Question

In your own words explain the difference between an exempt and nonexempt employee. More importantly, how does this classification affect payroll?

Note: Textbook we're using-Payroll Accounting 2019 6th edition, Author-Jeanette M. Landin

Answer 1

Exempt employee: Exempt employee are those salaried employees who satisfy both duties test and salaries test under Fair labor standards act. Exempt employees are not eligible for overtime pay even if they work more than their weekly hour limit of say 40hours.

Non Exempt employee: Non Exempt employee are those who do not satisfy either duties test or salaries test under Fair labor standards act. Non Exempt employees are eligible for overtime pay for every hour worked in excess of their weekly limit of say 40hours.

The classification of employees into Exempt and non-exempt is very important as any non-compliance can result in recoveries, penalties and fines if misclassification is found to be wilful violation of the law. Also,since, The salary payment varies for non exempt employee if he works overtime, any misclassification of Non-exempt into exempt employee may lead to underbooking/underpayment of salary expenditure. Similarly, if Exempt employee is classified as non exempt employee, It increase the salary expenditure if the exempt employee works overtime even though no eligible for it.