As a new business owner, you probably know how to define terms like minimum wage, overtime, and job duties. But you may not fully understand how to categorize your employees as either exempt or non-exempt based off this criteria.
The Fair Labor Standards Act1 (FLSA) establishes labor law regulations for employers. While some regulations vary by state, there are some basic rules you must follow that are essential.
Employee misclassification can lead to issues like unpaid overtime that can have significant financial consequences for your business. To help you avoid these missteps, we’ll go over exempt and non-exempt employee classifications and also cover how you can offer health benefits to both groups.
Check out our fringe benefits guide to see how you can support your exempt and non-exempt employees
What are exempt employees?
According to the FLSA, exempt employees are individuals who are exempt from a minimum hourly wage, overtime regulations, and other FLSA protections. Instead, exempt workers are given an annual salary figure. Exempt employees need to earn at least $684 per week.
Exempt employees tend to work in what are considered “executive” or “professional” jobs. They can receive year-end bonuses to compensate for the nature of their work and special perks or benefits.
Additional requirements can vary by state, but FLSA guidelines determine exempt employees as holding job positions in the following categories:
- Outside sales
- Computer-related occupations
However, job titles alone don’t determine exempt status. Your employee’s actual job duties and salary must meet specific Department of Labor exemption requirements2.
What are non-exempt employees?
Non-exempt employees are workers who earn at least the federal hourly minimum wage and qualify for overtime pay. As the name suggests, these workers aren’t exempt from FLSA regulations.
Non-exempt employees tend to be supervised by higher-level employees and managers and are expected to carry out tasks without interjecting their own management decisions.
Even if non-exempt employees earn more than minimum wage, they still take direction from supervisors and don’t hold an executive position.
For this reason, non-exempt employees tend to include:
- Construction and maintenance workers
- Assembly line workers
- Freelancers and independent contractors
- Retail associates
- Hospitality and food workers
While non-exempt employees are typically paid hourly wages, it’s not required in order for an employee to fall under the non-exempt category. In addition to hourly pay, non-exempt employees can also be paid on a commission or salary basis, as long as the compensation meets minimum wage requirements.
How does exemption status affect wages?
Since January 1, 2020, an employee must meet a salary threshold of no less than $684 per week, or $35,568 per year, to be considered exempt. As stated in earlier sections, these employees have exemptions from overtime pay. You can, however, offer additional compensation to your exempt employees for extra hours worked through your benefits package.
Non-exempt employees must be paid the federal minimum wage of $7.25 per hour, but some states with a higher cost of living have set minimum wages above the federal base. For example, 26 U.S. states3 have increased their minimum wage in 2022, so the threshold will change in certain areas.
These employees are eligible for overtime pay, which is calculated as 1.5 times their basic rate for every hour they work above a standard 40-hour workweek. Highly compensated non-exempt employees who make $107,432 or more per year aren’t required to be paid overtime.
It is possible to have a salaried employee that is also non-exempt. This happens if you have employees who don’t meet job duty requirements, earn less than $684 per week or $35,568 per year, or have certain deductions taken from their salary, putting them under the necessary thresholds. If this is the case, they may be eligible for overtime pay.
What are the penalties for misclassifying an employee?
According to the FLSA, if you misclassify an employee as exempt and they’re actually considered nonexempt, you may be held liable for all unpaid overtime owed to the employee going back as far as three years prior to the date of the claim.
Additionally, the court may issue penalties against you in the form of liquidated damages in an amount equal the sum of unpaid wages the employee is owed. This effectively doubles the amount of unpaid wages the employee may be eligible to receive.
Furthermore, if you intentionally or repeatedly misclassify employees as exempt are subject to up to $1,000 in civil penalties for each violation. You may also be criminally prosecuted, making you subject to a fine of up to $10,000 and/or jail time.
How you can offer health benefits to exempt and non-exempt employees
No federal regulations require you to provide the same benefit coverage to all employees. However, if you’re considering offering different health benefits to different employees based on exemption status, you must do it legally.
Employers that want to offer specific employee benefits or different benefits to different employees must base their decisions on “bona fide employment-based classifications.”
For instance, you could offer different levels of benefits based on employee classes like:
- Full-time or part-time job status
- Exempt (salaried) or non-exempt (hourly)
- Whether an employee works in or out of state
- An employee's job title
- An employee's seniority
These classifications of employees work because they’re anti-discriminatory and not based on characteristics such as race, sex, disability, or religion. Employees within the same class must be treated equally, meaning they must receive the same level of benefits.
These rules apply to all health benefits options, including non-traditional benefits like health reimbursement arrangements (HRAs) and taxable employee stipends. An HRA is an employer-funded health benefit used to reimburse employees, tax-free, for their health insurance premiums and over 200+ out-of-pocket medical expenses. Employee stipends are a taxable, fixed amount of money offered to each employee to help them pay for health, wellness, and other expenses of their choosing.
Setting employee classes with these benefits can help employers offer different allowance amounts to different employees, so you can better attract and recruit top talent at your organization.
For example, if you have an individual coverage HRA (ICHRA) or a group coverage HRA (GCHRA), you can offer your exempt employees more money per month to spend on healthcare items than your non-exempt employees. The ICHRA allows for 11 different employee classes, while the GCHRA allows for eight.
However, employee stipends work a little differently. If you’re offering a stipend, the rules around employee classes are more flexible because stipends aren’t as formal as HRAs. Because of this, you can create any employee classes you want, as long as they follow anti-discrimination rules. Keep in mind that you also can’t create a class that specifically excludes an employee from receiving the benefit.
Rules from the FLSA determine whether or not an employee is exempt or non-exempt. To determine if your workers are exempt or non-exempt employees, you should double-check how much money they earn, the type of work they do, and their specific responsibilities and actual duties.
Regardless of how your employees are classified, you should always consider benefits to better recruit and retain the type of employees you need at your organization. It’s not necessary to give equal benefits to all employees under federal law, but you must ensure the way you offer benefits isn’t discriminatory.
Luckily, with an HRA or employee stipend through PeopleKeep, you can set employee classes to help you offer personalized and flexible health benefits to your entire workforce—whether they’re exempt or non-exempt employees.