Non-exempt vs non-exempt salaried vs exempt: What’s the difference?

Video transcript:

Jim Duffy: Non-exempt, non-exempt salaried, and exempt employee classifications are some of the most misunderstood terms when it comes to the federal Fair Labor Standards Act, also known as the FLSA. Unfortunately, misunderstanding these terms and the rules that govern them can result in costly penalties. In this podcast, we'll cover key details about these classifications and discuss what employers need to know about them. Welcome to HR preneur. I'm Jim Duffy. From Main Street to your street, the HR preneur podcast is centered around helping small businesses like yours gain the knowledge you need, from HR payroll and hiring to time, taxes, benefits, and insurance. Today we'll talk with our guest, Meryl Gutterman, about classifying an employee as non-exempt, non-exempt salaried, or exempt. Meryl is senior counsel with ADP's HCM group. Hey Meryl, it's great once again to have you back on the show.

Meryl Gutterman: Thanks, Jim. It's great to be here today.

Jim Duffy: First off, what should employers understand about non-exempt employees?

Meryl Gutterman: So, under the federal Fair Labor Standards Act, or the FLSA, an employee who is considered non-exempt is entitled to at least the minimum wage for each hour worked and overtime pay at 1 and a half times the employee's regular rate of pay whenever they work more than 40 hours in a workweek. Non-exempt means that the employee is not exempt from the protections of the FLSA, such as overtime and minimum wage. Also, keep in mind that there are some states that may require overtime in additional circumstances. Employees are considered non-exempt unless they meet the FLSA tests for exemption.

Jim Duffy: Oh great, thank you for that, Meryl. We're going to get to those exemption tests in a minute, but let's go back here. What then is a non-exempt salaried employee?

Meryl Gutterman: So most non-exempt employees are paid on an hourly basis. However, there are employers who choose to pay non-exempt employees on a salary basis, but to do so, they have to make sure that the employee's pay for each hour of work meets or exceeds the minimum wage and the employee is paid overtime whenever they work more than 40 hours in a workweek. So, a non-exempt salaried employee is one who is entitled to the minimum wage and overtime but is paid a salary instead of an hourly wage, and they too are subject to the same recordkeeping requirements as other non-exempt employees.

Jim Duffy: Meryl, we sometimes see employers use "salaried" and "exempt" interchangeably for employees who are classified as exempt from the minimum wage and overtime. Should these terms be used interchangeably?

Meryl Gutterman: No, no, they shouldn't. While employers sometimes use the terms salaried and exempt interchangeably, not all employees who are paid a salary are exempt from overtime. So, we should use the term exempt when we're talking about an employee who is not entitled to overtime, meaning they are exempt from the FLSA overtime requirements. As you just made clear, non-exempt salaried employees are entitled to overtime whenever they work more than 40 hours in a workweek under the FLSA, and overtime must be paid at 1.5 times the employee's regular rate of pay.

Jim Duffy: How do you calculate the regular rate of pay for a non-exempt salaried employee?

Meryl Gutterman: Well, under the FLSA, calculating a non-exempt salaried employee's regular rate of pay for overtime purposes depends on the number of hours that the employer and the employee understand that the salary is intended to cover, provided the employee is reasonably expected to work for that number of hours. So, for example, if the employer and the employee understand the salary to cover 45 hours, then the employer may calculate the regular rate of pay by dividing the weekly salary in addition to any other form of compensation by 45 hours. Keep in mind though, that some states have different rules. So, in California, for example, employers are limited to dividing the weekly salary by a maximum of 40 hours when calculating the regular rate of pay for non-exempt salaried employees.

Jim Duffy: So, Meryl, when it comes to non-exempt and non-exempt salaried employees, is there anything else you'd like to cover?

Meryl Gutterman: Yes, there is. So, with non-exempt and non-exempt salaried employees, keeping an accurate record of hours worked is critical to help employers comply with the law. And keep in mind that under the FLSA, hours worked includes not only productive time, which is the time you actually spend working, but also certain nonproductive time such as rest breaks, travel time, and training time, and all of this must be included when determining whether you have met your minimum wage and overtime obligations.

Jim Duffy: So, Meryl, in addition to keeping an accurate record of hours, what other types of records must employers keep for non-exempt employees?

Meryl Gutterman: There are a number of records. So, employers have to maintain:

• The employee's name, home address, occupation, sex, and birth date if they're under 19 years of age.
• The hour and day when the workweek begins.
• The total hours worked each workday and each workweek.
• The total daily or weekly straight time earnings.
• The regular hourly pay rate for any week when overtime is worked.
• The total overtime pay for the workweek.
• Deductions from or additions to wages.
• The total wages that are paid each pay period in addition to the date of payment and the pay period that's covered.

Jim Duffy: So, Meryl, what if the regular time or overtime that the non-exempt employee worked wasn't authorized in advance?

Meryl Gutterman: Under the FLSA, if a non-exempt employee has worked overtime, they have to be paid an overtime premium regardless of whether the overtime was pre-authorized. So, if you have a policy that no overtime work is permitted unless it's authorized in advance, that still doesn't relieve you as the employer of this requirement. And also, employers can't withhold pay for time worked if the employee clocks in before their scheduled start time either.

Jim Duffy: All right, Meryl, let's switch gears. Let's turn to exempt employees. What is an exempt employee and what sets them apart?

Meryl Gutterman: So, as I briefly mentioned earlier, under federal law, an exempt employee is someone who is not subject to certain requirements under the FLSA, including federal overtime and minimum wage. These employees typically work in administrative, professional, and executive roles. To be considered exempt, they have to satisfy three tests:

1. The Salary Level Test: As of July 1, 2024, employers must pay employees a salary of at least $844 per week to meet the salary level test for these exemptions. Then, effective January 1, 2025, the minimum salary required for these exemptions is scheduled to increase to $1,128 per week.
2. The Salary Basis Test: This means that, with very limited exceptions, the employer must also pay employees their full salary in any week they perform work regardless of the quality or the quantity of the work.
3. The Duties Test: Under this test, the employee's primary work duties have to meet certain criteria.

Unless all of these tests are met, the employee must be classified as non-exempt, and they would then be entitled to at least the minimum wage for each hour worked and overtime pay if they worked more than 40 hours in a workweek.

Jim Duffy: So, Meryl, a moment ago you mentioned that some states have their own rules for exemption. How do these impact employers?

Meryl Gutterman: Yes, a number of states do have their own salary and duties tests for determining whether an employee is exempt from overtime under state rules. And generally, if the state law is more protective of the employee—and that means the law requires a higher salary amount or has a duties test that's harder to meet—then the state law should be followed. Complicating matters is that some states have exemptions from overtime but not for minimum wage. So, in those states, an exempt employee salary generally must also be sufficient to satisfy the minimum wage for all hours worked in a workweek to maintain that exemption.

Jim Duffy: Meryl, it's always fascinating to hear and have you share your information with us. It's useful and helpful, and this actually brings us to the end of our episode. Thanks once again. I enjoyed having you here on the show. So let's, um, let's recap some notes I've taken and please keep me honest. Um, I'll start with:

• Non-exempt employees are entitled to at least the minimum wage for each hour worked and overtime whenever they work more than 40 hours in a workweek.
• Non-exempt employees are typically paid on an hourly basis but may be paid as a salary instead, provided the employee's pay for each hour of work meets or exceeds the minimum wage and the employee is paid overtime whenever they work more than 40 hours in a workweek.
• For overtime purposes, the regular rate of pay of a non-exempt salaried employee depends on the number of hours the employer and the employee understand that the salary is intended to cover, provided the employee is reasonably expected to work that number of hours. State rules may differ.
• Accurately recording hours worked is key to complying with minimum wage and overtime requirements for non-exempt employees.
• Under the FLSA, if a non-exempt employee has worked overtime, they must be paid an overtime premium regardless of whether the overtime was pre-authorized.
• My last summary here is: state laws should also be considered.

Meryl Gutterman: Well, well said and well summarized. Thank you.

Jim Duffy: Thank you, Meryl. Presented by ADP, HR preneur focuses on the entrepreneurs and business drivers who are shaping the growth of their companies and positively impacting the lives of their employees. With each episode, we bring the experts to you, we answer your questions, and help you think beyond today so you can discover more success tomorrow. Thanks also to our listeners for joining us for today's episode. Be well, and we hope you'll join us again soon.