What’s the difference between exempt vs. nonexempt employees?

Employee classification can be a bit of a maze. And navigating it is more than a bureaucratic chore. It's a strategic necessity for every business. For HR managers and directors, understanding the major differences between exempt and nonexempt employees is foundational to running a compliant and efficient operation. Mistakes in classification can undermine employee trust and lead to severe financial penalties. So, it's important to get it right from the start.

In this article, we explain the difference between exempt and nonexempt employees. We share typical examples of each category, outline the key distinctions, and discuss the legal implications of each classification. By demystifying these terms, we aim to equip you with the knowledge to make informed decisions that protect your company and support your workforce.

What is an exempt employee?

An exempt employee is one who’s exempt from overtime pay provisions of the Fair Labor Standards Act (FLSA). This classification typically applies to employees who perform high-level work as their primary duty, receive a salary, and earn at least a specified minimum. The term "exempt" means these employees are "salary exempt," which indicates they don’t qualify for the overtime rules that apply to nonexempt employees.

Exempt employees often enjoy greater schedule flexibility, may earn higher compensation, and sometimes qualify for more comprehensive benefits in comparison to their nonexempt counterparts.

Examples of exempt employees 

To better understand who qualifies as an exempt employee, here are some common roles that typically meet the criteria for exemption because of their job responsibilities and level of decision-making authority:

• Business executives: Executives operate at a high level within a company, often managing a significant number of employees and making key decisions that affect the company's direction.
• Accountants: Qualified accountants, especially those in positions requiring discretion and independent judgment on significant financial matters, often qualify as exempt.
• Marketing professionals: Marketing roles that require considerable independent judgment and strategic thinking, often impacting business operations broadly, typically qualify as exempt.
• Managers: Managers supervise employees, have hiring or firing authority, and make significant contributions to operational decisions, which usually meets the criteria for exemption.
• Executive assistants: Executive assistants provide direct support to business executives and perform duties that significantly affect the company’s operations, which may also classify them as exempt.

What is a non-exempt employee?

A non-exempt employee qualifies for overtime pay under the Fair Labor Standards Act. These employees receive wages for each hour they work and earn overtime at a rate of one and a half times their regular hourly wage for hours exceeding 40 in a workweek.

Unlike their exempt counterparts who earn a fixed salary regardless of extra hours, non-exempt workers directly benefit from longer shifts through increased pay and always receive protection under state or federal minimum wage laws, which ensures fair compensation.

Examples of nonexempt employees 

Here are some common roles that typically fall into the nonexempt category, each requiring compensation for the hours they work beyond the standard workweek:

• Electricians: Often paid hourly, electricians must receive overtime pay for time spent on projects beyond the typical 40-hour workweek.
• Construction or maintenance workers: These workers earn hourly wages and are eligible for overtime when they exceed 40 hours of labor in a single week.
• Cashiers: Employed in retail settings, cashiers receive hourly compensation and qualify for overtime pay when they work over the standard full-time hours.
• Clerical or secretarial employees: These staff members handle routine office tasks on an hourly basis and receive overtime pay for any work beyond 40 hours per week.
• Food servers: Typically earning an hourly wage, food servers in restaurants and bars have a right to overtime for working long or irregular shifts.

4 differences between exempt and nonexempt employees

Here are four critical distinctions between exempt and nonexempt employees to help employers understand the difference:

Salary and overtime eligibility

Exempt employees earn a fixed salary and aren't eligible for overtime pay regardless of the extra hours they work. In contrast, nonexempt employees must receive overtime pay at a rate of one and a half times their regular hourly wage for the hours they work beyond 40 per week. 

Example: A project manager earning a yearly salary may work 50 hours one week without additional pay, whereas an hourly-paid administrative assistant would earn overtime for the 10 extra hours.

Job duties and responsibilities

Exempt workers typically perform high-level, strategic work that requires independent judgment and expertise. Nonexempt employees generally carry out operational or clerical tasks that follow established guidelines and procedures.

Example: A financial analyst who devises investment strategies is exempt, whereas a customer service representative handling queries based on a script is nonexempt.

Supervision and decision-making authority

Employees with exempt status often hold managerial or supervisory roles that involve making significant decisions about operations or personnel. Nonexempt employees usually have roles with little to no decision-making authority, primarily executing tasks under close supervision.

Example: A marketing director who decides on campaign strategies and oversees a team is exempt, while a sales clerk who stocks shelves and follows a manager’s instructions is nonexempt.

Work structure and independence

Exempt employees usually have the freedom to set their own schedules and approach tasks in a manner they see fit, reflecting their need for independence in decision-making. Nonexempt employees have more structured roles with set hours and specific guidelines on how to perform their tasks.

Example: An IT consultant who travels to different clients and manages his own schedule is exempt, while a call center operator who must adhere to a strict shift schedule is nonexempt.

Wage and overtime laws for exempt and non-exempt employees

Understanding and adhering to wage and overtime laws is key to maintaining compliance with federal regulations and ensuring fair treatment of all employees. Here’s a breakdown of these laws concerning exempt and non-exempt employees:

Minimum wage laws — federal vs. state differences

The federal minimum wage stands at $7.25 per hour, but many states set higher rates. For example, California requires employers to pay at least $16.50 per hour. Non-exempt employees benefit from these higher state minimum wages because they earn more per hour than they would under the federal rate.

For employees exempt from overtime, many states set salary thresholds that exceed the federal requirement of $684 per week ($35,568 per year). Some states, including California, require exempt employees to earn at least twice the state minimum wage for full-time work. In California, that means an exempt employee must earn at least $68,640 per year. New York and Washington also impose higher salary requirements for exempt employees, but the exact amounts vary.

Employers must check state laws to ensure they meet the correct salary threshold for exempt status. When a state raises its minimum wage, the minimum salary for exempt employees in that state may also increase.

Overtime pay for nonexempt employees

Salaried employees don't earn overtime. Nonexempt employees do, but the FLSA sets strict rules on how employers must compensate for this overtime. Employers must calculate overtime based on the employee’s regular rate of pay, which includes not just hourly wages but also bonuses, commissions, and certain other forms of compensation. Miscalculating overtime by excluding these earnings can result in legal penalties.

Some states go beyond federal law by requiring daily overtime pay when an employee works more than a set number of hours in a single day. For example, California mandates overtime pay after eight hours of work in a single day, not just after 40 hours in a week. Employers operating in multiple states must follow the most worker-friendly law that applies to each location.

Certain types of work arrangements also affect overtime eligibility. For instance, employers who use alternative workweeks, like four 10-hour shifts, must ensure they comply with both state and federal laws. Additionally, on-call time, required travel, or work performed remotely outside normal hours may also count toward overtime if the employer requires or benefits from the work.

Employers can't offer comp time (compensatory time off instead of overtime pay) in the private sector. Only government employers can provide comp time under specific conditions. In the private sector, employers must pay overtime in cash, even if an employee prefers time off.

Failing to follow overtime laws can lead to severe consequences, including back pay claims, liquidated damages, and additional penalties under state and federal labor laws. So employers must stay updated on changes to wage laws and review payroll practices regularly to avoid costly violations.

FLSA regulations on exempt vs. nonexempt status

The Department of Labor (DOL) enforces FLSA regulations to define exempt status and ensure proper worker classification. To qualify as exempt, employees must meet three key tests:

• Salary Basis Test: The employee must receive a fixed salary that doesn't fluctuate based on hours worked or performance.
• Salary Level Test: The employee must earn at least $684 per week ($35,568 per year). Some states set higher minimum salary levels for exemption.
• Job Duties Test: The employee’s primary responsibilities must align with one of the exemption categories (executive, administrative, professional, outside sales, or computer-related positions).

Employers must classify salaried employees as nonexempt if they fail to meet all three exemption criteria. Non exempt workers qualify for overtime pay. Employers cannot waive these requirements or negotiate away overtime rights. Even if an employee agrees to work extra hours without overtime pay, the law still requires the employer to compensate them properly.

The Department of Labor updates exemption rules regularly, and some states enforce stricter requirements than federal law. Employers must review job classifications frequently to stay compliant with both federal and state laws.

How to classify exempt and non-exempt employees: 5 steps

Employers must follow a structured process to classify employees correctly and comply with federal and state laws. Here's a step-by-step guide: 

Step 1. Define salary requirements (basis and level)

Exempt workers must receive a fixed salary, meaning their pay stays the same regardless of the number of hours they work. Employers must make sure that the salary meets both federal and state minimum thresholds:

• Federal law sets the minimum salary for exempt employees at $684 per week ($35,568 per year).
• Some states, such as California and New York, set higher salary requirements. For example, California requires $68,640 per year for an employee to qualify as exempt.
• Employers must classify employees earning below the required salary as non-exempt, no matter their job duties.

Step 2. Test job duties

A salary alone doesn’t determine exempt status. Employers must also analyze the employee’s primary responsibilities. The FLSA defines five exemption categories:

• Executive exemption: The employee manages the company, a department, or a division and supervises at least two full-time employees.
• Administrative exemption: The employee performs office or non-manual work that relates to business operations and exercises independent judgment.
• Professional exemption: The employee uses advanced knowledge in a specialized field, such as law, medicine, or engineering.
• Computer employee exemption: The employee works as a systems analyst, programmer, or software engineer and earns at least $684 per week or $27.63 per hour.
• Outside sales exemption: The employee primarily makes sales away from the employer’s business location.

If the employee’s job duties don’t meet one of these exemptions, an employer must classify them as non-exempt and pay them for overtime. 

Step 3. Review federal and state labor laws

The FLSA sets federal rules, but some states have stricter laws on employee classification. Employers must check both:

• State overtime laws: Some states require daily overtime pay (e.g., California requires overtime after 8 hours in a day, not just 40 hours per week).
• State salary requirements: Some states set higher salary thresholds for exempt employees than federal law. For example, New York requires employers with 11 or more employees in New York City, Long Island, and Westchester County to pay exempt employees at least $1,200 per week ($62,400 per year).
• Industry-specific exemptions: Certain industries, such as healthcare, construction, and hospitality, have special overtime rules that employers must follow. For example, in Ohio, hospitals and nursing homes can use a 14-day work period instead of a 7-day workweek to calculate overtime, but they must pay overtime for hours exceeding 80 in a two-week period, or over 8 hours in a single day.

Step 4. Verify compliance and document classification

Employers must keep written records of how they determine an employee’s classification. This includes:

• job descriptions that clearly outline the employee’s primary duties
• salary records that prove the employee meets the salary threshold for exempt status
• work schedules and overtime policies that align with federal and state laws

Employers must also apply consistent classification across similar roles. Two employees performing the same job duties can't have different classifications without a legal reason.

Step 5. Communicate classification and implement policies

After classifying employees correctly, employers must inform employees about their status and update company policies to ensure compliance. This includes:

• notifying employees whether they are exempt or non-exempt
• clarifying overtime policies for non-exempt employees
• training managers on labor laws and correct time-tracking procedures

Employers must review classifications regularly, especially when job duties change, salaries increase, or laws update.

What happens if you misclassify employees?

Misclassifying employees as exempt from overtime when they should be non-exempt leads to serious legal and financial consequences. Employers who fail to classify workers properly may owe back wages, face fines, and risk lawsuits. The FLSA enforces strict penalties for noncompliance, and many states impose additional regulations that increase liability.

Here’s what can happen when an employer misclassifies an employee:

Legal and regulatory consequences

The DOL actively enforces wage and hour laws, and misclassification violations often result in government investigations. If an employer improperly classifies an employee as exempt, the DOL may audit payroll records, interview employees, and require back payment of wages. Some states have their own labor agencies that conduct investigations, often imposing stricter penalties than federal law.

Employers must also comply with state-specific laws, which may differ from federal guidelines. For example, New York and California impose additional penalties beyond the FLSA for failing to classify employees properly. In some cases, government agencies may ban repeat violators from bidding on public contracts or receiving state funding.

Financial penalties and fines

Employers who misclassify employees may face hefty financial penalties under both federal and state laws. The FLSA requires employers to compensate misclassified employees for unpaid overtime, and in many cases, employers must pay double damages (the original unpaid wages plus an equal amount in liquidated damages).

If an employer intentionally misclassifies employees, the DOL may impose additional civil penalties of up to $1,000 per violation. Some states, such as California, Illinois, and Massachusetts, allow employees to recover three times their unpaid wages in certain cases.

Employers also risk additional penalties for failing to maintain accurate payroll records, which is a common issue in misclassification cases. Under FLSA rules, employers must keep detailed records of the hours their employees work and the wages they pay. Failing to do so may result in fines and additional wage disputes.

Potential lawsuits for unpaid wages

Employees who believe an employer misclassified them can file wage and hour lawsuits to recover unpaid overtime, back wages, and damages. They can sue individually or as part of a class-action lawsuit if multiple employees experienced the same misclassification.

Courts frequently rule in favor of employees when employers fail to meet wage and hour laws. Lawsuits often lead to substantial payouts, with legal fees and settlements reaching hundreds of thousands or even millions of dollars, especially when multiple employees take legal action together.

Expenses incurred to correct misclassification

Fixing a classification mistake requires more than just paying back wages. Employers must also:

• update payroll systems to ensure accurate classification and payment structures
• train HR teams and managers on proper wage and hour compliance to prevent future mistakes
• revise employee handbooks and contracts to reflect updated policies
• adjust time-tracking systems to make sure all non-exempt employees record their hours correctly.

Misclassification can also damage employee trust and lower workplace morale. Employees who feel cheated out of wages may become disengaged or look for opportunities elsewhere, leading to higher turnover and recruiting costs.

Streamline your workforce and employee classification management with Rippling

​Keeping up with employee classification laws and workforce management can feel overwhelming. Misclassifications lead to legal risks, payroll errors, and compliance issues. This can cost businesses thousands in penalties and back wages. With complex overtime laws, multi-state compliance requirements, and shifting job classifications, managing employees manually isn’t just time-consuming—it’s risky.

Rippling is the only platform that unifies all of a company’s HR, Payroll, IT, and Spend systems into a single workforce management solution. You can onboard new hires in 90 seconds, run payroll quickly and accurately, and automate many compliance processes. The best part? You can do all of this from one easy-to-use platform.

With Rippling, you can eliminate manual classification errors and automatically track employee data across payroll, time tracking, and benefits administration to make far easier work of complying with state and federal labor laws.

• Automatic overtime calculations: Rippling automatically calculates overtime pay for nonexempt employees, factoring in bonuses, commissions, and premium pay, so every paycheck is correct.
• State and federal law updates: The system auto-updates labor laws in payroll settings based on where employees work, preventing state-by-state compliance gaps.
• Audit-ready record-keeping: Rippling tracks employee hours, pay, and job classifications in one system, making it easy to prove compliance in case of a government audit.

Companies using Rippling spend far less time on administrative HR tasks and can benefit from eliminating costly payroll and compliance mistakes. 

FAQs on exempt vs nonexempt employees

What does exempt mean in a job?

If an employee is exempt, it means they don't have a right to overtime pay or minimum wage protections under the FLSA. This generally applies to executive, administrative, professional, outside sales, and certain computer-related roles.

To qualify as exempt, an employee must:

1. perform exempt job duties (e.g., management, specialized knowledge, or decision-making)
2. receive a fixed salary, not based on the hours they work
3. earn at least $684 per week ($35,568 per year) under federal law

Some states require a higher salary threshold for exemption, often linked to state minimum wage laws:

• California requires twice the state minimum wage, meaning a $68,640 annual salary in 2024.
• New York and Washington also set higher exempt salary requirements.

Employers must follow the higher of federal or state law, so checking state-specific exemptions is essential.

What does non exempt mean in a job?

A nonexempt employee qualifies for minimum wage and overtime pay under the FLSA. When a nonexempt employee works more than 40 hours in a week, the employer must pay overtime at 1.5 times the regular hourly rate.

Nonexempt employees can earn an hourly wage or a salary, but they don’t meet the FLSA requirements for exempt status. If a job doesn’t qualify for exemption, the employer must classify the employee as nonexempt and ensure proper overtime pay.

How do you determine if a position should be exempt or nonexempt?

To determine whether a position qualifies as exempt or nonexempt, employers must evaluate three key factors:

1. Salary basis: The employee must receive a fixed salary that does not fluctuate based on hours worked.
2. Salary level: The employee must earn at least $684 per week ($35,568 per year) under federal law. 
3. Job duties: The employee’s primary job duties must meet the criteria for one of the FLSA exemption categories:
• Executive (e.g., managers and department heads)
• Administrative (e.g., HR, finance, and compliance roles)
• Professional (e.g., doctors, lawyers, engineers)
• Outside sales (e.g., traveling sales representatives)
• Computer employees (e.g., software engineers and IT analysts)

If a job doesn't meet all three criteria, the employer must classify the employee as nonexempt and pay them overtime for the hours they work over 40 per week.

Does an exempt employee have to work 40 hours a week?

No, exempt workers don't have a legal requirement to work 40 hours per week under the FLSA. As they earn a fixed salary, their pay doesn't change based on the number of hours they work.

However, employers can set expectations for work hours and job performance. Many exempt employees work more than 40 hours because of job demands, but they’re exempt from overtime.

Some employers offer flexibility, allowing exempt employees to adjust their schedules as long as they meet performance expectations. However, state laws may affect certain industries, so employers should review local labor laws for additional requirements.

What is the duties test for exempt employees?

The duties test ensures an employee’s primary job responsibilities qualify for exempt status under the FLSA. Simply paying an employee a salary doesn't make them exempt. They must perform specific exempt duties.

Each FLSA exemption has a different duties test:

• Executive exemption: Must manage a business or department, supervise at least two employees, and have the authority to hire or fire staff.
• Administrative exemption: Must perform non-manual office work that relates to business operations and exercise independent judgment in decision-making.
• Professional exemption: Must work in a field requiring advanced knowledge or specialized training, such as law, medicine, accounting, or engineering.
• Computer employee exemption: Must work as a systems analyst, software engineer, or programmer and earn at least $684 per week or $27.63 per hour.
• Outside sales exemption: Must regularly work outside of the employer’s place of business making sales or obtaining contracts.

If an employee fails to meet the duties test, an employer must classify them as nonexempt and pay them for overtime.

This blog is based on information available to Rippling as of March 5, 2025.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.