Salary Vs. Hourly Pay: The Complete Manager’s Guide
Paying employees as salary vs. hourly is essential for the success of your busin...
Deciding how to classify exempt vs. non-exempt employees can be confusing at first. But with a bit of light research, you can make the best choice for your business.
In this article, the workforce management experts at Sling tell you everything you need to know so that you understand the difference between the two categories and how exempt vs. non-exempt applies to your company.
The difference between exempt and non-exempt employees has its origins in the Fair Labor Standards Act (FLSA), which establishes the following standards for the vast majority of businesses in the United States:
It’s the first two standards — minimum wage and overtime pay — that directly apply to our discussion of exempt vs. non-exempt employees.
We’ll discuss each topic in a bit more detail so we’re all on the same page, but the heart of the matter is whether these two standards apply to your employees (they’re non-exempt) or not (they’re exempt).
The FLSA sets the minimum wage standard at $7.25 an hour for all adult, non-tipped employees (some exceptions apply).
Having said that, each individual state can set their own wage standards as long as the minimum does not fall below the federally mandated $7.25 an hour.
So, for example, in 2020, Indiana, Kentucky, and Oklahoma set their minimum wage at $7.25 an hour while Minnesota, California, and Maine adopted other minimums ($10 an hour, $13 an hour, and $12 an hour respectively).
For most businesses, overtime pay is the most relevant (and impactful) standard when it comes to exempt vs. non-exempt classification.
The FLSA states that businesses must pay their employees at a rate of not less than one and one-half times their regular rates of pay after 40 hours of work in a workweek.
For example, if your business pays an employee $10 an hour and they work 50 hours in a workweek, you will owe them 10 hours of overtime pay calculated at 1.5 times their regular pay rate.
Here’s how that works out:
Your business would owe that employee $550 for the 50 hours they worked during the week.
For more information on overtime and payroll, take a few minutes to read this helpful article from the Sling blog: How To Calculate Overtime Related To payroll | The Complete Guide.
As we mentioned earlier in the article, the basis of exempt vs. non-exempt status comes down to whether or not the previous two standards — minimum wage and, more specifically, overtime pay — apply to your employees.
That’s what we’ll discuss in the next two sections.
An exempt employee is one who is NOT subject to the overtime pay and/or minimum wage standards as put forth by the FLSA.
For example, if you employ a teacher, they may be exempt from overtime pay standards, minimum wage standards, or both.
On the other hand, if you employ a salesperson, they may be exempt from the overtime pay standard only.
In most cases, it’s the overtime pay standard that is most directly applicable to a business’s choice to classify an employee as exempt vs. non-exempt.
This is because the majority of exempt employees receive a salary for the work they perform rather than being paid by the hour.
When a business classifies an employee as exempt, the business then has the authority to determine what, if anything, and how they will pay an individual for any overtime worked.
Typically, the business won’t pay any kind of overtime because the employee is paid a set amount regardless of the number of hours they work during the week.
The employee might work 30 hours one week and 50 hours the next week, but they would receive the same amount in their paycheck both weeks.
Certain professions and types of work are exempt from the FLSA standards while others are not. For more details on exempt vs. non-exempt employees, visit the United States Department of Labor website.
There, you’ll find more examples of exempt and non-exempt employees, such as:
To make sure your business is in full compliance with local, state, and federal mandates (be it overtime, wages, or recordkeeping), consult an attorney who is familiar with labor law in your industry.
In the meantime, here’s a bit more detail about exempt vs. non-exempt employees to help you distinguish the two.
When it comes to exempt vs. non-exempt employees, the exempt classification only applies to those whose job duties require a higher level of expertise, experience, knowledge, and training.
For example, supervisors, managers, administrators, and executives are typically classified as exempt positions because their duties require that they exercise more skills than most entry-level employees have at first.
That doesn’t mean that an entry-level employee (classified as non-exempt when they first start working in your business) can’t “graduate” or transition to an exempt managerial position, it just means they’ll need to be trained to exercise the advanced skills.
As we’ve touched on already, exempt employees earn a set salary instead of an hourly rate.
Many businesses that classify certain employees as exempt establish a base payment (often per week, per month, or per year) and distribute this payment regardless of the number of hours the employee works in the set time period.
So, for example, you may set an exempt employee’s base pay (or salary) at $50,000 per year. If that employee worked 48 weeks out of the year, their weekly salary would be $1,041.67 before taxes and benefits whether they work 30 hours, 40 hours, 50 hours, or more that week.
One thing to keep in mind when deciding on the base payment for a certain exempt employee is that the number you select must be higher than the FLSA minimum threshold.
We’ll discuss that more in the next section.
To qualify as exempt, an employee must earn the minimum salary threshold set by the Fair Labor Standards Act (FLSA).
That salary threshold currently sits at $684 per week (or $35,568 per year for 52 weeks of work).
If an employee makes less than this base amount, you can’t classify them as exempt even though you pay them on a salary basis (your pay structure) and they perform the advanced job duties we mentioned earlier.
If you do have employees that qualify as exempt according to the three criteria mentioned here, it’s important to keep track of the current government standards.
The current change (to $684 per week) took effect in January 2020, but the Department of Labor is currently debating a proposal to raise the rate to somewhere around $900-$1,000 per week ($46,800-$52,000 per year).
That’s a pretty significant jump that may force businesses to either raise pay rates or reclassify employees as non-exempt.
One of the most common exempt vs. non-exempt types is the executive classification.
To qualify for the executive employee exemption, all of the following criteria must be met:
Another common exempt vs. non-exempt type is the administrative classification.
To qualify for the administrative employee exemption, all of the following criteria must be met:
To qualify for the professional employee exemption, all of the following criteria must be met:
To qualify for the highly compensated employee exemption, all of the following criteria must be met:
To qualify for the outside sales employee exemption, all of the following criteria must be met:
To qualify for the computer employee exemption, the following criteria must be met:
For more details on these and other exempt vs. non-exempt employee types, visit the Department of Labor’s website.
A non-exempt employee is one to whom the mandates in the FLSA directly apply. That means that they are entitled to both minimum wage and overtime pay standards.
Most non-exempt employees are paid on an hourly basis.
Your business can choose what hourly rate to pay non-exempt employees — as long as it abides by federal and state minimums — but overtime pay applies to all such employees.
Examples of non-exempt employees include:
Even if you start an employee off with the non-exempt classification, you can switch to exempt status at a later date.
For example, if you hire an administrative assistant and pay them hourly as a non-exempt employee but later find that they are consistently working a half-hour of approved overtime Monday through Friday, it may be best to change their classification to exempt.
In that case, you would pay them a set amount (a salary) each week regardless of the number of hours worked.
Again, visit the United States Department of Labor website and consult an attorney familiar with your business to ensure that your minimum wage and overtime pay structure are in compliance with state and federal mandates.
In the meantime, here’s a bit more detail about non-exempt employees to help you distinguish the two.
The job duties of non-exempt employees are much more varied than those of their exempt counterparts.
The key point to remember is that they still take direction from managers or supervisors and that they don’t have administrative or executive positions.
The pay structure for non-exempt employees is as follows:
As long as your business meets those two criteria, you can choose when to pay your team.
Some businesses operate on a weekly payroll schedule. Other businesses operate on a bi-monthly (every two weeks) payroll schedule or even a monthly payroll schedule.
It all depends on what works best for your team and your business.
Total earnings for non-exempt employees are different from those of exempt employees because there is no government-mandated weekly threshold to abide by.
Instead, non-exempt employees must be paid at least the federal minimum wage for every hour worked — currently set at $7.25 per hour — as well as any overtime wages (paid at 1.5 times their base wage) for any hours over 40 that they accrue during the work week.
Keep in mind that some states have set their minimum wage at a higher rate than the federal minimum.
For example, Colorado has set theirs at $13.65 per hour while Connecticut will raise theirs to $15.00 per hour effective June 01, 2023, and Florida will raise theirs to $12.00 per hour effective September 30, 2023.
As mentioned, all overtime hours must be paid at 1.5 times the hourly wage you pay your non-exempt employees. Your business may choose to pay more than the federally-mandated time-and-a-half for overtime, but it can’t pay less.
Any employee that doesn’t qualify as exempt according to the three requirements mentioned earlier — job duties, pay structure, and total earnings — is a non-exempt employee.
As a general rule, the pool of non-exempt employees in your business may be much larger than the pool of exempt employees.
This isn’t always the case — some businesses, such as law firms, may have more exempt employees than non-exempt — but restaurants, retail establishments, coffee shops, and caterers typically classify their team members as non-exempt.
Deciding whether to hire part-time or full-time employees and classify them as exempt vs. non-exempt is important for your business. It will directly affect your business’s bottom line.
Equally important is how you choose to manage, organize, and optimize your workforce.
Software is the solution to that conundrum. And the Sling app is the best choice to help you manage all aspects of your business.
First and foremost, Sling gives you unprecedented control over your scheduling process.
And with the built-in artificial intelligence, Sling automatically reminds you of requested time off, double bookings, and overtime hours so you can finalize the schedule in less time and with less effort.
Sling also acts as a time clock for your business so you can accurately track when your team members work.
Because Sling works on a variety of devices, you can set up a central terminal or allow your employees to clock in and out right from their mobile devices.
And with Sling’s powerful geofencing feature, you can prevent early clock-ins, missed clock-outs, and time theft with the touch of a button.
Sling even lets you optimize labor costs by setting wages for each individual employee or position so you can see how much each shift will cost your business.
You can also keep track of your labor budget and receive alerts when you’re about to exceed those numbers.
All of this — and much more — will help you save money and increase profits regardless of how you classify exempt vs. non-exempt employees.
For more free resources to help you manage your business better, organize and schedule your team, and track and calculate labor costs, visit GetSling.com today.
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This content is for informational purposes and is not intended as legal, tax, HR, or any other professional advice. Please contact an attorney or other professional for specific advice.