As a small business owner, you probably know how to define terms like minimum wage, overtime hours, and job duties. But you may not fully understand what exempt or non-exempt means or how to categorize your employees as one or the other.
Understanding these terms is important for complying with the Fair Labor Standards Act1 (FLSA), which establishes labor law regulations for employers. While regulations can vary by state, there are some basic rules you must follow.
Employee misclassification can lead to issues like unpaid overtime wages 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 how you must treat each type of employee. We’ll 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. If you have employees in a state with its own minimum wage, you’ll need to reference state law to determine the minimum salary for exempt employees.
Employees who meet the exemption requirement 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 for exemption can vary by state, but FLSA guidelines determine them as:
- Executive employees. According to the U.S. Department of Labor (DOL) Wage and Hour Division2, to qualify for this exemption, all of the following tests must be met:
- The employee must be paid on a salary basis no less than $684 per week.
- The employee’s primary duty must be managing the organization or at least a part of it.
- The employee must oversee the work of at least two or more other full-time employees.
- The employee must have the authority to hire or fire other employees or have a say in the matter.
- Administrative employees. To qualify for this exemption, all of the following tests must be met:
- The employee must be paid on a salary basis no less than $684 per week.
- The employee’s primary duty must be handling office work directly related to the management or general operations of the business.
- The employee’s primary duty includes using their best judgment when tending to matters of significance.
- Professional employees. To qualify for this exemption, all of the following tests must be met:
- The employee must be paid on a salary basis no less than $684 per week.
- The employee’s primary job must require advanced knowledge, defined by the DOL as work that is predominantly intellectual in character.
- The advanced knowledge must be in a field of education or science
- The advanced knowledge must be customarily acquired through higher learning
- Outside sales employees. To qualify for this exemption, all of the following tests must be met:
- The employee’s primary duty must involve sales or obtaining orders or contracts for services.
- The employee must typically work away from the employer’s place or places of business.
- Computer-related occupations. To qualify for this exemption, all of the following tests must be met:
- The employee must be paid on a salary basis no less than $684 per week.
- The employee must be a computer programmer, computer systems analyst, software engineer, or other similarly skilled worker in the computer science field.
However, job titles alone don't determine exempt status. Your employee's job description, professional duties, and salary must meet specific DOL exemption requirements3.
A salaried worker isn’t necessarily an exempt employee, as non-exempt workers can also be paid a salary. Additionally, some exempt computer professionals, teachers, lawyers, and doctors can be paid an hourly wage instead of a salary.
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. They are expected to carry out tasks without interjecting their own management decisions.
Even if non-exempt workers 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
Hourly workers aren’t necessarily the same as non-exempt 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 an hourly rate, 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. Currently, 30 U.S. states4 have a higher minimum wage than the federal minimum wage.
These employees are eligible for an overtime rate, which is calculated as 1.5 times their regular 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. You should check with your state for specific overtime laws in your area.
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 non-exempt, 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 to 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, you could face costly compliance violations. If you intentionally or repeatedly misclassify employees as exempt, you are subject to up to $1,000 in civil penalties for each offense. 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
- Salaried workers or hourly workers
- 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.
However, not all HRAs support employee classes. For example, if you have an individual coverage HRA (ICHRA) or a group coverage HRA (GCHRA), you can offer your salaried employees more money per month to spend on healthcare items than your non-salaried employees. The ICHRA allows for 11 different employee classes, while the GCHRA allows for eight. You can’t differ allowances by employee class with a qualified small employer HRA (QSEHRA).
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.
Conclusion
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 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.
This article was originally published on July 27, 2022. It was last updated on May 31, 2023.
1. https://www.dol.gov/agencies/whd/flsa
2. https://www.dol.gov/agencies/whd/fact-sheets/17a-overtime
3. https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/fs17a_overview.pdf
