Compliance 101: Exempt vs. non-exempt employees

As an employer, there’s a lot about your role that’s fulfilling: Building a diverse, passionate team, mentoring employees throughout their careers, watching them grow their skills, gain confidence and shine …

But there are also some (let’s face it) less exciting parts of being an employer — like navigating employee classifications correctly.

While we wish we could tell you it was simple, how you pay, schedule and assign tasks to employees may change based on whether an employee is exempt or non-exempt. And understanding your employees’ exemption status doesn’t just impact your ability to make strategic decisions about your team and budget — it’s also the key to complying with federal laws.

Before we dive in, it’s important to note: You’re solely responsible for complying with laws applicable to you, including but not limited to federal, state and local labor and employment laws. Heartland is not responsible for ensuring your compliance with various laws. All information listed here is for informational purposes only, and all clients must seek the advice of their legal counsel.

Now that we’ve covered that, read on as we walk through the ins and outs of exemptions:

FLSA employee classifications

Before we dive in, let’s set the stage: If you’re an employer, you’re likely required to classify your employees according to federal, state and local regulations. We’ll start with the Fair Labor Standards Act (FLSA).

If you’re wondering what the FLSA is, you’re not alone. It’s a federal law that sets standards around minimum wage, child labor and overtime provisions for most US employers and employees. It also maintains the criteria for how to determine whether a worker is exempt or non-exempt. Let’s get into it.

What makes an employee exempt?

The easiest way to think about the difference between exempt and non-exempt employees is this: Exempt employees are typically not entitled to an hourly minimum wage or overtime pay, while non-exempt employees are.

So what exactly makes an employee exempt? Is it just a matter of being salaried? Unfortunately, the answer is a little more complicated. The FLSA uses three major criteria to help you figure out an employee’s eligibility:

While the first two criteria are fairly straightforward, the third is less black and white. To be considered an executive, professional or administrative employee, workers must:

• Have advanced knowledge of their field

• The ability to exercise independent judgment

• Meet additional criteria as defined by the law

Now that we’ve gone over the criteria for FLSA exemptions and what they mean, the question is — how many of the criteria does a worker need to meet to be considered exempt?

Fitting the bill for just one or two usually doesn’t cut it. For the most part, workers must meet all three criteria to be considered exempt. However, there are special exceptions for retail workers, outside sales employees and first responders. If that sounds like anyone on your payroll, be sure to read the fine print!

What makes an employee non-exempt?

We’ve nailed down what makes an employee exempt. But what about the other side of the coin? There are three key ways to tell if your worker should likely be classified as a covered, non-exempt employee:

While you might sail through determining who earns an hourly wage vs. who’s a salaried employee, defining job duties can feel like splitting hairs. If you’re worried you might’ve misclassified an employee, consulting a professional in employment law is your best bet.

Employee classifications (the state version)

You’ve got a good grasp on how federal law impacts employee exemptions — but we’re not done yet. To stay compliant, you have to keep state and local employee exemption laws in mind, as well.

Although an additional layer of legislation might complicate navigating compliance, it actually empowers states and cities with the flexibility to set their own rules to address any unique economic or labor issues they face. Let’s explore a few high-level examples:

California

• Minimum wage: California’s “Fight for 15” movement advocated for a minimum wage of $15 per hour — over twice the federal minimum. Driven in part by the state’s high cost of living, the rate continues to increase. As of January 1, 2024, the state minimum wage rose to $16 per hour, although some cities and counties have set a higher rate.

• Salary level: To be classified as exempt, computer professional employees must earn an annual salary of $112,065.20 or more.

New York

• Salary level: Executive and administrative employees working in New York City, and Nassau, Suffolk and Westchester counties must receive a minimum weekly salary of $1,200 to be considered exempt; an amount slightly over the state minimum of $1,124.20 per week. Both salary thresholds are set to increase every year through 2026.

Colorado

• Minimum wage: Depending on where employees work and whether their employer takes a tip credit, the minimum wage differs. Rates are higher in Denver, Edgewater and Boulder than they are for the rest of the state, and each one should be adjusted for inflation every year.

• Salary level: To be classified as exempt, employees must receive a minimum weekly salary of $1,057.69.

• Overtime: Non-exempt workers are entitled to time-and-a-half the regular rate of pay for every hour worked in excess of 12 hours daily. Employers are also expected to comply with the FLSA’s weekly overtime rule.

Alaska

• Minimum wage: Non-exempt workers must receive a minimum wage of $11.73 per hour. School bus drivers are entitled to at least twice the minimum wage.

Maine

• Salary basis, level and duties tests: To be considered exempt, Maine employees should be paid on a salary basis, earn more than $816.35 per week or $42,450.20 per year and pass the duties tests.

• Overtime: Workers who do not pass the duties tests of a specific exemption category are entitled to receive time-and-a-half pay for any number of hours worked in excess of the standard 40-hour work week. Exceptions exist for workers in agriculture and other industries.

As you might’ve noticed, some state and local laws differ from those set by the FLSA. If you’re wondering what to do in that situation, the general rule of thumb is to follow the law that’s best for the employee. But remember: When it comes to exemptions, caution is the name of the game — it’s always best to consult legal counsel.

Upcoming changes to the FLSA

Now that we’ve covered the basics, you should be ready to give your employee classifications another go, right? Well … not so fast.

On April 23, 2024, the US Department of Labor (DOL) announced a final rule that increases the minimum salary thresholds required for employees who are exempt from the FLSA overtime requirements. Let’s break that down:

• Under the final rule, the minimum salary levels required for exempt status will increase from $35,568 ($684 per week) to $43,888 ($844 per week) starting on July 1, 2024, and to $58,656 starting on January 1, 2025.

  The salary threshold for highly compensated workers will increase from $107,432 to $132,964 starting on July 1, 2024, and to $151,164 ($1,128 per week) starting on January 1, 2025. We won’t go into detail here, but you can read more about HCEs on the DOL’s website.

• That means that under the final rule, standard employees would have to meet the salary basis and duties tests criteria and earn at least $43,888 a year to be exempt from the law beginning July 1, 2024. Employees who make less than that would be entitled to minimum wage and overtime pay.

• The final rule will also update the salary threshold every three years starting on July 1, 2027, and applies to employees in all territories subject to the federal minimum wage. Puerto Rico, the US Virgin Islands, the Commonwealth of the Northern Mariana Islands (CNMI) and Guam are included in the list.

How to prepare for changes to the FLSA

The next step? Making sure you’re ready for these changes.

It’s important to think about evaluating your workforce now. That way, you’ll know exactly how much the new rule could impact your business when it goes into effect. And you’ll be able to make a game plan for how to minimize disruptions and labor cost increases.

If you’re not sure where to begin, consider taking a few steps that can help you get started:

Once you do the math for each employee, you’ll have an estimate of how much the new rule could cost your business once it goes into effect July 1, 2024. Armed with data, you’ll have the decision-making and strategy tools you need to make the most of your labor budget.

What to expect if you make a misclassification

You’re a go-getter, mover-and-shaker, powerhouse business owner. But you’re also only human, which means mistakes are possible. As much as we hope a misclassification never happens to you, we do want you to be prepared. Here’s what to expect if you misclassify an employee:

Fines and penalties

First, let’s talk about the impact misclassification could have on your business’ bottom line. According to the FLSA, employers who willfully or repeatedly violate the minimum wage or overtime pay requirements are subject to a civil penalty of up to $2,451 for each violation. Willful violations of the FLSA can lead to criminal prosecution and a fine of up to $10,000 for the violator.

If you’re wondering why the penalty seems so severe, it’s because getting a classification wrong can really hurt your employees’ quality of life. When a non-exempt employee is classified as exempt, that employee often loses out on protections specifically guaranteed to them by the FLSA and state and local labor laws — like overtime pay and meal and rest breaks.

Compliance strategies you can put to work now

With fines, legal penalties and your employees’ protections on the line, it’s no wonder getting classifications correct is so important. But we get that perfectly classifying every employee is easier said than done. Keep reading for a few tips on how to improve your chances of staying in compliance and out of trouble.

Refresh your workplace policies

Complying with labor laws isn’t just up to you as the employer. Your managers and employees have to get in on it too. Creating workplace policies around job descriptions, time tracking and overtime can be a good way to make that happen. Let’s go over a few examples of what that could look like in action:

Job duties

Since the duties tests apply to the work an employee actually does, it’s important your job descriptions reflect the reality of workers’ everyday responsibilities. Instead of thinking of descriptions as something you write once and never look at again, treat them like living documents. It’s important your teams review those descriptions on an ongoing basis and make adjustments as needed. You might also consider asking employees to read and acknowledge their job descriptions, so they understand what they should be doing day to day.

Overtime rules

If you don’t already have policies in place around time tracking or working overtime, now is a good time to think about creating some. Make sure employees understand when they should be clocked in and out, and stress how important accuracy is. You may also want to consider a policy that requires employees to alert managers to potential overtime before it happens.

Take advantage of technology

While effective policies play a big role in staying compliant, it still requires a lot of work on you and your employees’ part. From manually entering timekeeping data to calculating pay rates, it’s all too easy to make a mistake. But you don’t have to do everything yourself — that’s what technology is for.

Time tracking software

Skip the stress with Heartland Time, our user-friendly time and attendance solution that integrates seamlessly with our payroll processing software.

Whether you have a handful of employees or a few hundred, Heartland Time helps you keep timesheets accurate and payrolls error-free with precision-forward software. You can build schedules with drag-and-drop tech that estimates payroll and overtime expenses for you. Plus, use mix-and-match punching options and continuous tracking to make sure employee time is accurate from clock-in to clock-out.

Payroll processing and HR tech

When it comes to navigating hourly rates, salaries and overtime pay, we’ve got something for that too.

Our all-in-one payroll and HR solution makes it easy to pay your employees accurately each pay period — whether they get overtime pay or not. On top of powerful payroll processing, our solution also includes full-service tax management. We calculate, file and pay your payroll taxes to the appropriate agencies — and you rest easy knowing they’re done accurately and on time.

Stressed about navigating complex classifications and maintaining compliance with ever-changing labor law requirements? Consult our 24/7 HR resource hub, labor law poster program, federal and state department of labor sites, and timely compliance updates. If there’s ever an inquiry, you can quickly access records of hours worked each workday and workweek, as well as earnings and wages with a unified, electronic recordkeeping solution.

You don’t have to go it alone

That’s a wrap on employee classification 101! We hope you gained a better understanding of how federal, state and local labor laws could impact your business, but suggest you contact local labor counsel with questions. Taking the time to learn the ropes will go a long way toward building a compliance strategy that keeps your labor costs in check and your business operations humming.

If you need a helping hand, you’re in the right place.

With Heartland, you gain access to a team of certified human resources professionals who are ready to help you work through tricky situations, no matter how labor laws change in the future. Ultimately, complying with applicable labor laws is up to you, and consulting with legal counsel is always your best bet. We’re also here to help keep you up to date, so you can make decisions with confidence.

Want more information? Drop us a line or browse our payroll solutions online today.

FAQs

Disclaimer: The information provided in this document does not, and is not intended to constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. Information provided may not constitute the most up-to-date legal or other information, and readers of this information should contact their attorney to obtain advice with respect to any particular legal matter, in the relevant jurisdiction. All liability with respect to actions taken or not taken based on the contents here are hereby expressly disclaimed.

---

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us