Knowing whether a team member is exempt or nonexempt shapes how and when they get paid, from their overtime eligibility to how often they track their hours. In the United States, it also determines what legal requirements under the Fair Labor Standards Act (FLSA) you’ll need to follow.
In this guide, you’ll learn how exempt versus nonexempt employee classification works under U.S. law, the consequences of missteps, and how Oyster can help you accurately classify employees around the world.
What is an exempt employee?
Exemptions are a way to determine how much and when a worker needs to be paid under the FLSA. Exempt employees are typically paid a salaried (versus an hourly) wage, receiving a consistent paycheck each pay period. The FLSA’s overtime rules don't cover these employees, meaning you won’t pay them more for working more than 40 hours in a workweek. While their annual salary may reflect higher expectations or specialized skills, extra effort doesn’t translate into additional earnings.
However, being salaried doesn’t automatically make someone exempt. The FLSA outlines three common exemption position types:
- Executive roles: Manages a team or department, supervises at least two full-time employees, and has a say in hiring and firing decisions.
- Administrative roles: Performs office or nonmanual work tied to operations, with authority to make independent decisions on significant matters.
- Professional roles: Requires advanced education and involves creative or intellectual responsibilities—think engineers, researchers, and educators.
The FLSA includes exemptions for computer employees (like systems analysts and programmers) and highly compensated workers making $107,432 or more annually. Each exemption has its own criteria, but specific salary levels and job duties are still required to qualify.
Pros
- Consistent salary regardless of hours worked: Exempt employees earn the same amount each pay period, even when their workload fluctuates. This stability can be a plus for both budgeting and long-term planning.
- May offer more autonomy or flexibility in work schedule: Many exempt roles allow employees to adjust their hours as needed as long as responsibilities are met, especially in roles driven by outcomes rather than time spent.
Cons
- No eligibility for overtime pay: Working late nights or long weekends won’t entitle exempt employees to extra compensation.
- Higher responsibility without extra compensation: Broader responsibilities often come with more pressure and no guarantee of additional pay when job demands grow.
What is a nonexempt employee?
Exemption status has its perks, but being nonexempt can bring more financial upside in busy periods. Nonexempt employees are protected by the FLSA, which guarantees they’ll earn at least the federal minimum wage (which has been $7.25 since 2009) and are paid overtime for working more than 40 hours in a workweek. This classification usually applies to hourly workers, but can also include some salaried positions that don’t meet the exemption criteria.
By law, employers must track hours worked and ensure nonexempt team members receive overtime pay at time and a half their regular rate. Roles commonly classified as nonexempt include:
- Clerical and administrative support
- Retail workers and cashiers
- Food service employees, such as cooks or servers
- Warehouse staff or laborers in construction or manufacturing
These positions usually don’t meet the employee exemption criteria because they’re more task-driven with clear duties and direct supervision rather than high-level decision-making.
As far as taxes are concerned, exempt and nonexempt employees are treated the same. Both exempt and nonexempt employees must: fill out W-4 forms for employers to withhold federal taxes; pay income tax, Medicare, and Social Security; and report their income on W-2 forms. However, many employers give salaried roles access to pre-tax benefits like health insurance or retirement contributions that hourly roles may not receive.
Pros
- Eligible for overtime pay: When the hours pile up, so does compensation. You must pay time and a half for any time worked over 40 hours per week.
- Compensation based on hours worked: Employees are paid based on their work hours, which makes it easier for them to estimate ebbs and flows in pay.
Cons
- Less scheduling flexibility: It’s common to assign fixed shifts to nonexempt workers, leaving little room to adjust their schedules.
- Often lower base pay: Hourly roles typically offer lower base compensation than exempt positions and may lack additional benefits or incentives.
6 differences between exempt and nonexempt employees
While exempt and nonexempt roles can look similar under U.S. labor laws, the legal and practical differences change how you structure scheduling, pay, and supervision. Even if distinguishing your roles between these statuses seems inconsequential, be aware that misclassification can land you in hot water.
1. Overtime eligibility
Overtime is the clearest legal dividing line between exempt and nonexempt status. Exempt employees are paid the same amount regardless of how much they work. Nonexempt employees are eligible for FLSA overtime pay for working beyond 40 hours a week.
2. Type of compensation (salary vs. hourly)
Most exempt workers are salaried employees, meaning their pay doesn’t change based on work hours. Nonexempt employees are typically paid hourly, though some receive a salary below a specific financial threshold. Either way, how employees are paid doesn’t determine their classification.
3. Job duties and decision-making authority
Exempt positions tend to require employees to make decisions and manage others or oversee key business functions. These roles involve strategy, leadership, or independent judgment. Nonexempt roles are often more task-oriented and follow set processes with closer oversight.
4. Pay stability
A salaried exempt worker can expect the same paycheck each period whether they leave early for a dentist appointment or stay late for a project deadline. Hourly nonexempt workers receive pay strictly based on hours worked, which can result in variable earnings from one week to the next.
5. Level of supervision required
Exempt employees often manage their own schedules and work with minimal supervision. Nonexempt workers operate under direct supervision with clearly defined tasks and structured shifts.
6. Scheduling flexibility
Employees in exempt roles have more freedom around when and where to work, especially in remote or results-driven environments. Nonexempt workers are more likely to follow fixed schedules and may need approval to make adjustments, mainly because their time is closely tied to compensation.
Consequences of misclassifying exempt and nonexempt employees
Misclassifying a team member’s exempt status might not seem like a big deal, but getting it wrong can trigger severe financial and reputational fallout. Some local labor laws expand on protections beyond the FLSA’s baseline requirements, so you’ll need to follow whichever rules provide greater protection to the employee.
Reputational consequences
Legal battles and wage disputes can damage more than your balance sheet—they also affect your brand. Prospective team members, investors, and partners think twice when an organization becomes known for mishandling pay or employee classification. Rebuilding trust internally and externally takes time and resources most companies can’t afford to lose.
Financial consequences
Employers may owe back pay for overtime and wages if a nonexempt employee is wrongly treated as exempt. Sometimes, businesses must also reimburse payroll taxes or provide retroactive benefits. Add penalties, interest, and potential damages, and multiply if several team members were misclassified—the bill can quickly inflate.
Legal consequences
FLSA gives employees the right to sue for misclassification. Employees can file claims triggering Department of Labor audits or, if they uncover systemic issues, class action lawsuits. Even unintentional errors qualify as violations, and legal settlements are time and resource-consuming beyond missed pay.
How to classify exempt and nonexempt employees
The FLSA has a three-part test to determine whether you should classify someone as exempt or nonexempt. You’ll need to confirm all three parts before assigning exempt status. Relying on job titles or assumptions won’t cut it.
Salary level test
Under the FLSA, a salaried employee must earn more than $684 per week ($35,568 annually) to qualify for exemption. If the salary doesn’t meet that requirement, the employee is considered nonexempt regardless of job duties.
Salary basis test
Being paid on a salary basis means receiving a fixed, predetermined amount each pay period. Employers can’t adjust the pay based on the amount of time spent in the office or quality of the employee’s work. If someone’s earnings fluctuate or depend on hours worked, they won’t pass this part of the test and are considered nonexempt.
Job duties test
This final test looks at what the employee does, not what their job title says. To qualify as exempt, their primary responsibilities must align with one of the defined exemption categories (such as executive, administrative, or professional). If the day-to-day work is closely supervised or doesn’t require independent judgment, the employee will likely fail the duties test.
Get classification right every time with Oyster
The difference between exempt and nonexempt only matters if someone is classified as an employee in the first place. Proper classification—between employee and contractor, exempt versus nonexempt, and more—is essential from day one. And for globally distributed teams, it gets more complex. Employment laws vary from country to country, and so do the rules around overtime, job duties, and exemptions.
Oyster helps companies hire, pay, and manage talent in over 180 countries while complying with local laws at every step. From built-in legal guidance to agreement reviews, Oyster gives you the tools to avoid misclassification and confidently navigate every region’s legal employment requirements.
Explore how Oyster supports global compliance and simplifies hiring through its employer of record (EOR) services.
About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
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