
The ability to determine which hires fall under an exempt vs. non-exempt employee designation can have major implications for businesses. Let’s explore the differences between these two designations, how you can determine which status should be assigned to each employee, and how to avoid the penalties for incorrect status attribution.
What Does Exempt vs. Non-Exempt Mean?
First, let’s explore the differences at a high level. What is “exemption” in the context of employee status? At its core, this status designation determines whether or not an employee should receive overtime pay for hours worked above the standard 40-hour workweek.
Key Difference: Exempt employees are not eligible for overtime pay, while non-exempt employees are eligible.
While this is the primary distinction, other aspects also differ between exempt and non-exempt status. We’ll explore these in more detail below.
What Factors Play a Role in Determining Exempt vs. Non-Exempt Status?
While many people assume that pay structure is the determining factor, other aspects play important roles in deciding the employee’s exempt vs. non-exempt status determination.
Exempt | Non-Exempt | |
Overtime Eligibility | Not eligible for overtime pay for hours worked above 40/week | Eligible for overtime pay for all hours worked above 40/week |
Minimum Wage | Minimum base salary ($35,568 as of 2025) | All FLSA & state regulations for minimum wage apply |
Salary Structure | Salaried | Paid hourly |
Part-Time vs. Full-Time | Usually full-time | Usually part-time but can also be full-time |
Job Duties | Vary, but typically include professional, supervisory, strategic, and/or decision-making duties | Vary, but typically include technical, customer service, or manual tasks |
We’ll explore each of these aspects further below.
What Does It Mean to Be an Exempt Employee?
Overtime
Exempt employees generally do not report hours worked, so they are not entitled to overtime pay.
Minimum Wage
Exempt employees’ minimum wage is based on a minimum baseline salary instead of an hourly rate. While this is the subject of much discussion, the current federal minimum salary for exempt employees as of January 2025 is $35,568 per year.
Note that this can vary by state. California, for example, requires that exempt workers be paid at least twice the state’s minim wage. In this example, the current minimum wage in California is $16.50/hour, so the minimum salary for exempt workers would be $68,640 as compared to the $34,320 an hourly employee making minimum wage would make for the same 40-hour workweek.
Salary Structure
As they do not track hours worked, exempt employees are nearly always salaried (vs. paid hourly).
Part-Time vs. Full-Time
Exempt employees will almost always be full-time.
Job Duties
In most cases, exempt employees will be in a professional or managerial role. Examples include supervisors, IT professionals, outside sales representatives, doctors, lawyers, and teachers.
What Does It Mean to Be a Non-Exempt Employee?
Overtime
Non-exempt employees are entitled to overtime pay for any hours worked per week above 40. Overtime pay equates to time-and-a-half for the employee’s regular rate. For example, a non-exempt employee that makes $20/hour would make $30/hour for any hour worked above 40 for a given week.
Note: This can be a grey area, as payroll cycles do not always follow a weekly schedule of paydays. In most cases and states, employees’ pay must be determined on a weekly basis and calculated for a pay date within the pay cycle. Each state and locality can also set its own requirements for overtime reporting. For example, California requires daily entries for overtime tracking.
Minimum Wage
Non-exempt employees must make at least the federal minimum wage ($7.25/hour in 2025).
Minimum wage can also vary by state or even locality (city, county, etc.), though this wage can never be lower than the federal rate. For example, the current minimum wage in California is $16.50/hour—$9.25 higher per hour than the federal minimum wage. Within California, San Francisco has a local ordinance listing the minimum wage at $18.67/hour. In cases like this, the employee must make the higher minimum wage.
While this is an uncommon scenario, it’s very possible that employees that all work for the same company make different minimum wages.
Example: A Pennsylvania-based company mostly hires employees residing in-state but has recently hired two California-based employees: one from Sacramento and one from San Francisco. Pennsylvania follows the current federal minimum wage of $7.25/hour. So most of the company’s employees would make a minimum of $7.25/hour, while the Sacramento-based employee would make the California minimum wage of $16.50/hour and the employee living in San Francisco would make the local minimum wage of $18.67/hour.
Salary Structure
Non-exempt employees must track hours worked to be eligible for overtime.
Part-Time vs. Full-Time
While they can technically work full-time hours, many non-exempt employees tend to work part-time.
Job Duties
This designation is much broader, and most employees will fall into this category. In most cases, non-exempt employees will be in a role that does not have significant decision-making or managerial authority. Examples include clerical or manual tasks, working in the trades (electrical, plumbing, etc.), production/plant work, and customer service.
Why Are Employees Sorted Into Exempt vs. Non-Exempt Designations?
The exempt and non-exempt employee status stems back to the post-Depression-era New Deal program. In an era of economic turmoil, this series of programs was designed to improve the nation’s socioeconomics, especially the situations of the working class and tender populations like children and the elderly.
The Fair Labor Standards Act (FLSA) was passed in 1938 as part of the New Deal era, focused on protecting workers from unfair labor practices. In addition to prohibiting the employment of minors (what had regularly included “oppressive child labor”), FLSA determined:
- A federal minimum wage
- Limiting work weeks to 40 hours (and requiring 1.5x hourly pay rate for hours worked above that amount)
Non-exempt employees are covered by the protections put in place by FLSA. Exempt employees, however, are not covered because they meet specific criteria to exclude them from this act: executive/administrative job duties and salary-based pay instead of an hourly wage.
The distinction is intended to ensure that hourly and lower-wage workers receive fair compensation for their extra work, while also recognizing that higher-paid roles often come with broader responsibility and more flexible hours.
What Are the Implications for Incorrect Designation of Employee Status?
Proper employee status classification is crucial to understand and implement. Misclassification can have serious legal, financial—and reputational—consequences for employers. Some of these implications include:
- Legal Consequences — Lawsuits from individual or groups of employees (class action suits, for example), government investigation and sanctions like fines or penalties
- Financial Penalties — Back pay and taxes (often with interest accrual), double damages (back pay + equal amount as damages), and state-specific financial penalties
Outside of these legal and financial penalties, the reputational damage can be more significantly impactful than one might think. An employer that is willfully and regularly misclassifying employees to avoid paying overtime can lead to a workforce that feels exploited and resentful—leading to both high turnover rates and difficulty hiring talent—and can result in public scrutiny that can ultimately lead to a company being “canceled” and driven to bankruptcy.
How Can You Ensure You’re Correctly Assigning Exemption Status to Your Employees?
Department of Labor Duties Tests
The Department of Labor (DoL) provides guidelines to help employers determine whether an employee should be classified as exempt or non-exempt. In general, the answer must be “yes” to all three of these FLSA exemption questions for an employee to be classified as exempt:
- Is the employee paid on a salary basis?
- Does the employee earn at least the federal minimum salary (more in states/localities with with higher minimum wage)?
- Do the employee’s job duties include any of the following: management of a team or office, require advanced knowledge or education, sell outside of the corporate office?
In general, positions that generally require routine exercise of discretion and independent judgement will be classified as exempt through the DoL duties test.
Review State Rules
Some states have stricter rules than the federal standards about salary thresholds or job duties that constitute exemption. Employers will always be required to follow whichever standard (federal or state) provides greater protection and benefits to the employees.
Review Job Duties and Descriptions
Keep detailed job descriptions for each position. These should accurately reflect actual duties the employee holding this position will be responsible for. As regulations continually evolve, conduct regular classification audits to ensure that roles, titles, duties and salaries comply with the most current requirements.
Pro Tip: Make a note to pay particular attention to employees whose salaries are close to the minimum threshold and those whose duties have shifted since the last audit.
(For other helpful reminders, check out our Year-End Payroll and HR Checklist!)
Keep Records
Keep records of the job duties/description audits discussed above, along with records of all hours worked (including overtime) for non-exempt employees. Tracking hours for exempt employees (while not strictly required) can also be helpful protection in case of an audit. When in doubt, archive all historical data for verification should the need arise!
Seek Professional Advice
For complex cases, consult with HR professionals, payroll specialists, or labor attorneys to avoid misclassifying employees so you can avoid potential penalties.
Green Payroll Support for Employee Classification
By doing a bit of due diligence, employers can limit the liability the area of exempt vs. non-exempt employee status can produce. Still have concerns about employee classification? We’re here to help! Green Payroll has professional HR staff that help to navigate the job description, duties and responsibilities, and help to hire correctly. Contact us to start exploring your company’s unique needs!