No matter who’s on your team, HR leaders need to understand the difference between exempt vs. non-exempt employees.
Think of it this way: exempt workers are exempt from certain protections under the Fair Labor Standards Act (FLSA), which lays out minimum wage and overtime rules. Non-exempt workers are (you guessed it) not exempt from these protections.
If you classify someone incorrectly, you risk expensive compliance violations and legal issues. And in some areas, non-exempt employees may have the right to even greater benefits than those mandated by the FLSA. When you get this classification right, you protect your business from penalties and ensure the fair treatment of your workforce.
What Is an Exempt Employee?
Per federal law, workers who are paid a salary above a certain level and perform specific types of work are called exempt employees. These roles typically involve executive, administrative, or professional duties that require independent judgment and decision-making authority.
To qualify as exempt, an employee needs to meet both salary and job duty requirements. These job descriptions typically involve managing others, exercising discretion on significant matters, and advanced knowledge in a specialized field. Exempt employees are generally not subject to the same wage and hour protections as their non-exempt counterparts.
Examples of Exempt Employees
These types of positions are typically exempt:
- Chief financial officers who oversee financial operations and strategic planning
- Executive directors who manage departments and supervise multiple employees
- HR managers who develop company policies and oversee personnel decisions
- IT managers who lead technical teams and make strategic technology decisions
- Marketing directors who develop campaign strategies and manage budgets
- Licensed professionals such as doctors, lawyers, and engineers
- Creative workers who produce original written or designed assets
- Corporate professionals, including managers and employees, who make independent decisions at work
Pros and Cons of Exempt Employees
Employing exempt workers has many pros and cons, including:
| Pros | Cons |
|---|---|
| • Predictable payroll costs with fixed salaries • No overtime calculations or tracking required • Greater scheduling flexibility for both employer and employee • Typically attracts experienced professionals with specialized skills • Simplified payroll processing and administration | • Higher base salary requirements • Limited ability to reduce compensation during slow periods • Potential for employee burnout without overtime compensation • Must ensure positions meet exemption criteria to avoid misclassification • Company culture requires careful monitoring to prevent overwork |
What Is a Non-Exempt Employee?
Non-exempt employees are protected by FLSA wage and hour laws. They’re usually paid an hourly wage or earn a salary below the exemption threshold. These employees must receive at least minimum wage for all hours worked, plus overtime pay for any hours beyond 40 in a workweek.
Most jobs that involve routine tasks, direct supervision, or manual labor fall into the non-exempt category. The nature of the work typically doesn’t require the same level of independent judgment as exempt positions.
Examples of Non-Exempt Employees
Common non-exempt positions include:
- Administrative assistants who provide clerical support
- Customer service representatives who handle routine calls
- Retail associates who assist customers and process sales
- Manufacturing workers who operate machinery or assemble products
- Restaurant servers and kitchen staff
- Data entry workers who input and manage information
Pros and Cons of Non-Exempt Employees
Managing non-exempt employees has pros and cons, including:
| Pros | Cons |
|---|---|
| • Flexibility to scale labor costs based on business needs • Employees receive fair compensation for all hours worked • Clear wage and hour protections reduce compliance risk • Overtime pay provides additional earning opportunities for employees | • Administrative burden of tracking hours and calculating overtime • Higher labor costs during peak periods requiring overtime • Potential for payroll errors if hours are not accurately recorded • More complex payroll tax calculations |
Exempt and Non-Exempt Employees: Wage and Hour Laws
The FLSA provides a framework for wage and hour requirements nationwide. Depending on your company’s location, you may need to comply with additional wage, hour, and overtime rules. The following rules apply on a federal level, meaning they impact employees in every U.S. state:
FLSA Overtime Rule
The FLSA requires employers to provide non-exempt employees overtime pay at 1.5x their regular rate for any hours worked beyond 40 hours in a standard workweek.
As of January 1, 2025, most employees (with some exceptions) must earn at least $684 per week to potentially qualify for exempt status (DOL). However, meeting the salary threshold alone doesn’t automatically make an employee exempt. The position must also satisfy specific job duty tests established by the Department of Labor.
Note that as of December, 2025, various lawsuits regarding the minimum exempt salary threshold are still in process. The final number is subject to change. Leaders should refer to the DOL website and check in with compliance experts to make sure their policies are up to date.
Exempt Employee Overtime
Exempt employees are not entitled to overtime pay under federal law, no matter how many hours they work. However, some employers choose to offer additional compensation or time off to exempt employees who consistently work long hours, even though they’re not legally required to do so. This can be one of many valuable retention strategies.
In some states, local laws impose additional requirements. Always check your state’s specific regulations, since they may provide greater protections than federal law.
How to Classify Exempt vs. Non-Exempt Employees
To determine whether a worker qualifies as exempt, consider the following factors. All three of the following criteria must be met:
1. Determine Salary Basis
Exempt employees are paid a predetermined, fixed salary that doesn’t vary based on hours worked or quality of work. This salary must be paid in full for any week the employee performs work, with limited exceptions.
2. Determine Salary Amount:
The employee must earn at least the minimum salary threshold set by the Department of Labor. As of January 1, 2025, the threshold for executive, administrative, and professional workers is $684 per week. Other types of workers may have different thresholds per federal law.
3. Consider Job Duties
The employee’s primary duties must fall into one of the following exempt categories.
- Executive exemption: Managing the enterprise or a department, supervising at least two employees, and having authority over hiring and firing decisions
- Administrative exemption: Performing office work directly related to management or business operations and exercising discretion on significant matters
- Professional exemption: Intellectual work requiring advanced knowledge in a field of science or learning, typically acquired through prolonged specialized education
- Computer employee exemption: Computer-related work such as systems analysis, design, development, testing, or creation of computer systems or programs
- Outside sales exemption: Sales work that primarily occurs away from the employer’s place of business
Non-Exempt vs. Exempt Employee Misclassification Consequences
Incorrectly classifying employees, even unintentionally, can cause serious financial and legal consequences. Employers who misclassify non-exempt workers as exempt may face:
- Back pay for unpaid overtime, potentially covering several years
- Liquidated damages equal to the amount of unpaid wages
- Civil penalties and fees
- Additional penalties for willful violations
- Legal fees and court costs if employees file lawsuits
The Department of Labor actively investigates misclassification complaints. And employers must correct any violations promptly and compensate affected employees as soon as possible. In some cases, like intentional misclassification, employers may face criminal charges.
Exempt vs. Non-Exempt Employee State Laws
Several states have enacted laws that provide greater protections than federal standards. As of April 2025, these states included Alaska, California, Colorado, Maine, New York, and Washington (National Law Review). Here’s more information about the laws in each state:
Alaska: Employers must pay overtime after eight hours in a day, not just after 40 hours in a week.
California: Higher salary thresholds apply for exempt employees. The state requires overtime pay after eight hours per day and double time after 12 hours. California also mandates overtime for work performed on the seventh consecutive day.
Colorado: Employees must earn at least the state-specific salary threshold to qualify as exempt. Colorado requires overtime pay after 12 hours worked in a day or 40 hours in a workweek.
Maine: The state salary threshold for exempt status is tied to the state minimum wage. Maine law requires overtime pay for hours worked over 40 in a week.
New York: Salary thresholds vary by region and employer size. New York City and the surrounding areas have higher thresholds than other parts of the state.
Washington: The state has its own salary threshold that adjusts annually based on inflation. Different rules apply depending on the size of your business.
Note: Check with your legal or compliance team to confirm you’re following the most up-to-date state regulations. If your company does business in more than one state or employs remote workers, this issue requires extra attention to detail.
Tax Implications: Exempt vs. Non-Exempt
Both exempt and non-exempt employees are subject to federal and state income taxes, Social Security, and Medicare taxes. However, the administrative processes are different for the two classifications.
Exempt Employee Tax Implications
Exempt employees receive a fixed salary, which simplifies payroll tax withholding calculations. Employers withhold the same amount each pay period unless the employee changes their W-4 form or their salary changes.
The predictability of exempt employee compensation makes budgeting and tax planning more straightforward for both employers and employees. However, employers must still ensure accurate withholding based on the employee’s W-4 elections.
Non-Exempt Employee Tax Implications
Non-exempt employees present more complex tax considerations because their pay varies based on hours worked. Overtime pay increases gross pay, which can push employees into higher tax brackets and increase withholding requirements.
Exempt employees may also work through variable pay periods, which means employees may see fluctuating net pay, even when they work consistent hours.
As a result, employers must calculate withholdings on total compensation, including overtime, which requires more sophisticated payroll processing.
How Paycor Helps You Classify Exempt vs Non-Exempt Employees
To correctly classify employees, HR leaders need to stay on top of changing federal and state laws. Paycor’s payroll software provides the tools and resources you need to manage both exempt and non-exempt employees accurately.
Our platform empowers HR to:
- Track exempt and non-exempt status for all employees
- Automatically calculate overtime for non-exempt workers
- Monitor hours worked with integrated time tracking
- Generate compliance reports to verify proper classification
- Maintain accurate records in case of an audit
Paycor’s time and attendance tools integrate directly with compensation software, reducing payroll errors and streamlining all HR operations. When regulations change, our experts work with you to minimize compliance risk for everyone on your team.
Classify Non-Exempt vs. Exempt Employees Correctly
Paycor’s comprehensive HCM platform gives you the tools and support to maintain compliance across all aspects of workforce management.
Want to streamline complexity and drive results? Schedule a guided tour to learn how Paycor helps you classify employees correctly.
Exempt vs. Non-Exempt Employee FAQs
Still have questions about exempt and non-exempt employee classification? Read on!
What is a salaried exempt employee?
A salaried exempt employee receives a fixed salary that meets the federal threshold and performs duties that qualify for exemption under the Fair Labor Standards Act (FLSA). These employees are not entitled to overtime pay, no matter how many hours they work.
What is a salaried non-exempt employee?
Non-exempt employees are typically paid on an hourly basis. However, they can also be salaried or paid on commission. A salaried non-exempt employee receives a set salary each week regardless of hours worked, but they also receive overtime pay for hours beyond 40 in a workweek, or based on other criteria in certain U.S. states.
Are independent contractors considered exempt or non-exempt?
Independent contractors are neither exempt nor non-exempt because they are not employees. The FLSA applies only to employer-employee relationships. Contractors are responsible for their own taxes and are not entitled to overtime pay or other employee protections.
Can you require exempt employees to work certain hours?
Yes, employers can require exempt employees to work specific hours or be present during certain times. However, because exempt employees are paid for the job rather than the hours, their compensation doesn’t change based on the hours worked.
Does an exempt employee have to work 40 hours a week?
There is no federal requirement that exempt employees work exactly 40 hours per week. Employers can set work hour expectations, but the exempt employee’s salary cannot be reduced for working fewer hours unless specific circumstances apply, such as taking unpaid leave.
Is it better to be an exempt or non-exempt employee?
The answer depends on your individual circumstances. Exempt positions typically offer higher base salaries, but no overtime pay. Non-exempt roles provide overtime compensation and stronger wage protections but typically have lower hourly rates. For non-exempt employees, fluctuating wages can significantly impact income. Consider your financial needs, work-life balance priorities, and career goals when evaluating these opportunities.
Is it better to employ exempt or non-exempt employees?
The two classifications serve different business needs. Exempt employees work well for leadership and professional roles requiring flexibility and independent judgment. Non-exempt employees are appropriate for positions with defined tasks and variable workloads. Many companies employ a mix of exempt and non-exempt employees to meet a variety of needs.
Can you reclassify an exempt or non-exempt employee?
Yes, employers can reclassify employees when a worker’s compensation or job duties change. However, reclassification must be based on legitimate changes to the position, not simply to avoid paying overtime. Make sure you document any changes clearly in order to maintain compliance.
Are highly compensated employees eligible for overtime pay?
Highly compensated employees may be exempt from overtime if they perform at least one exempt duty. The requirements for this exemption are less stringent than for other exempt classifications, but employers must still verify that the position qualifies.
What are three factors used to determine exempt or non-exempt status?
The three factors are:
Salary basis: receiving a predetermined fixed salary
Salary level: meeting the minimum compensation threshold
Job duties: performing work that qualifies under executive, administrative, or professional exemptions
All three criteria must be met for proper exempt classification.
What is the difference between Exempt vs. Non-Exempt Employees?
Think of it this way: exempt workers are exempt from certain protections under the Fair Labor Standards Act (FLSA), which lays out minimum wage and overtime rules. Non-exempt workers are (you guessed it) not exempt from these protections.