Payroll Exempt vs. Non-exempt: What Employers Should Consider

When it comes to compensating employees, one of the first decisions an employer must make is whether a position should be classified as exempt or non-exempt. Each structure has advantages and challenges, both for the employee and the employer.

We help businesses navigate these decisions to align compensation with their operational goals and compliance obligations.

Here’s a closer look at the key differences and considerations for each option.

Exempt (Salaried)

1. Consistency

One of the most significant advantages of offering an exempt position is the consistency it provides. Employees receive the same amount in each paycheck, making it easier for both the company and the employee to budget and plan financially. This predictability also promotes stability and long-term commitment among team members.

2. Professional Roles

Salaries are typically associated with professional, managerial, or specialized roles that require a higher level of responsibility. These employees are expected to focus on achieving goals rather than tracking every hour worked. As a result, an exempt classification structure is well-suited for positions where outcomes and performance matter more than time spent.

3. Employer Control

When employees are classified as exempt, employers often have greater flexibility in how they schedule work and delegate responsibilities. There is less attention required to monitor hours, which can streamline operations and improve efficiency in project management and client service . When an employee’s position is deemed exempt, they are not eligible for overtime, which further impacts the employer’s capacity to make effective budgetary decisions.

To qualify as a salaried exempt employee, the employee must meet the salary basis threshold, which is currently $35,586 annually or $684 per week. If they do not, the position must be classified as “salaried non-exempt” or just “non-exempt.”

Non-exempt Roles Enable Flexibility

Workers categorized as non-exempt are compensated only for the hours they actually work. Therefore, if an employer wants an employee to work fewer hours during a certain period of the year and more at another time, they are allowed to do so, but it will affect the employee.

1. Employees are Paid Overtime

Hourly employees are typically classified as non-exempt, which means they are entitled to overtime pay for any hours worked over 40 in a workweek. While this may lead to higher labor costs in some cases, it ensures compliance with labor laws and protects the business from potential penalties and disputes.

2.Employees are Paid for Actual Time Worked

Another benefit of an hourly structure is the fairness it ensures. Employees are compensated for actual time worked, which can boost morale and trust. For roles that involve irregular hours, fluctuating workloads, or on-call demands, hourly pay ensures that employees are fairly compensated for their.

As noted above, a non-exempt role can be paid on a salaried or hourly basis; it simply means the employee is eligible for overtime for all hours worked over 40 in a workweek under federal law (but be sure to refer to state law as well because other states, like California, require overtime to be paid after 8 hours in a day.)

Which Approach is Right for Your Business?

Determining if your position should be classified as exempt or non-exempt ultimately depends on the nature of the role, the expectations for the position, and your business operations.

Whether you’re expanding your team, restructuring your workforce, or reviewing your payroll practices, we’re here to help you make informed decisions that position your business for success.

Contact us today to learn how we can support your payroll, HR, and accounting needs.

Frequently Asked Questions:

What is an Exempt Employee?

In the U.S., an exempt employee is a worker who receives a fixed salary from his/her employer and is not entitled to receive overtime pay for working more than 40 hours in one week. Exempt employee categories include executives and professional (finance, marketing, sales, etc.). According to the Fair Labor Standards Act (FLSA), the federal minimum salary is $35,586 annually in 2025. Note that California has a higher minimum salary for exempt employees, which is set at $68,640 per year. 

What is a non-exempt Employee?

Per the FLSA, non-exempt employees are compensated for actual time worked. A non-exempt role can be paid on either a salaried or hourly basis; however, the employee is eligible for overtime pay for all hours worked over 40 in a workweek. 

What’s the difference between exempt and non-exempt employees?

Exempt and non-exempt employees differ in whether or not they are paid overtime wages (1.5 times regular hourly rate) for working more than 40 hours in one week. Employers are responsible for ensuring that their employees are properly classified as exempt or non-exempt and that they are paid according to the applicable state or federal laws. Misclassifying employees can result in legal penalties for employers.