Understanding the distinctions between non-exempt hourly, exempt salary, and non-exempt salary employees is crucial for both employers and employees. These classifications determine how employees are compensated, their eligibility for overtime, and compliance with labor laws.

Understanding Exempt vs. Non-Exempt Employees

The terms exempt and non-exempt refer to employee classifications under the Fair Labor Standards Act (FLSA), which determine eligibility for overtime pay. Exempt employees are not entitled to overtime pay regardless of the number of hours they work, provided they meet specific criteria related to job duties and salary thresholds. In contrast, non-exempt employees are eligible for overtime pay (typically at 1.5 times their regular rate) for any hours worked beyond 40 in a workweek. While exemption status is influenced by the nature of an employee’s duties, it often intersects with whether the employee is paid on an hourly or salary basis.

The Difference Between Hourly and Salary Employees

The distinction between hourly and salary employees relates to how wages are calculated and paid. Hourly employees are paid based on the exact number of hours worked, making them inherently non-exempt and eligible for overtime pay under the FLSA. Salary employees, on the other hand, receive a fixed annual or weekly amount regardless of hours worked. However, being salaried does not automatically mean an employee is exempt. Non-exempt salary employees are still entitled to overtime pay if they do not meet the specific duties and salary tests required for exemption. This dual classification—salaried but non-exempt—can sometimes lead to confusion for both employers and employees.

Non-Exempt Hourly Employees

Definition: Non-exempt hourly employees are paid by the hour and are entitled to overtime pay for any hours worked over 40 in a workweek, as mandated by the Fair Labor Standards Act (FLSA). Overtime is typically calculated at 1.5 times the employee’s regular hourly rate.

Key Points:

• Overtime Eligibility: Must track hours worked and are eligible for overtime pay.
• Record-Keeping: Detailed record-keeping is required for hours worked.
• Common Roles: Often found in roles such as retail, hospitality, and manufacturing.
• Potential Confusion: Misclassifying these employees as exempt can lead to significant legal and financial penalties.
• Work Environment: Typically perform tasks that require physical presence and adherence to set schedules.
• Advantages: Provides clear compensation for all hours worked, including overtime.
• Challenges: Requires meticulous tracking of hours and strict adherence to labor laws.

For more details on non-exempt employees, visit the U.S. Department of Labor.

Exempt Salary Employees

Definition: Exempt salary employees are not entitled to overtime pay regardless of the number of hours worked. These employees must meet certain criteria regarding job duties and receive a fixed salary that meets a minimum threshold set by the FLSA.

Key Points:

• Exemption Criteria: Not eligible for overtime pay; must meet specific duties tests and salary basis requirements.
• Common Roles: Found in executive, administrative, and professional roles.
• Autonomy: More autonomy in managing work hours and responsibilities.
• Potential Confusion: Paying an employee a salary does not automatically make them exempt. They must also meet the duties test.
• Work Environment: Often involved in decision-making, management, and specialized tasks requiring higher responsibility.
• Advantages: Fixed salary provides stable income; no need to track hours meticulously.
• Challenges: Potential for overwork without additional compensation; requires meeting specific criteria to qualify as exempt.

Salary Threshold: The minimum salary threshold of for exempt employees is $35,568.

For more information on these changes, see our article on the DOL’s new overtime rule.

Non-Exempt Salary Employees

Definition: Non-exempt salary employees receive a fixed salary but are still eligible for overtime pay. Their salary must be converted to an hourly rate to calculate overtime.

Key Points:

• Overtime Eligibility: Eligible for overtime pay.
• Salary Conversion: Salary is divided by the number of hours the salary is intended to cover to determine the hourly rate.
• Stable Income: Provides a stable income with the benefits of overtime compensation.
• Potential Confusion: Fluctuations in work hours can complicate overtime calculations.
• Work Environment: Suitable for roles that require consistent work hours with occasional overtime.
• Advantages: Stability of a salary with the added benefit of overtime pay.
• Challenges: Requires accurate conversion of salary to hourly rate for overtime calculations; must ensure compliance with labor laws.

Understanding Salary Exemptions under the DOL’s Salary Test

The Department of Labor (DOL) outlines several exemptions to overtime pay requirements under the Fair Labor Standards Act (FLSA). These exemptions are collectively referred to as the “white-collar exemptions” and apply to specific roles based on job duties. Here’s a breakdown of each exemption:

Executive Exemption

The Executive Exemption applies to employees who primarily manage the enterprise or a recognized department or subdivision. To qualify, employees must:

• Have a primary duty of managing the organization or a department.
• Regularly direct the work of at least two or more full-time employees (or their equivalent).
• Have the authority to hire or fire employees, or their recommendations on hiring, firing, or other status changes must carry significant weight.

Administrative Exemption

Employees under the Administrative Exemption perform office or non-manual work directly related to management or general business operations. This exemption is for those in roles that involve:

• Exercising discretion and independent judgment on matters of significance.
• Tasks related to areas like finance, accounting, marketing, human resources, or compliance.

Professional Exemption

The Professional Exemption is divided into two categories:

• Learned Professionals: Roles requiring advanced knowledge in a field of science or learning, typically acquired through prolonged education (e.g., doctors, lawyers, engineers, or teachers).
• Creative Professionals: Positions involving work requiring invention, imagination, originality, or talent in a recognized creative field, such as artists, musicians, or writers.

Computer Employee Exemption

The Computer Employee Exemption applies to employees in computer-related roles. To qualify, employees must perform:

• Systems analysis, programming, or software engineering duties.
• Design, testing, or modification of computer systems or programs.

Outside Sales Exemption

The Outside Sales Exemption applies to employees who:

• Have a primary duty of making sales or obtaining contracts or orders for services or the use of facilities.
• Regularly perform their duties away from the employer’s place of business.
  This exemption specifically excludes employees who spend their time making sales via phone or online, as it requires face-to-face sales.

Highly Compensated Employee Exemption

Highly Compensated Employees (HCEs) are those performing office or non-manual work and whose total annual compensation exceeds a specified threshold. While these employees must customarily and regularly perform at least one exempt duty outlined in the Executive, Administrative, or Professional exemptions, they are not required to meet all the duties tests.

Ensuring Compliance

1. Conduct Regular Audits: Regularly review employee classifications and job descriptions to ensure compliance with labor laws.

2. Provide Training: Train HR staff and managers on proper employee classification and compensation practices.

3. Update Policies: Keep your employee handbook and policies up-to-date with the latest federal and state labor laws.

4. Consult Experts: Seek advice from HR consulting firms like The Unit Consulting to navigate complex compliance issues.

How The HR Outsourcing Firm of The Unit Consulting Can Help

Understanding and correctly classifying your employees is essential to maintaining compliance with labor laws and ensuring fair compensation. At The Unit Consulting, we specialize in helping businesses navigate the complexities of HR compliance, including employee classification and overtime rules. Our expert team is here to ensure your business adheres to all regulations, avoiding costly fines and improving employee satisfaction. Contact us today to learn how we can assist you with your HR needs.