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Exempt Vs. Non-Exempt Employees: A Legal Guide

Two paychecks with very different payment amounts, showing the difference between pay for exempt vs. non-exempt employees.

Whether you are living your dream of owning a small business with a few employees who are like family or part of a larger business with many employees scattered across multiple locations, having a workforce means being responsible for ensuring that they are properly compensated for their time. Before getting into a business, you may think compensation is as simple as an hourly wage and offering benefits such as sick leave, vacation, health insurance, and perhaps other perks such as gym membership discounts. While these are all forms of compensation that employees appreciate, compensation is much more than that. Specifically, compensation changes depending on whether the employee is exempt or non-exempt.

When determining exempt vs. non-exempt, there are specific factors that make the determination and specific differences in how the two employees are compensated. One of our experienced labor and employment attorneys at Schwab & Gasparini may be able to assist you in determining employee classification for your employees and dealing with any consequences you may be facing as a result of misclassification. Call our Syracuse Office at (315) 422-1333, our Albany Office at (518) 591-4664, or our White Plains or Hudson Valley Offices at (914) 304-4353 to learn more about your responsibilities as an employer.

What Is the Meaning of Exempt Vs. Non-Exempt Employees?

Employees are usually classified as exempt or non-exempt. The main difference between exempt vs. non-exempt is in how the employee is paid.

Non-Exempt Employees

Non-exempt employees are paid overtime for any hours they work in a work over 40. They are typically paid hourly, piece rate, or commission, though sometimes they do receive a set salary. Generally, their pay changes based on how many hours they work. These employees are often in positions where they perform more manual or technical duties.

Overtime pay is 1.5 times the employee’s typical hourly wage. This employee is protected by the Fair Labor Standards Act (FLSA), which also provides that the employee is paid at least federal minimum wage, that the employer must keep records of the time the employee works, and places restrictions on child labor to ensure that minors do not work jobs, conditions, or hours that could be dangerous for them or interfere with their educational opportunities.

Exempt Employees

Exempt employees are not entitled to overtime pay and are paid a set salary. To be considered exempt, this salary must be at or above a particular threshold. These employees are typically in administrative, executive, or professional roles. Their jobs often require advanced knowledge, a high degree of decision making and independent judgment.

These employees are not protected in the same way by FLSA. Their set salary remains the same whether they work less than, more than, or exactly 40 hours in a week. They may work longer hours and their hours are often not tracked by the employer.

How Does an Employer Determine Exempt Vs. Non-Exempt Employees?

While salary and lack of overtime pay are the primary differences between exempt vs. non-exempt employees, employers cannot just decide that they will pay an employee a salary and call them exempt. There are three specific tests that the United States Department of Labor Wage and Hour Division uses to determine whether an employee is exempt. If the employee meets the criteria for all three tests, they are an exempt employee.

Salary Basis Test

This test considers the nature of how the employee is paid. An exempt employee gets paychecks on a regular basis (every week, every other week, once a month, etc.). Their paycheck is the same amount every time regardless of the number of hours they have worked. There are some deductions that the employer can take from their pay, but they are very limited.

Salary Level Test

This test also focuses on the employee’s salary, but instead of how they are paid, it considers how much they are paid. To be considered exempt, an employee must make a minimum of $684 per week or $35,568 per year. However, just because an employee meets this salary requirement does not mean they are exempt. They must pass all three tests to be considered exempt.

Job Duties Test

The job duties test assesses the duties the employee performs. While many exempt employees are in administrative, executive, professional, outside sales, or computer roles, job titles do not determine exempt vs. non-exempt status. However, to be considered exempt, the employee’s primary job duty must be that of an exempt administrative, professional, or executive employee. For these purposes, primary means the main, principal, major, or most important job duty they perform.

There are some exceptions to the duties test. For example, teachers, doctors, and lawyers are exempt employees. Firefighters, police officers, and paramedics are not exempt employees. If you are uncertain about classifying an employee as exempt vs. non-exempt, an experienced labor and employment attorney with Schwab & Gasparini may be able to offer guidance and clarity.

Can Employers Treat Exempt Employees Like Non-Exempt Employees and Vice Versa?

Because the consequences of misclassifying an employee as exempt when they should be non-exempt can be significant, some employers may wonder if they can simply make all their employees non-exempt, even if some of them are exempt. Employers can treat exempt employees like non-exempt employees, including paying them one and a half times their usual wage for any hours worked over 40 in a week. A completely non-exempt workforce in a business is both possible and permissible.

However, employers should recognize that they cannot reverse this and treat all employees as exempt. While exempt employees can be treated as though they are non-exempt, treating non-exempt employees as though they are exempt results in depriving the employee of certain rights protected by FLSA, including being paid for overtime hours. Additionally, they may violate New York’s Department of Labor rules for meal and rest breaks in some cases.

Consequences of Misclassifying Employees

Misclassifying employees as exempt when they should be non-exempt is often a mistake. However, some employers have misclassified employees in an attempt to avoid paying overtime, avoid other labor protections, or reduce labor costs. Even when the misclassification is a mistake, employers can face significant consequences as a result. The employer may face lawsuits from individual employees or as a class-action. They may also be required to pay the overtime, back wages, and lost benefits owed to the misclassified employee, plus interest and other damages.

Additionally, they may face Internal Revenue Service (IRS) audits. In addition to exempt vs. non-exempt, workers can also be classified as independent contractors. If this happens, and the employer is incorrect, the IRS may require the employer to pay the employment taxes for that employee, including income, Social Security, Medicare, and unemployment taxes. Employers may want to consider implementing internal audits to ensure wage and hour compliance, if they do not already do so.

Other Important Differences Between Exempt vs. Non-Exempt Employees

In addition to verifying that the employee passes the three tests to be exempt and that the employer is not required to pay exempt employees overtime, there are some other significant differences to be aware of so employers can ensure they do not unintentionally violate any laws or regulations. The first difference is that the employer cannot deduct from an exempt employee’s pay for employer-caused absences or absences caused by the business’s operating requirements, such as power outages that close down the business. In other words, if the employee was available and ready to work, they must be paid even if there was no work.

The employer also generally cannot deduct from an exempt employee’s pay due to inclement weather closures, jury duty, or illnesses. The employer can deduct for illnesses if they have a bona fide sick leave plan or policy that specifically indicates such deductions will be made. Additionally, the United States Department of Labor does allow employers to offset any amount received by an exempt employee as jury duty fees, witness fees, or temporary military pay against the salary due for the same week in which those fees or temporary military pay was earned.

How a New York Employment Attorney May Be Able to Assist You

Properly classifying employees is an important aspect of having employees. Misclassification can be a very costly mistake. The laws and regulations that explain how to classify employees and what requirements must be met or factors must be considered can be confusing, though. If you are concerned that any of your employees may be misclassified, or you are about to hire your first employees and want to make sure you classify them correctly, an experienced labor and employment attorney with Schwab & Gasparini may be able to assist you in determining which employees are exempt vs. non-exempt. Call one of our four New York offices to schedule a consultation and learn more: reach our Syracuse Office at (315) 422-1333, our Albany Office at (518) 591-4664, or our White Plains or Hudson Valley Offices at (914) 304-4353.

Sun Nov 10 2024, 12:00am