For employers, the difference between exempt employees and non-exempt employees can mean thousands of dollars in compensation that's overpaid or underpaid, because the exempt employees aren't entitled to overtime while non-exempt employees are. In addition to the effects exempt and non-exempt status have on compensation, distinguishing between the two is essential for employers to construct accurate job descriptions and assign proper duties to employees.
Fit your business needs with the right LLC package
The federal Fair Labor Standards Acts, or the FLSA, governs minimum wage, employee hours, overtime pay and exempt classification criteria. The Wage and Hour Division of the U.S. Department of Labor enforces the FLSA regulations and has jurisdiction over most private-sector and public-sector employers. The federal Labor Department also has the right to investigate wage claims by compelling the production of employer payroll and wage documents, and interviewing witnesses to determine whether the employer complies with the FLSA laws.
Many state laws mirror the federal FLSA laws concerning wage and hour issues, as well as exempt and non-exempt classification criteria. This prevents potential conflict between the state and federal guidelines and eliminates the possibility of misinterpretation when employers have to choose between federal or state regulations. The state can determine whether its own labor department or the federal Labor Department investigates wage claims.
Non-Exempt Minimum Wage
Individual states can mandate higher minimum wage amounts for non-exempt employees than the federal minimum wage. When the state's minimum wage amount is higher than the federal minimum wage, employers must pay the wage that favors non-exempt employees. For example, as of September 2011, the minimum wage for the state of California is $8.00 per hour, while the federal minimum wage as of September 2011, is $7.25 per hour. Non-exempt California employees must be paid at least $8.00 per hour, according to state law. Additionally, some California municipalities have even higher wages for non-exempt employees. As of September 2011, the minimum wage is $9.92 per hour within the City and County of San Francisco, California.
Exempt Minimum Salary
Exempt employees must receive a salary of at least $455 per week under the FLSA. Likewise, some states have higher minimum salary thresholds. In Connecticut, for example, the minimum salary for exempt workers is $475 per week, as of September 2011. When the state threshold is higher than the federal law, the employer is obligated to pay a higher wage. For exempt employees, the first test to determine exempt status is the salary test. If an employee meets the salary test, the job duties and responsibilities are scrutinized to determine whether they are meet the standards for exempt classification.
Exempt Classification Criteria
The FLSA mandates the criteria for exempt classification. The categories for exempt workers are administrative, executive, professional, and, in some cases, outside sales and computer-related occupations. All of the exempt classification criteria require that exempt employees exercise independent judgment in the performance of the majority of their job duties. Exempt employees also are considered employees responsible for managing business operations, supervising employees or working in a capacity where they determine the organization's strategy. The exempt criteria for executive employees, for instance, apply to workers who own at least 20 percent of the company, and highly compensated employees — with annual salaries of more than $100,000 — are automatically considered exempt under the FLSA.
Non-exempt employees get overtime pay; exempt employees don't. That's the primary difference between the two. Non-exempt employees must receive at least the minimum wage, and when they work more than 40 hours in a workweek, they also must receive overtime pay at 1½ times their regular hourly rate. Exempt employees are paid on a salary basis and don't receive overtime pay. Salaried exempt employees receive a fixed salary for a certain number of hours, such as an annual salary of $50,000 for a full-time position, which usually means 40 hours a week. However, salaried employees are expected to fulfill their job duties and responsibilities, regardless of whether they work 40 hours in a week or 60 hours in a week.