Exempt vs. Non-Exempt Worker Status: What is the Difference?

In the US, exempt workers are salaried employees who, under labor laws, cannot claim overtime (compensation for hours worked outside of a standard 40-hour work week). By contrast, non-exempt workers are entitled to overtime pay at 1.5 times their usual rate. This classification is determined based on how much a worker earns, their pay structure, and job duties.

Understanding the difference between exempt and non-exempt workers, as each category has tax and payroll implications. Moreover, misclassification can lead to substantial damages for employers, triggering penalties, audits, lawsuits, and backpays.

To mitigate these risks, many employers use a professional employer organization (PEO), which provides expertise on worker classification, as well as handling administrative, payroll, and other HR responsibilities. With Deel PEO, you can entrust your compliance matters to us while taking advantage of competitive benefits packages, expert tax advice, and 24/7 customer support.

In this article, we explore the differences between exempt and non-exempt employees, how to determine status, nuances in regulation, and state and local differences.

What is the difference between an exempt vs. non-exempt employee?

The distinction between exempt and non-exempt workers is described in the US’s Fair Labor Standards Act (FLSA) of 1938.

The FLSA is a federal law that sets the standards for many worker protections and rights. This includes criteria for job duties, salaries, and pay structure that determine if workers should be categorized as exempt or non-exempt.

What is an exempt worker?

An exempt worker receives fixed payments on a regular basis and cannot claim additional compensation for overtime. Exempt workers are not legally required to track their hours under the FLSA. These workers have to earn at least $684 USD per week and perform duties that fall into specific categories, including professional, administrative, and executive functions.

What is a non-exempt worker?

Non-exempt workers are required by law to track their working hours and are entitled to receive overtime pay at 1.5 times their normal rate once their working hours exceed 40 hours in a week. Payments to non-exempt workers can be made hourly, as a salary, wage, or any other agreed-upon means—though they still have to comply with the federal minimum wage of $7.25/hour. The type of duties designated as non-exempt typically include, but are not limited to, laboring, “blue-collar,” or customer service work.

An overview of the differences between exempt and non-exempt workers can be found in the table below:

How is exempt vs. non-exempt status determined?

The Department of Labor (DOL) is a federal agency responsible for governing labor laws on a national level, including enforcing FLSA by providing interpretations, specific benchmarks, and regulations. According to the DOL, three criteria need to be met for a worker to qualify as exempt: the salary basis test, the salary level test, and the duties test. To achieve an exemption status, all three criteria must be met.

Salary basis test

To meet the salary basis test, an employee must be paid a fixed and pre-defined salary that does not change with variations in work quantity or quality. Payments need to be made regularly, such as monthly or biweekly. Workers need to be paid in full, regardless of what days or hours they work. Deductions can only be made in specific circumstances, such as disciplinary reasons or unpaid leave.

Salary level test

The salary level test is based on the amount of pay the worker receives. An exempt worker must meet a minimum threshold for their income of $684/week (or $35,568 per annum). This baseline compensation does not apply to bonuses, commissions, or other irregular payments.

Employees who receive at least $107,432 per year—also known as highly compensated employees (HCEs)—may qualify for an exemption. To qualify, they have to meet the requirements of a separate HCE-specific duties test

• Perform office or nonmanual work
• Customarily or regularly undertake at least one exempt duty as an executive, administrative, or professional employee

Duties test

The employee’s primary duties (as opposed to job title or description) also matter in establishing a worker’s status. Under the law, exempt workers primarily perform duties that might be classified as professional, administrative, or executive, though this list is not exhaustive (the DOL provides a more detailed list of duties on their website). The following table gives an overview of what duties qualify for an exemption status:

How exempt and non-exempt roles differ in practice

Choosing to hire an exempt or non-exempt employee will depend on your specific needs and considerations as an employer. Below, we highlight some of the key differences:

Predictable vs. flexible payroll

• Exempt employees are paid in regular, fixed installments, which provides consistency and predictability in payroll planning and execution

• Non-exempt employees are paid for hours completed and can incur overtime, but this can also result in more flexibility and better suit short-term or infrequent projects

Compensation

• Exempt employees typically have higher base salaries (often due to qualifications and level of responsibility), but this can become more cost-efficient in the long term, as they don’t require overtime pay
• Non-exempt employees usually have a lower rate of pay than exempt employees but can charge overtime, which can result in unexpected costs depending on the tasks they are hired to complete

Scheduling and oversight

• Exempt employees typically aren’t required to track their hours and have more autonomy
• Non-exempt employees are mandated by law to track all their worked hours, which could require additional resources for oversight and payroll

Classification concerns

• Exempt employees must meet the criteria for all three DOL tests, which means employers need to evaluate those workers’ duties, pay levels, and pay structures carefully to avoid misclassification penalties
• Non-exempt employees are easier to classify, reducing employers’ liability risks

Practical considerations

The FLSA puts the responsibility of ensuring correct classification on the employer. As such, employers need to stay on top of any changes in legislation as well as their workers’ employment terms and conditions. Some of the considerations to keep in mind can include the following:

• Status can change: Keep an eye on how an employee’s job responsibilities and pay evolve over time, as this can shift their exemption status and lead to worker misclassification
• Job titles do not necessarily mean exemption: While some roles may contain ‘manager’ or ‘executive’ in their title, that does not automatically classify a worker as exempt—only the duties performed determine the outcome of the DOL’s duties test
• State legislation: Companies that hire across the US need to be aware that regulations differ from one state to another

Employers should consult a legal advisor to determine their workers’ exemption status in order to avoid facing financial and legal repercussions.

Federal and state thresholds for 2025

The DOL’s exemption status criteria is applied in most jurisdictions in the US (special exceptions to this being the US Virgin Islands and Puerto Rico, where DOL does not apply). However, additional rules and regulations might be enforceable across the different states.

Whenever a state provides more generous employee rules (such as allowing individuals to qualify for overtime at 8+ hours per day as opposed to 40+ hours per week), the more comprehensive worker protections apply.

A key example of regulatory differences is the minimum salary threshold that is needed for a worker to be classified as exempt. If the state threshold is higher than the federal one, the employer must comply with the threshold set by the state.

State-by-state minimum salary thresholds

A breakdown of the state-by-state minimum salary threshold required for exemption status is provided below:

Put your US workforce management on autopilot with Deel

Worker classification is determined by legal DOL tests: the salary basis test, the salary level test, and the duties test. Ensuring employees are correctly classified falls on the employer, who may face penalties, backpay, and legal repercussions if they do not correctly categorize their workers.

To minimise risks, employers should stay updated on any regulatory changes (such as minimum salary thresholds), document any decisions and changes, and seek legal advice if in doubt.

Deel PEO ensures your business remains fully compliant in every state in the US, providing HR guidance and streamlining all your payroll and benefits processes. We handle your worker’s classification, onboarding, and admin, freeing up your resources so you can focus on growing and developing your business.

Book a demo with our team to learn more.