Employees are classified as either exempt or nonexempt. That classification affects pay, overtime eligibility and recordkeeping. Misclassifying an employee can be costly, so it is important to understand the rules that determine status.
Who determines classification
A federal wage-and-hour law sets standards for minimum wage, overtime pay, child labor and recordkeeping. That law also establishes tests used to determine whether a worker is exempt from minimum wage and overtime rules.
For related insurance and compliance resources, see FLSA (Fair Labor Standards Act) and Insurance Coverage.
The difference between exempt and nonexempt employees
Exempt employees are not eligible for overtime pay under the wage-and-hour rules. They typically work in white-collar roles such as managers, professionals and certain administrative positions, though some sales and computer-related positions may also qualify as exempt.
Nonexempt employees are generally eligible for overtime pay and are often paid hourly. Examples commonly include clerical, maintenance, construction and semiskilled roles such as technicians and laborers.
How to determine exempt versus nonexempt status
Salary
One factor in classification is pay structure. Exempt employees are usually paid on a salary basis and must meet a federal minimum salary threshold; that threshold can change over time and may differ from state requirements.
Duties
Job duties—not job titles—are key. To be exempt, an employee’s responsibilities must meet the definitions and tests established by the wage-and-hour rules for executive, administrative, professional and other exempt categories.
Consequences of an employee misclassification
Classifying a worker incorrectly can result in substantial liability. Employers may be required to pay back wages for unpaid overtime, along with fines, penalties and legal fees. Misclassification claims commonly arise in industries such as construction, food service and retail.
For more information about how these rules interact with insurance programs, see Fair Labor Standards Act (FLSA) Insurance Overview.
Correct classification is both a legal obligation and an important part of fair pay practices. If you need help reviewing employee status or understanding potential liabilities, talk to an agent or consult a payroll or employment specialist.
Frequently Asked Questions
How do I know if an employee is exempt?
Evaluate whether the employee is paid on a salary basis, meets the applicable salary threshold, and performs duties that satisfy the specific exemption tests for executive, administrative, professional, or other categories.
Are all salaried employees exempt from overtime?
No. Being paid a salary alone does not guarantee exempt status; the employee’s duties must also meet the exemption criteria set by wage-and-hour rules.
What can happen if I misclassify an employee?
Your business may be liable for unpaid overtime, back wages, penalties and legal costs if a misclassification is found.
How can I correct a past misclassification?
Review the employee’s duties and pay, consult payroll and legal advisors, and consider voluntarily correcting pay and recordkeeping while seeking expert guidance to limit exposure.