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Updated: June 14, 2023
From W-2 employees to 1099 contractors to hourly and salary-based employees, there’s a lot to take into consideration when classifying your workforce. But, it’s important to make sure you understand these differences to avoid making payroll mistakes and getting on the wrong side of the IRS.
Once you’ve determined that a worker is an employee (not a contractor), there are two basic types of employment classifications in the workplace — exempt employees and non-exempt employees. These terms are defined by the Fair Labor Standards Act (FLSA), which specifies that certain employees must receive a minimum wage and also overtime pay when they work more than 40 hours a week. Others are exempt from minimum wage and overtime requirements.
Read on to understand how to tell the difference between these types of employees and what each classification means.
You should look at three criteria to know whether an employee should be classified as exempt or not:
If you want to find more specific guidance, the Department of Labor has a specific list of tests (and descriptions of the different roles) you can apply for different types of employees. Let’s dig a little deeper to see what rules apply to each classification, and how to classify your employees to make sure you are paying them correctly.
Exempt employees are not covered by the FLSA’s overtime and minimum wage pay requirements, which means they are generally paid on a salary basis. Their role typically involves administrative, executive, or professional duties (as defined below).
Also, these employees must be paid a minimum of $684 per week or $35,568 annually to be considered exempt from FLSA regulations. Please note that the salary threshold is a recent increase from $455 a week or $23,660 annually and shifted an estimated additional 1.3 million workers to the non-exempt category — and therefore eligible for overtime pay.
The FLSA recognizes the following broad categories of employees as exempt:
Outside of these standard categories, there are a few other areas where employees are commonly classified as exempt. These include:
Typically, an employee must meet all the standards described by the Department of Labor’s tests. Please check with a tax professional or HR representative if you have any questions about how to apply the classification tests.
Unlike exempt employees, most non-exempt workers are paid by the hour and eligible for overtime pay rates (at one and half times their normal rate of pay) for any hours worked above the standard 40-hour workweek. They are also entitled to the federal minimum wage, the tipped wage minimum, or their state’s minimum wage if it’s higher. But, remember that not all non-exempt employees are paid by the hour.
Non-exempt status also doesn’t limit the number of hours an employee may work in a workweek and applies to employees who are at least 16 years of age. Overtime pay does not apply to weekends, holidays, or “regular days of rest” unless overtime hours were worked on those days.
Hopefully, now you have a good understanding of the difference between exempt and non-exempt employees. Keep in mind that most states have additional guidelines and laws to abide by, so visit your state’s department of labor website to check them out. And if you have questions about the difference between exempt and non-exempt employees — or what the classifications mean — be sure to talk to an expert.