When hiring you have to make a myriad of important choices for each new hire including whether they will be full-time vs contractual, remote vs onsite, and exempt vs nonexempt.

Some of these categorizations, including whether an employee is exempt from the Fair Labor Standards Act (FLSA), are defined by law and misclassifying workers could be punished by massive fines or even jail time.

Key Takeaways:

  • Market Expansion: The e-learning market is rapidly expanding, with projections suggesting it will reach $350 billion by 2025, driven by widespread adoption in both academic and corporate settings.
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  • Corporate Adoption: Businesses are increasingly turning to e-learning for employee training, noting major cost savings and improved retention of training material compared to traditional methods.

Understanding the Differences Between Exempt vs. Nonexempt Employees

In a nutshell, the difference between exempt employees and nonexempt employees comes down to whether they are eligible for minimum wage and premium overtime.

Business owners and hiring staff need to be well-versed in the differences between exempt and nonexempt to avoid violating labor laws. Likewise, workers should also know about the difference between the two to make sure they are fairly classified and paid.

In this article, we will use our extensive expertise in hiring and labor laws to help you understand the difference between exempt and nonexempt employees. Finally, we will show you exactly how you can classify your workers (or yourself) so that you don’t have to worry about breaking labor laws.

Exempt vs Nonexempt: Fair Labor Standards Act (FLSA) Explained

Today’s labor laws in the US look nothing like those in the early 20th century. There was no minimum wage, and no requirements to pay employees more for overtime. Even worse, child labor was still quite common. That was until President Franklin D. Roosevelt signed the Fair Labor Standards Act (FLSA) into law in 1938 as part of his series of legislation called the New Deal.

president Franklin D. Roosevelt signs bill into law, flanked by others
President Franklin D. Roosevelt signs New Deal legislation into law

The FLSA was quite a pathbreaking law and came amid the tail end of the Great Depression. While the final law was a toned-down version of its original plan and did not apply to all industries, it was still a monumental shift to US labor laws. It banned child labor (for the most part), fixed a minimum wage at $0.25 per hour, and set requirements for employers to pay extra for overtime (work over 40 hours per week).

black and white image of child laborers working on looms
Child laborers in Macon, Georgia 1909 before FLSA banned child labor

The purpose of FLSA was to eliminate “labor standards detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.” Roosevelt said that the law was meant to ensure “[a] fair day’s pay for a fair day’s work.” The Supreme Court expanded the definition in 1989 in the case Barrentine v. Arkansas Best Freight System, saying that it is meant to protect workers “from the evil of ‘overwork’ as well as ‘underpay'”

What Is an Exempt Employee?

Section 13(a)(1) of the FLSA provides an exemption from both minimum wage as well as overtime pay for certain employees who are employed as bona fide professional, administrative, executive, and outside sales employees.

The FLSA specifies that the employee must meet the salary level, salary basis, and job requirement tests before they are classified as exempt. These include

  • They should be paid on a salary basis and not an hourly rate and their their weekly salary should not be less than $684 (though this requirement is higher in some states with minimum wages).
  • Employers might use incentive payments (including commissions) and nondiscretionary bonuses which can be paid on an annual or more frequent basis to exempt employees to meet up to 10% of the salary level.
  • To be classified as an exempt employee the worker should work in an exempt job function such as an administrator or executive. This means that even if the employee meets the salary level and salary basis test they would be considered nonexempt workers if the job duties are nonexempt.

It’s important to note that the FLSA specifies that job titles do not have any bearing on whether an employee would be considered exempt and that it is related to the job description and the nature of the work. It adds, “In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department’s regulations.”

For instance, an employee can be designated as a “manager” and still be classified as a nonexempt worker if they are doing manual work and don’t make their own decisions regarding their work. Usually, all white-collar workers are exempt employee which means that the overtime regulations and minimum wage does not apply to them.

The Department of Labor (DOL) specifies the following exemptions:

Executive Exemption

To qualify for the executive exemption, the worker should meet the following conditions

  • They should be paid on a salary basis at a minimum of $684 per week. The minimum salary is subject to change just as the federal minimum wage is raised frequently to keep pace with the rising cost of living.
  • The employee’s job duties should primarily include managing the enterprise and they must direct the work of two or more employees, along with having the authority to hire or fire employees in the organization.

Administrative Exemptions

This exemption is similar to the executive exemption, requiring the same minimum salary but for administrators. The worker should perform administrative tasks or non-manual work and “exercise of discretion and independent judgment with respect to matters of significance.”

Professional Exemptionsanimated image of doctors and researchers

Employees using advanced knowledge typically in the field of science and learning which is acquired through a prolonged course through specialized intellectual instruction are also classified as exempt employees. Doctors, scientists, and teachers are examples of professional exemptions.

In addition, outside sales employees whose primary job duties involve making sales are also classified as exempt employees.

Highly compensated employees who receive a minimum of $107,432 in annual salary are also classified as exempt and aren’t entitled to overtime. Some jobs governed by other laws and regulations, such as truckers and railroad workers, may be exempt as well.

Examples of Common Jobs for Exempt Employees

Examples of jobs that could be worked by exempt employees include:

  • Outside salespeople
  • Software engineers
  • Accountants
  • Doctors
  • Lawyers
  • Teachers
  • Managers
  • C-suite executives like CEOs

Are All Salaried Employees Exempt?

While the salary test is a key determinant of an employee’s exempt status, not all salaried workers are exempt employees. For instance, if a worker’s salary is less than $684 per week they would be a nonexempt employee even though they are paid on a salary basis. Also, nonexempt blue-collar workers can be paid a salary and are still eligible for overtime pay even though they aren’t paid hourly.

Can Exempt Employees Earn Overtime Pay?

FISA overtime rules don’t apply to exempt employees and they are not legally entitled to overtime pay. Their employer could still pay them extra for overtime work but they aren’t required to. Employers often add additional compensation to make their job offering enticing in various forms such as benefits or bonuses.

What Is a Nonexempt Employee?

construction workers on a work site

Nonexempt employees are not exempt from the requirements for premium overtime pay and a minimum wage as specified by the FLSA. They generally earn less than $682 per week and carry out orders without making many of their own decisions (common in manual labor jobs like construction). While they can be paid on an hourly rate or salary basis, they are eligible to receive overtime pay beyond 40 hours worked in a week.

Notably, while the federal minimum wage and overtime rules for employees are governed by the FLSA, some state and local jurisdictions have their own wage and hour laws. In this case, the company must apply the laws that are more favorable to the nonexempt employees.

If you still aren’t totally sure that you understand the important differences between exempt vs nonexempt employees, check out HR Party of One’s breakdown on the topic for a quick recap:

Examples of Nonexempt Employees

Usually, nonexempt employees do manual and repetitive jobs and are “blue-collar workers.” The following are examples of nonexempt employees.

  • Assembly line workers in manufacturing industries like steel and automotive
  • Food servers
  • Retail workers
  • Construction workers
  • Certain skilled workers like electricians, carpenters, and mechanics

Exempt vs Nonexempt Employees: Risks of Misclassification

There are various risks and legal repercussions of misclassifying employees. Firstly, the employer is liable to pay overtime pay extending as far back as three years for misclassifying employees. Also, the courts might order the company to pay penalties equal to the unpaid wages.

There are also reputational risks to the company for misclassifying employees and they might receive negative media coverage for doing so – which could hurt its reputation among customers, employees, and suppliers.

If an employer repeatedly misclassifies workers or does so willfully, they are subject to $1,000 in civil penalties for every such violation. Additionally, they may be subject to criminal prosecution.

Workers who were underpaid due to misclassification often sue the offending company in class action lawsuits. In fact, FLSA lawsuits were by far the most common employment-related class action litigation in the US in the past 15 years.

map of US with numbers of FLSA class action lawsuits per state
Image Courtesy of DuaneMorris and the Class Action Weekly Wire

According to the massive international law firm DuaneMorris, which runs a regular podcast about class action lawsuits called the Class Action Weekly Wire, there were 2,646 total state FLSA collective actions filed in 2022. Check out the Weekly Wire episode on the topic to learn more:

Exempt vs Nonexempt Employees: How to Classify Your Workers

exempt vs nonexempt explainer

The substantial risks of misclassifying workers make it tremendously important to accurately determine the exempt status of your employees. In a nutshell, if an employee is doing manual repetitive work and don’t make decisions themselves, they are usually nonexempt employees.

On a similar note, white-collar employees are generally exempt (see the executive, administrative, professional, etc. exemptions listed above) and thus are not entitled to overtime pay. The following three-part test should help you determine whether the employee is exempt.

  • Firstly, the employee should pass the salary basis test which means that their pay across pay periods is similar irrespective of the number of hours worked in a week or the pay period.
  • Secondly, the worker should pass the salary level test and their salary should be higher than the minimum threshold which currently stands at $684 per week at the time of writing.
  • Finally, the worker should pass the job function test which means that while employees working in managerial, administrative, professional, and executive positions are exempt, those working in manual jobs are nonexempt employees.

The Bottom Line

To sum it up, it is important for employers to correctly classify their employees as exempt and nonexempt employees and misclassifying employees would mean that the company is in violation of federal law, apart from it being a reputational risk.

From an employee’s perspective also, they should understand whether they are an exempt or nonexempt employee which would determine whether they are owed overtime pay by the company.