Exempt and Nonexempt Employees: What Can This Difference Do?

by OverHeadWatch Team | Nov 16, 2017 | Budget Planning, Library

There are exempt and nonexempt employees. The two terms mean everything to a business owner. Yet, many are fuzzy on the differences between the two. What are workers exempt from? How does a person classify their employees?

The Fair Labor Standards Act requires that an employee receives a classification upon hiring. Simply, an employee that is nonexempt has coverage from the FLSA rules, while the exempt employee has not.

What Are Exempt and Nonexempt Employees?

An exempt employee is one that is excluded from minimum wage due to their level of income. They don’t receive overtime regulations.
Also, they don’t have the rights and protections that come along with the non-exemption status.
They are paid a salary based on a contractual agreement.
Because they do not get an hourly wage, they fall into a different classification.
These positions are typically held by professionals, management, sales staff, executives, and upper-level employees.
The business owner saves money by giving them this classification as they work many hours. Also, they require a great deal of dedication to their job.

Which Are the Differences Between the Two?

Anyone that is an hourly worker falls under the category of a nonexempt employee. Basically, they are not exempted from the FLSA requirements. These rules and regulations protect them.

They must receive at least the minimum wage for their hours worked.
Also, they have the right to overtime pay for each hour that they work beyond 40 hours in a week.
Overtime is classified as time-and-a-half pay, though some companies give double time for holidays and weekends.
To add further demands to the business owner, many states also have both wage and hour requirements. These mandates must be met in addition to the FLSA stipulations.
Business owners must abide to both federal and state wage and hour laws to avoid legal troubles.

Understanding the Tax Liability Differences Between the Two

There are various tax brackets that a person falls into based on their income level. However, there is no difference in the way that one has to pay taxes. Exempt and nonexempt employees are taxed the same. Both categories of workers have their pay classified as earned income.

Each person has a separate tax bracket based off of their earnings. Also, they will be taxed according to that bracket. However, it doesn’t matter if they earned the income or by the hour when it comes to taxes, everyone must pay their dues. For the employer, it is the same. They don’t have to pay any more for exempt or nonexempt employees on their taxes.

Focusing on the Overtime Implications

Exempt and nonexempt employees have vastly different work schedules. An exempt employee needs to devote a specific number of hours to their job. They may be on a part-time schedule where they work just a few hours a week. For anything under 30 hours, the employer doesn’t have to offer insurance and benefits. Many fast food places hire teenagers and other part-time workers to help reduce their overhead. Management usually costs a great deal more because there are the salary and full-benefit options.

Now, it doesn’t matter if a nonexempt employee works 35 or 55 hours in a week. They are still paid the same. They get paid to do the job regardless of how many hours that takes. Their compensation will not change just because their hours do. An exempt employee, however, receives time-and-a-half for their hours worked over 40. Most employers will strive to keep hourly employees’ hours down, if at all possible. Additionally, most nonexempt employees punch a time clock, whereas the exempt does not.

Employee Protection Under the Laws

A nonexempt employee will receive greater protection from the federal laws than an except employee does. Consequently, most employers treat their employees the same no matter what their classification is. The main piece of the federal legislation that applies to people in the workplace is that they have right to a healthy and safe environment. They have a right to have equal employment opportunities. Also, they have coverage under the Family Medical Leave Act as well as federal child labor laws. Both exempt and nonexempt employees have protection under these regulations.

Unemployment laws vary greatly among the states. Typically, both exempt and nonexempt employees can collect benefits from unemployment, without issue. If a person has put in so many hours, then their employee classification doesn’t matter.

Exempt and Nonexempt Employees: Which Is Better?

To determine the classification that is best, you must talk to both employer and employees. From an employer’s standpoint, having exempt employees means they can require long hours without paying overtime costs.
If an exempt employee is late or misses a day, it won’t have as big of an impact. They get paid the same amount regardless of hours worked or days missed.
If a nonexempt employee misses work, then they won’t get paid, if they don’t have any paid time off. There are some liberties to being exempt, but those liberties come with a cost. An employee could work up to 100 hours and not receive a dime more.
When looking at the employer’s standpoint, it can be a bit confusing. First, exempt and nonexempt employees should always be treated the same. However, hiring people by the hour, who work less than 30 hours a week, can save a ton of money on labor costs.
By keeping the hours low, many employers save big on benefit packages. Hourly workers, typically, clock in and out. They aren’t usually the ones that carry company cell phones or can respond at all hours.
An employer doesn’t have to pay any overtime costs to a nonexempt employee. Neither do they have to answer to the fair labor board regarding this staff member.

To the Choice

Each company has different setups and needs. In some situations, an exempt employee makes better sense. However, in other cases, a nonexempt staff member is better.

It’s up to the structure of the company and the type of work that needs to be done.

Images from depositphotos.com.