Avoiding Employee Misclassification: The Difference Between Exempt and Nonexempt

Employee classification is tricky– and doing it incorrectly can lead to hefty fines. Use this guide to determine if your employees are exempt or nonexempt.

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Employee classification can be difficult, and there are several differences between exempt and non-exempt employees. Should you be tracking hours and paying overtime? Is a base salary all that I need to offer? If you don’t take the time to classify an employee correctly, you could face some hefty penalties. Learn how to assign the proper classification to your employees based on their role and responsibilities.

What is the Fair Labor Standards Act (FLSA)

Exempt employees are exempt from the minimum wage and overtime laws of the Fair Labor Standards Act (FLSA). These individuals can work more than 40 hours in a week and not receive overtime.

A non-exempt employee is required to adhere to FLSA and must be paid at a higher rate for overtime hours. The federal law states non-exempt employees should receive 1.5 times their regular pay rate for any hours worked over 40 per work week. These employees must also be paid at least minimum wage for all hours worked.

Time Worked

If your employee leaves work early can you deduct that time from their paycheck? It depends. Non-exempt employees don’t have to be paid for time not worked. Exempt employees must be paid, but how they are paid as long as they receive the minimum salary requirement can vary.

What Happens If I Misclassify an Employee?

Employee classification can have a real impact on small businesses when done incorrectly. After going through the steps of determining exemption, you might still be asking yourself if you classified an employee correctly.

Classifying Non-Exempt as Exempt

If you knowingly classify a non-exempt employee as exempt, you will be required to pay back wages if more than 40 hours are worked in a single week. These additional working hours prevent the employee from meeting minimum wage requirements.

Also, if state laws require wages to be paid within a certain time frame and your organization doesn’t comply, you’ll be penalized a per day fee until wages are issued.

Misclassifying an employee as exempt can result in more than a slap on the wrist. Penalties, fees, audits, will be involved. Classify them correctly before the employee begins work to avoid these unnecessary headaches.

Classifying Exempt as Non-Exempt

On the other hand, if you have an exempt employee who meets the qualifications, but is classified as non-exempt you’re in the clear. It’s more beneficial for employees to be non-exempt than exempt because they are receiving overtime pay and other non-exempt benefits. Therefore, your company is less likely to be subject to penalties or fines with this incorrect employee classification.

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