Exempt vs. nonexempt employees: What’s the difference?

Being a great boss means more than just inspiring your team—it means getting payroll right, every single time. And when you're bringing on new hires, understanding the differences between "exempt" and "nonexempt" employees is key. 

These terms refer to how workers are classified under the Fair Labor Standards Act (FLSA), the federal law that sets the ground rules for minimum wage and overtime in the US. Job misclassification can be costly, so you'll need to understand the difference before hiring. 

In this guide, we'll break down the nuances of each employee type, highlight why accurate classification is non-negotiable, and explore the pros and cons to help you confidently navigate payroll.

Jump to:

• What is an exempt employee?
• What is a nonexempt employee?
• Salary vs. hourly pay
• How to classify exempt vs. nonexempt employees
• Nonexempt vs. exempt employee pros and cons
• When to hire exempt or nonexempt employees
• Common misconceptions about exempt vs. nonexempt employees
• Tools and resources for employers
• Keeping your employees happy and productive

What is an exempt employee?

An exempt employee is a worker who is exempt from the Fair Labor Standards Act's (FLSA) minimum wage and overtime pay requirements. This means they do not receive overtime pay for hours worked beyond 40 in a workweek.

To qualify as exempt under federal law, an employee must generally meet three specific criteria:

• Be paid a predetermined, fixed salary.
• Earn at least $1,128 per week or $58,656 annually, as of January 1, 2025.
• Pass the FLSA duties test by working in an approved position.

An exempt employee's primary job duties must involve executive, administrative, or professional work, as defined by the FLSA duties test. This includes tasks requiring specialized knowledge, independent judgment, and/or managerial responsibilities.

Although exempt employers don't have to pay exempt employees overtime, they can offer extra pay through a compensation benefits package. 

Here are the job types that can qualify an exempt employee:

• Executive: This applies to employees whose work is primarily managing a business. They must customarily and regularly direct the work of two or more other employees and have the authority to hire or fire.
• Administrative: Covers employees whose work involves performing office work directly related to the general business operations of the employer or its customers.
• Learned professional: Applies to employees whose work requires advanced knowledge in a field of science, like law or medicine. The work must be predominantly intellectual.
• Creative professional: This applies to employees whose work involves performing work requiring invention, imagination, or talent in a recognized creative field, such as musicians or artists. 
• Computer employee: This covers employees who work as computer programmers, systems analysts, or software engineers.
• Outside sales: This applies to employees whose work is making sales and who regularly perform their duties away from the employer's place of business. Unlike other exemptions, there is no salary level or salary basis requirement for outside sales employees.

During the hiring process, be upfront with your exempt employees about the fact that they don’t qualify for overtime wages. This is usually the function of human resources and will help prevent any misunderstandings or disputes about wages that may come up in the future.

Remember that even if a nonexempt employee receives a salary or commission, their employer must still track their hours to ensure they are paid at least minimum wage for all hours worked and receive proper overtime for any hours exceeding 40 in a workweek.

Salary vs. hourly pay

Exempt employees are usually paid a salary, which means they receive a fixed amount of money per year, although the number of hours they work can vary. They are expected to complete their job responsibilities, regardless of the hours required to get the job done.

Understand your employees' compensation type

Understanding your employees’ compensation type can help you navigate payroll and time tracking with ease: 

• Time tracking: You’ll be able to track the hours your nonexempt employees work and know when they qualify for overtime
• Payroll: You’ll be able to set up a recurring payment in the form of a salary for exempt employees

Nonexempt employees are usually paid an hourly wage, which means they receive a set amount of money for each hour they work. They typically have set hours and shifts to track their hours worked.

Understanding your employees’ compensation type can help you navigate payroll and time tracking with ease—especially paired with the features available in QuickBooks Online. 

QuickBooks Online allows you to accurately track hours for your nonexempt employees and easily set up recurring, fixed salaries for your exempt staff.

How to classify exempt vs. nonexempt employees

Complying with federal labor regulations is important for all companies, but especially for small businesses. One of the most violated labor regulations among new businesses is classifying employees as exempt or nonexempt.

Employers must classify employees correctly according to the FLSA or risk facing penalties, fines, and lawsuits. 

Employee classification factors

Generally, there are three factors in determining your employee's classification:

• Income level: Minimum wage payments can potentially equate to a nonexempt employee, while exempt employees earn at least $1,128 a week.
• Income basis: Fixed pay periods, regardless of hours worked, qualify an exempt employee, while fluctuating hourly pay equates to non-exempt
• Job duties: Exempt employees must pass the job duties test, while nonexempt employees can work in a variety of positions. 

Employees who are unsure about their classification should consult with their human resources department or an employment lawyer.

How does the Fair Labor Standards Act (FLSA) affect employee exemption status?

The FLSA sets minimum income requirements for both exemption statuses and requires employers to perform a duties test to determine whether their employees qualify for an exemption status.

Nonexempt vs. exempt employee pros and cons

When deciding between hiring an exempt or nonexempt employee, consider the trade-offs of each category. Both classifications have distinct advantages and disadvantages related to pay structure, benefits, and job security that can impact both the employer and the employee.

Exempt employee pros and cons

Hiring an exempt employee doesn’t come without issues. For example, exempt employees may have to work longer and harder than nonexempt employees without extra compensation. 

Here are the advantages and disadvantages of being an exempt employee: