee must receive a salary beyond a certain minimum threshold. Currently, the FLSA rules state the employee must make at least $23,660 a year or $455 a week in order to meet this threshold. There was a proposal to raise this to $47,476 a year but that ruling is currently pending.

So, if the above three conditions are met, the worker will be considered as exempt. If one or all of the conditions are not met, the person will be classified as non-exempt. It’s important to understand that employers must have a logical and legal argument, based on the above points, in order to classify a worker exempt.

NON-EXEMPT EMPLOYEES

What about the non-exempt employees? What kinds of conditions determine their status? As a non-exempt employee, the person must receive at least the minimum wage for all the hours he or she works – including overtime pay for excess hours. While exempt workers need to meet certain conditions, non-exempt employees are generally all the workers who don’t meet those conditions. In the US, the minimum federal salary is currently $7.25, with some states having a higher minimum salary set.

Although non-exempt employees generally receive hourly pay, the employers can choose to pay a salary instead. However, unlike the exempt workers, the non-exempt will also receive an applicable payment for any overtime they work. In practice, anyone receiving an hourly pay will always be classified as non-exempt.

Non-exempt workers are often more under scrutiny in terms of the tasks they perform during the workday. Since you are paid by the hour, you are expected to work during those hours and not have conversations with your colleagues around the water cooler. If you are constantly pushing yourself to overtime, the employer might start wondering what you are doing – they will have certain expectations in terms of what you can achieve during the normal work hours.

The overtime must be paid according to the law. Under current US federal law, the non-exempt employee who works over 40 hours in a workweek, must receive 1.5 times his or her regular rate of pay for the overtime hours. So, if a non-exempt worker works for 50 hours a week, they will receive a normal rate of pay for the 40 hours and 1.5 times the normal rate for the extra 10 hours.

Furthermore, non-exempt workers can have better protection from national and local laws. In the US, the Department of Labor’s Federal Minimum Wage and Agricultural Employment law specifically targets non-exempt employees. For the employers, the non-exempt status often means stricter recordkeeping requirements – this is specifically in terms of the work hour records of the employee.

WHAT DOES THAT MEAN TO YOU?

In fact, what does this mean to employees and employers?

The employee – what’s the deal?

As an employee, if you are exempt, you will be expected to perform the duties listed in your contract whether or not your job takes 35 or 55 hours. You can’t expect to be paid extra – you will receive a pre-determined salary and any additional benefits the employer provides, but you won’t legally be entitled to overtime pay. As mentioned above, your employer might provide it but it is at the company’s discretion, not mandated by the law.

This means you’re expected to perform your duties as mentioned in your job contract and you’ll receive the salary you’ve agreed in the contract. If your duties require more work than the hours agreed on your contract, you can’t expect any extra pay.

On the other hand, as a non-exempt worker, you will be paid at least the minimum hourly rate – or any other hourly rate you’ve agreed in the contract –and a different rate for any overtime you do. If it takes you longer to perform the required tasks, then the employer will have to pay you for those extra hours you work. You might be paid a salary or receive your pay based on the hourly rate – naturally, the employer can provide any other extra benefits they want.

Generally, exempt workers receive a higher salary on average, which might make you want to pursue exempt status. This is because there is an expectation that you’ll perform your duties whether or not it pays extra and therefore, the employer is prepared to pay more upfront.

However, whether the non-exempt or exempt status is the right for you, is really down to personal preference and your current situation. As you could see from the different conditions associated with exempt status it might not always be even up to you or the employer – law is the law. It is, of course, helpful to understand the employment laws before you sign the contract.

In terms of unemployment benefits, you are generally entitled to the same payments whether you’ve been an exempt or non-exempt employee.

The employer – what’s the deal?

For the employer, the difference is more evident in terms of the rights of the employee. As mentioned above, the non-exempt workers might have better protection under the law and the record-keeping responsibilities are often more rigorous.

For example, an employer doesn’t have to keep an official record of the hours an exempt worker works. Of course, the minimum wage is something the employer has to account for in the case of non-exempt workers. With exempt workers, the salary can be set according to industry standards and the employer’s wishes and capabilities.

However, it must be noted there are general health and safety laws that naturally apply to all workers in the workplace. Furthermore, laws such as equal employment and child labor laws are in place whether you are a non-exempt or an exempt worker.

Since employers have to pay more for non-exempt workers in terms of overtime (remember the salary for these hours has to be 1.5x the normal rate), it helps them to try to avoid overtime. On the other hand, in terms of exempt employees, the employer always knows how much they have to pay each month – the salary can’t go up even if the employee has to stay for longer hours.

THE BOTTOM LINE

The difference between exempt and non-exempt workers is essentially down to the level of responsibility in the particular job. It’s also often an indication of the person’s status as a professional. It most clearly shows in the payment and especially in the overtime payment structure. While exempt workers are not qualified for overtime payments, it doesn’t really mean their salaries are worse – in fact, it is often the opposite.

Since the conditions to qualify as an exempt worker are signed into law, as an employer or an employee you won’t have much say over what your status will be. Nonetheless, these concepts are important to know when it comes to understanding your employee contract.

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