Exempt vs Non Exempt Employee: If you’re a new business, you’ve likely run into classifying your employees. But how do you know if you’re choosing the correct classification?
It’s important to realize there are specific pros and cons to having exempt vs. non-exempt employees that you need to be aware of to run your business smoothly. However, your first step is understanding the key differences between these classifications.
Keep reading this non-exempt vs. exempt employee guide to learn everything you need to know!
What Is an Exempt Employee?
An exempt employee doesn’t qualify for overtime pay per the Fair Labor Standards Act (FLSA), which establishes minimum wage and overtime pay eligibility.
This is because exempt employees receive a salary for their weekly hours and must complete their tasks within that time frame.
For an employee to be exempt, they’ll need to earn at least $684 a week or $35,568 yearly. They also need to work in management or hold positions in fields such as:
- Administrative
- Professional
- Executive
- IT or computer science
- Sales
- Creative Professional
You’ll also need to review your state’s rules on exempt employees.
What Is a Non-Exempt Employee?
On the other hand, a non-exempt employee must be paid over time by law. If they work over 40 hours a week, they’ll need to be paid 1.5 times their regular hourly rate for every hour they work over 40 hours.
Also, non-exempt employees must receive the federal minimum wage of $7.25 per hour. However, certain states may set this wage higher due to the cost of living.
What Happens if You Improperly Classify Your Employees?
It’s important to realize that misclassifying your employees can lead to severe tax penalties. It will also affect you when reporting employee retention credit on your tax return.
First, misclassified employees are entitled to up to three years of back pay and can also sue you for any legal fees.
Courts can also add extra penalties and damages to the amount. This basically doubles the amount you would owe. Additionally, if one exemption status has vacation time or other paid time off and not the other, you’ll also have to pay that back.
If you repeatedly misclassify your employees, you can get a civil penalty of up to $1,000 per violation.
The best way to avoid this is by having experienced HR staff in-house. You can also look at outsourcing HR services to help you with this.
Finally, check online for the FLSA exemption questionnaire, which will take you through a flow chart to help you determine the correct classification.
Knowing the Differences Between an Exempt vs Non Exempt Employee
Now that you know the key differences between Exempt vs Non Exempt employees, you’ll be able to accurately determine the correct status when hiring new employees.
If you’re a new business, it’s important to remember there are many laws and regulations you need to know when hiring employees. Don’t be afraid to reach out and get professional help to ensure you’re in compliance.
If you found this Exempt vs Non Exempt Employee guide helpful, then check out our blog for more business tips!
