Understanding the Differences with Salaried, Exempt, and Non-Exempt Employees

UPDATED NOVEMBER 21, 2024

Have you ever used the term “salaried employee” as a way of describing someone who does not track time because they are paid the same amount each week?

While I’m not here to correct you on your HR jargon, it is valuable to understand the similarities and differences between salaried, exempt, and non-exempt employees — and how they do not necessarily mean the same thing. An employee must meet specific salary basis and duties criteria to be considered exempt from overtime under the Fair Labor Standards Act (FLSA).

What does “salaried employee” mean?

In an HR-appropriate world, a salaried employee refers to someone who is paid on a salary basis, regardless of hours worked. This means the amount they earn one week is the same amount they earn the following week. Whether they work 30 or 50 hours in a week, their paycheck remains the same.

However, the term “salaried employee” does not necessarily mean they do not (or should not) track time. Why? Because salaried employees are not automatically exempt.

Confused? Let’s break this down a little.

Salaried employees must be exempt from overtime to not have to track work time. And to be exempt, the employee must meet one of the below-mentioned exemption statuses. Otherwise, the employee is considered non-exempt and must track their work time and be paid applicable overtime wages. 

What does “exempt employee” mean?

An exempt employee is a white-collar worker who is exempt from receiving overtime wages, regardless of the number of hours worked. To be considered exempt, their role must meet specific criteria that include the following:

Minimum salary

Exempt employees other than an outside sales rep have a minimum salary requirement of at least $684 per week ($35,568 per year) and meet at least one of the allowable exemptions, regardless of job titles.

• • Executive exemption

    Performs management duties and can hire, fire, and promote staff.

• • Administrative exemption

    Exercises "discretion and independent judgment with respect to matters of significance." The Department of Labor breaks down what that means in this more detailed explanation.
    
    

  • Professional exemption

    Job duties require advanced knowledge in a field of science, learning (typically a college degree is required), or a creative field.

• • Computer employee exemption

    Serves in a role that is highly skilled at computers. This fact sheet from the DOL has more information.
    
    

  • Highly compensated employee exemption

    Receives annual total compensation of at least $107,432 and performs office or non-manual work.

• • Outside sales exemption

    Primary responsibility is to make sales away from the employer’s place of business.

What does “non-exempt employee” mean?

If a worker cannot meet the exemption criteria listed above, they are considered nonexempt employees. This means they must track hours and receive applicable overtime pay.

Nonexempt employees are entitled to receive overtime pay if they work more than 40 hours in a week. This applies whether the employee is paid hourly or on a salary basis.

Please note that some state and local regulations have different overtime thresholds than the federal overtime requirement of working over 40 hours a week to qualify for premium overtime wages.

Key differences between exempt and non-exempt employees

The fundamental difference between exempt employees and non-exempt employees lies in eligibility for overtime pay based on their employee classification.

Exempt employees

Exempt employees do not receive overtime pay, as they meet the specific criteria for exemption under the FLSA. In most cases, exempt employees tend to be paid on a salary basis rather than an hourly basis. They also earn more than the FLSA minimum and perform certain exempt job duties.

Non-exempt employees

Nonexempt workers must be paid the premium overtime rate of 1.5 times their regular pay for any hours worked over 40 in a workweek. This is regardless of whether they are paid hourly, salary, piece rate, day rate, or other form of pay.

Please note that some state and local regulations have different overtime thresholds than the federal overtime requirement of working over 40 hours a week to qualify for premium overtime wages.

The FLSA governs this distinction to protect non-exempt employees by ensuring they receive proper compensation for all hours worked. While most non-exempt employees are hourly employees, FLSA regulations do not dictate how employees are generally paid (assuming they are paid at least minimum wage). However, it does require nonexempt workers to be paid a premium wage for overtime.

How does minimum wage apply to exempt and non-exempt employees?

For non-exempt employees, they must be paid at least the federal minimum wage (or state/local minimum wage if that is higher) for every hour worked. This applies regardless of whether the non-exempt employee is salaried, hourly, paid piece rate or day rate, or compensated some other way.

For exempt employees, the FLSA requires that they earn more than the specified minimum salary amount to maintain their exempt status. If their salary falls below this threshold, they could lose their exemption and become eligible for minimum wage and overtime pay protections.

Calculating overtime for non-exempt salaried employees

You can be either a non-exempt hourly employee or a non-exempt salaried employee.

Non-exempt hourly employees must be paid overtime premium pay for 1.5 times their regular hourly rate. In most states, such individuals receive overtime pay once they exceed 40 hours in a workweek.

A non-exempt salaried employee is still paid a fixed salary, but they must track their work hours. These employees are eligible for overtime pay in most states once they exceed 40 hours in a workweek, per FLSA requirements.

When calculating how much to pay non-exempt employees for overtime, you divide their weekly salary by the number of hours they are expected to work (typically 40 hours), then multiply the resulting hourly wage by 1.5 for the overtime premium rate.

For employees who receive bonuses, shift differentials, commissions or tips, or are compensated with day rate or piece rate productivity, calculating overtime is much more complex. See our guide on how overtime pay is calculated.

(Remember that some state and local regulations have different overtime thresholds than the federal overtime requirement of working over 40 hours a week to qualify for premium overtime wages.)

Ensuring compliance with the Fair Labor Standards Act (FLSA)

Improper classification can risk costly compliance violations, leading to legal and financial repercussions. The FLSA is strict about ensuring employees are classified correctly as exempt or non-exempt based on their job duties and salary level.

If you are unsure whether an employee qualifies as an exempt employee, you can:

1. Err on the side of caution, classify them as non-exempt, and pay overtime. This ensures your employees receive adequate compensation and helps you avoid costly penalties in the event they do not legally qualify for exempt status. However, this could be more costly for your business in terms of overtime pay.

2. Seek professional advice. An HR consultant or employment attorney can provide guidance to ensure you are classifying employees correctly based on their duties and salary basis.

If you need help determining your employee's status, please contact your certified HR consultant. Not a current Stratus HR client? Book a free consultation and our team will contact you shortly.