Lynchburg Business

Exempt vs. Non-Exempt: Sharpening the Blurred Line

Issue: July 2010 by Carrie Williams in Human Resources, Inside The Magazine

You’ve just hired a new employee. You’ve gone through all of the interviewing and decision-making that goes along with the careful choice of who to add as a new member to your team. While the hard work is seemingly done, that might not be the case if you are just starting out in the world of small business ownership. The next logical step in the new hire process is to determine an employee’s rate of pay, but with that comes the decision of their classification: non-exempt or exempt. How do you decide?

The status of exempt versus non-exempt is carefully monitored by the Fair Labors Standards Act (FLSA) under the Department of Labor (DOL). While some of the decision of employee status is based on job title, the most weight is actually placed on an employee’s level of responsibility.

Donn Schnarr, a Senior Professional in Human Resources (SPHR) and President of SHRM of Central Virginia, explained that some of the determining factors are “rate of pay (there is a minimum-based pay required for exempt employees), their level of independent decision-making ability, the need or lack of direct supervision and [whether or not] they supervise other full-time employees.” Schnarr recommends seeking legal counsel from an employment law attorney if there is any doubt. However, depending on the size of your company and your departmental resources, an HR manager should be qualified to make this decision based on review of the current DOL law.

Let’s start by exploring the particulars of employees with an “exempt” status. These are typically managers and higher-level supervisors managing a team of at least two full-time employees. These people are paid a yearly salary and are usually given greater freedom when it comes to determining their schedules.

“The more responsibilities and independence in decision-making matters, the more apt they may be in an exempt role,” Schnarr explained.

Some of the downsides of being classified as an exempt employee are that, while you may not have to track your work time to the same degree as your non-exempt coworkers, you are expected to complete the tasks of your role regardless of an hourly schedule, whether that means staying at the office after hours or coming in early.

“The exempt individual usually does not have to ‘punch a time card,’ but is expected to complete tasks regardless of the hours that it takes to complete them,” Schnarr said.

Furthermore, if one were to track an exempt employee’s hours in detail during a exceptionally busy period of time, the “hourly rate” may begin to decrease with the increased number of hours worked.

Under the FLSA, exempt employees are further broken down into three categories: Exempt Executive, Exempt Administrative and Exempt Professional. According to Schnarr, the primary difference between each is based on duties within each respective category. 

“The [Exempt] Executive is in management, directs the work of two or more full-time employees and has the authority to hire and fire,” he said,

The input of an Exempt Executive staff member regarding an employee’s status is also usually given special weight. An Exempt Administrative, however, usually has less decision making power.

“The Exempt Administrative role is to provide office or non-manual work directly related to business operations and management of employees or customers,” Schnarr said.

As for the final sub-classification of Exempt Professional, Schnarr says this “is usually someone that has advanced learning in a field of science or…prolonged technical/specialized training, such as an engineer, accountant, etc. This role usually requires creativity, imagination or talent in their role.”

On the other side of the spectrum, a “non-exempt” employee is usually someone who is paid by the hour, though some companies do have a “salaried non-exempt” employee status. Regardless of salary versus hourly classification, the biggest determining factor of a “non-exempt” employee is that their hours are tracked very carefully and, according to the DOL, are not able to equal more than 40 hours a week. The other big distinction of a “non-exempt” employee is that they are required to receive overtime pay for any hours worked beyond the maximum 40 hours a week. Exempt employees, on the other hand, are not eligible for overtime pay.

Non-exempt employees are also those who have little responsibility when it comes to major decision-making and can, in Schnarr’s words “leave work at work.” It is usually frowned upon and often forbidden for non-exempt employees to take their work home to complete after normal working hours, whereas it is almost expected that exempt employees will do so at some point, depending on work load.

There are two things to keep in mind when choosing employee status: 1) Stay on top of the FLSA and DOL laws when classifying each new and existing member of your staff, and 2) know the consequences of misclassifying an employee. In Schnarr’s research, he explained that “some of the more severe consequences for misclassifying a non-exempt employee as exempt may be back pay to the affected employee, a more thorough audit to determine if other employees (current or past) were or are affected, a fine by the DOL, future intense scrutiny from the DOL and morale and credibility issues with current and future employees.” Because of this, he says that it is “critical to ensure that those classified as exempt employees truly meet the DOL criteria.”

For more information regarding exempt versus non-exempt, Schnarr recommended that business owners research the following link: www.paychex.com/pdf/exempt.pdf. He also suggests an annual review of the law to stay ahead of the game and avoid mistakes. One way to do this is to attend Employment Attorney seminars on the subject.

Now that you know a little bit more about the differences between each status and how it could effect you as an employer, you can be more confident when it comes to deciding your new employee’s status. Know when to seek outside counsel and make sure you base your decision on careful review of the FLSA and DOL laws. If you do this, the answer to the “Exempt or Non-Exempt?” question will be clear.