"They're salaried, so we don't pay overtime." It is one of the most common sentences in small business HR, and one of the most expensive misunderstandings. Under the federal Fair Labor Standards Act (FLSA), every employee is entitled to minimum wage and overtime at one and a half times their regular rate for hours over 40 in a workweek, unless they fit a specific exemption. Salary alone is never enough.
This guide explains how the exemptions work, where the federal salary threshold stands after recent litigation, and why state law often sets a higher bar.
What "exempt" and "non-exempt" mean
Non-exempt employees must be paid at least minimum wage for every hour worked and overtime for hours over 40 in a workweek. They can be paid hourly or by salary; a salaried non-exempt employee still gets overtime.
Exempt employees are excluded from the FLSA's minimum wage and overtime requirements because they meet the conditions of an exemption. The most common are the "white-collar" exemptions for executive, administrative and professional employees, plus computer employees and outside sales.
The burden is on the employer to prove an exemption applies. If you cannot show it, the employee is non-exempt.
The three tests for white-collar exemptions
For the executive, administrative and professional exemptions, an employee generally must meet all three of these:
- Salary basis test. The employee receives a predetermined, fixed salary each pay period that is not reduced because of variations in the quality or quantity of work.
- Salary level test. The salary meets the minimum threshold.
- Duties test. The employee's primary duty matches the exemption's requirements.
Where the federal salary threshold stands
The federal minimum salary for the white-collar exemptions is $684 per week (equivalent to $35,568 per year), the level set in 2019. The Department of Labor issued a 2024 rule that would have raised it in two steps, but a federal court in Texas vacated that rule in November 2024, and the agency has since returned its regulations to the 2019 levels. The highly compensated employee (HCE) threshold is likewise back at $107,432 in total annual compensation. Because this area has been heavily litigated, confirm the current figure on the DOL website before relying on it, and expect future rulemaking.
Several states set a much higher salary threshold for exemption under state law, often tied to the state minimum wage. California, New York, Washington and Colorado are well-known examples. You must meet whichever standard is more protective for the employee, so check our state HR law guides for your state's number.
Salary basis pitfalls
Improper deductions can destroy an exemption. In general you cannot dock an exempt employee's salary for a partial-day absence, for a day the business is closed, or for jury duty. Permitted deductions are narrow, such as full-day absences for personal reasons, certain full-day disciplinary suspensions for workplace conduct violations, and unpaid FMLA leave. Adopting a clear policy prohibiting improper deductions, with a complaint mechanism, helps protect you if a mistake happens.
The duties tests at a glance
| Exemption | Primary duty must be... | Other key requirements |
|---|---|---|
| Executive | Managing the business or a recognized department or subdivision | Customarily directs the work of at least two full-time employees (or equivalent); has authority to hire or fire, or their recommendations carry particular weight |
| Administrative | Office or non-manual work directly related to management or general business operations | Exercises discretion and independent judgment on matters of significance |
| Learned professional | Work requiring advanced knowledge in a field of science or learning, usually acquired through prolonged specialized instruction | Consistent exercise of discretion and judgment (examples: lawyers, doctors, accountants, engineers) |
| Creative professional | Work requiring invention, imagination, originality or talent in a recognized artistic or creative field | Salary requirements apply |
| Computer employee | Systems analysis, programming, software engineering or similar skilled computer work | Paid on a salary basis at the threshold or hourly at not less than $27.63 per hour |
| Outside sales | Making sales or obtaining orders, customarily and regularly away from the employer's place of business | No federal salary requirement |
Job titles do not count. An "Operations Manager" who spends most of the day doing the same tasks as the team, with no real authority, may not be exempt. Look at what the person actually does.
Common misclassification traps
- Assistant managers and shift leads who mostly perform front-line work.
- Administrative assistants and coordinators, whose work is often clerical rather than involving independent judgment on significant matters.
- Entry-level marketing, HR and recruiting roles that follow established procedures.
- IT support roles such as help desk, which usually do not meet the computer employee duties test.
- Inside sales, which does not qualify for the outside sales exemption.
- Paying a salary below the state threshold even when the federal threshold is met.
Classification checklist
- Write an accurate job description based on real duties, not the ideal version.
- Identify the employee's primary duty, meaning the main or most important part of the job.
- Match that duty to a specific exemption and its requirements.
- Confirm the salary meets the federal threshold and any higher state threshold.
- Confirm pay is on a true salary basis with no improper deductions.
- Document the reasoning and the date of the review.
- Re-review when duties change, when someone is promoted, or when thresholds change.
- For non-exempt employees, make sure all time is tracked, including pre-shift work, short breaks and after-hours messages.
Paying non-exempt employees correctly
Non-exempt does not have to mean hourly. You can pay a non-exempt employee a salary, but you still need to track all hours worked and pay overtime for hours over 40 in a workweek. Overtime is based on the regular rate, which generally includes non-discretionary bonuses and commissions, not just the base hourly rate. Some states also require daily overtime or have other rules that go beyond the FLSA, so confirm your state's requirements.
What if you get it wrong?
An employee misclassified as exempt can claim unpaid overtime, typically for two years back and three years for willful violations under federal law, plus an equal amount in liquidated damages and attorney's fees. State law can add longer lookback periods and separate penalties. If you find a misclassification, reclassify going forward, start tracking hours, and talk to counsel about how to address back pay.
Reclassifying someone from exempt to non-exempt does not have to feel like a demotion. Explain that it is a legal classification, not a judgment on their value, and walk them through how timekeeping will work.
Key takeaways
- Salary alone never makes someone exempt; duties and salary level both matter.
- The federal threshold is back at $684 per week after the 2024 increase was struck down, but state thresholds are often higher.
- Job titles are irrelevant; actual primary duties decide.
- Improper salary deductions can jeopardize the exemption.
- Document your analysis and revisit it regularly.
Check your roles
Paste a job description into AskHrAI's job description analyzer or ask the AI HR chat to walk through the duties test for a specific role in your state.
This article is general information, not legal advice. Employment laws change and vary by state and city — confirm details with your state labor department or an employment attorney.