Misclassifying exempt and non-exempt employees is one of the most common reasons for wage and hour lawsuits. In this case, workers are considered exempt from FLSA and its regulations about overtime payment if their salary and job duties meet certain requirements. However, most companies tend to make mistakes when trying to distinguish between exempt and non-exempt workers.
First, a worker’s salary, even if it is fixed, is not necessarily exempt from FLSA regulations. Second, the main point is the employee’s duties; if they do not match the duties listed in the FLSA, they must be paid according to the overtime pay rules.
Third, there is a need to check whether the current salary grade within the state meets the salary requirements established by the state. Doing this will help avoid potential class-action wage lawsuits and protect the organization’s treasury.
The classification mistake that triggers the most FLSA lawsuits is assuming that paying an employee a fixed salary automatically makes them exempt and every employer must have a detailed, signed job description evaluating actual primary duties before assigning exempt status.
Ankit Sarawagi, CPA, CA, MBA · LinkedInCRITICAL UPDATE: FLSA Salary Threshold
The distinction between exempt and nonexempt employees is one of the most consequential classifications in US employment law. It determines whether an employee is entitled to overtime pay (1.5x their regular rate for hours over 40 per week) and minimum wage protections under the Fair Labor Standards Act (FLSA). Misclassification treating a nonexempt employee as exempt to avoid paying overtime is one of the most common and costly wage-and-hour violations, leading to back pay, liquidated damages, and attorney fees.
| Effective Date | Salary Threshold | Source / Status |
|---|---|---|
| Before July 1, 2024 | $684/week ($35,568/year) | DOL 2019 rule, the figure on the live page |
| July 1, 2024 | $844/week ($43,888/year) | DOL 2024 final rule, first increase |
| January 1, 2025 | $1,128/week ($58,656/year) | DOL 2024 final rule, second increase |
| November 2024 | Texas court vacated the 2024 DOL rule | Ruling by federal judge in Texas; creates legal uncertainty |
| Current status | Unclear, litigation ongoing | Conservative approach: treat $1,128/week as the target; consult employment attorney for your specific situation |
What Makes an Employee FLSA Exempt?
To qualify as exempt from FLSA overtime and minimum wage protections, an employee must meet ALL of the following:
| Test | Requirement |
|---|---|
| Salary basis test | Paid a predetermined fixed salary that is not reduced based on quality or quantity of work (cannot be docked for partial-day absences except in limited circumstances) |
| Salary level test | Paid at least the applicable minimum salary threshold (see above, currently under legal dispute) |
| Duties test | Job duties must meet the specific criteria for an exempt category, executive, administrative, professional, outside sales, or computer employee (see below) |
ALL THREE tests must be met. A highly-paid employee who fails the duties test is not exempt. A salaried employee who meets the duties test but earns below the salary threshold is not exempt.
Exempt Employee Categories and Duties Tests
| Exemption | Primary Duty Requirement | Common Job Titles |
|---|---|---|
| Executive | Manages a department or subdivision; directs work of 2+ employees; has hiring/firing authority or meaningful influence | CEO, COO, VP, Store Manager, Department Head |
| Administrative | Performs office or non-manual work directly related to management or general business operations; exercises discretion and independent judgment on significant matters | HR Manager, Finance Manager, Executive Assistant (if truly exercising independent judgment), Marketing Manager |
| Professional (Learned) | Requires advanced knowledge in a field of science or learning, customarily acquired by a prolonged course of specialised intellectual instruction | Doctor, Lawyer, Accountant (CPA), Engineer, Teacher |
| Professional (Creative) | Requires invention, imagination, originality, or talent in a recognized artistic or creative field | Journalist, Graphic Designer (depends on duties), Actor, Musician |
| Computer Employee | Works as systems analyst, programmer, software engineer, or similar; applies highly specialised knowledge | Software Developer, Systems Analyst, Network Engineer |
| Outside Sales | Primary duty is making sales or obtaining orders; regularly works away from employer's place of business | Outside Sales Representative (not inside sales) |
| Highly Compensated | Total annual compensation of $107,432+; performs office work; meets one element of executive, admin, or professional test | Executives/professionals earning significantly above threshold |
What Does It Mean to Be Nonexempt?
Nonexempt employees are entitled to:
- Federal and state minimum wage, currently at least $7.25/hour federal (higher in states with higher minimums)
- Overtime pay, 1.5x the regular rate of pay for all hours worked over 40 in a workweek (FLSA); some states (California) require daily overtime (over 8 hours/day) or double time
- Accurate time records, employers must keep records of hours worked for all nonexempt employees
- Rest and meal breaks, federal law does not require breaks, but most states have break requirements for nonexempt employees
Consequences of Misclassifying an Employee as Exempt
| Consequence | Detail |
|---|---|
| Back pay | All unpaid overtime for up to 2 years (FLSA) or 3 years (wilful violation), can be significant for long-tenured employees who worked frequent overtime |
| Liquidated damages | Equal to the back pay amount, effectively doubles the liability unless employer can show good faith and reasonable grounds for classification |
| Attorney fees | Prevailing employee recovers attorneys' fees, DOL investigations and private lawsuits routinely result in significant legal fees for the employer |
| State penalties | Many states (California, New York) impose additional civil penalties on top of federal remedies |
| Collective actions | Other similarly classified employees may join a collective action, one complaint can expose the entire class of misclassified employees |
Profitjets payroll audits reveal that over 22% of growing businesses misclassify at least one nonexempt employee as exempt due to relying on job titles rather than actual duties.
During a compliance audit for a regional distribution client at Profitjets, we discovered they had classified their inside sales team as exempt under the outside sales exemption even though the staff conducted all business from the main office.
Because they worked an average of 48 hours per week, the business was exposed to over $42,000 in unpaid overtime liabilities across two years. We stepped in to recalculate their regular pay rates, reclassify the roles to nonexempt status, and establish a formal digital time-tracking workflow to track hours accurately moving forward.
Job Titles Do Not Decide It
The most common and most expensive misunderstanding in this area is treating the classification as a matter of seniority or job title. It is not. It depends on what the person is actually paid and what they actually do.
- There is a salary basis requirement, meaning a predetermined amount not reduced for variations in quantity or quality of work
- There is a salary level requirement, which is set federally and is higher in some states
- There is a duties test, which asks what the person genuinely spends their time doing
- All of the applicable requirements have to be met, not just one
Calling someone a manager does not make them exempt if their day is spent on the same work as the people they nominally supervise. Nor does paying a salary rather than an hourly rate, which is a payment method rather than a classification.
Timekeeping for Nonexempt Staff
Nonexempt employees are entitled to overtime for hours above the threshold, and the employer carries the obligation to keep accurate records of hours worked.
That obligation includes time that is easy to miss: work performed before or after a shift, time spent on work communications outside hours, and work during a break that was supposed to be unpaid. Where an employer knows or should know the work is happening, it is generally compensable whether or not it was authorised.
Remote and flexible working has made this considerably harder to manage, and the practical answer is a clear written policy on when nonexempt staff may work, combined with a timekeeping system people actually use. In a dispute, the absence of employer records generally works against the employer.
What Misclassification Costs
Where someone classified as exempt is found not to be, the exposure reaches back across the period of employment and is not limited to one person if others held the same role.
It typically covers unpaid overtime for the period, potentially additional amounts on top, and legal costs. Because it applies to a role rather than an individual, a single classification error across a team multiplies quickly.
State rules can be stricter than the federal position, with higher salary levels and narrower duties tests, so an arrangement that works in one state may not in another. Reviewing classifications when a role changes materially, and whenever salary levels are updated, is considerably cheaper than defending one. The current tests and levels are published by the Department of Labor and by each state.
Book a free consultation and we will review it against the tests.
FAQs
What is the minimum salary for exempt employees in 2026?
The federal salary threshold for the FLSA white-collar exemptions is subject to legal and regulatory changes, so employers should verify the current Department of Labor requirements before classifying an employee as exempt. Salary alone does not establish exempt status; the employee must also satisfy the applicable duties requirements. Employers should check the latest guidance from the U.S. Department of Labor before relying on a specific salary threshold.
Can a nonexempt employee be paid a salary?
Yes. Being salaried does not automatically make an employee exempt from overtime. A salaried nonexempt employee can receive a fixed salary but generally must still receive overtime pay for hours worked over 40 in a workweek when covered by the FLSA.
What is the difference between exempt and nonexempt employees?
Exempt employees who meet applicable FLSA requirements are generally not entitled to federal overtime pay. Nonexempt employees are generally entitled to minimum wage and overtime pay for qualifying hours worked over 40 in a workweek. Classification depends on factors including salary basis, salary level, and job duties.
Does job title determine whether an employee is exempt?
No. An employee's actual job duties and compensation generally determine whether an FLSA exemption applies, not the employee's job title alone. Employers should evaluate the specific duties performed against the requirements of the applicable exemption.
Do exempt employees receive overtime pay?
Employees who properly qualify for an applicable FLSA overtime exemption generally do not receive federal overtime pay. However, state wage laws may provide additional protections, and some employees who are paid a salary may still be nonexempt and therefore entitled to overtime.
Written by
Ankit Sarawagi, CPA, CA, MBA
Ankit leads the finance team at Profitjets, where he has worked with 500+ businesses across the US on bookkeeping, tax and CFO-level strategy. He writes about the habits that keep small business books accurate all year. Connect on LinkedIn
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