I was auditing a client’s payroll the other day, and I noticed something that made my stomach drop. They had a whole team of “managers” who were working 50 to 60 hours a week, getting paid a flat salary of $35,000 a year, and receiving zero overtime. The owner thought because they had the title “manager” and were paid a salary, they didn’t have to pay them extra. It’s a classic mistake, and it’s incredibly dangerous. It always brings up the fundamental question: exempt vs. non-exempt employees: what’s the difference? Honestly, getting this wrong is one of the fastest ways to get sued by the Department of Labor.
The terms “exempt” and “non-exempt” refer to the Fair Labor Standards Act (FLSA). Specifically, they refer to whether an employee is exempt from the FLSA’s minimum wage and overtime rules. A non-exempt employee must be paid at least the minimum wage, and they must be paid time-and-a-half for any hours worked over 40 in a single workweek. An exempt employee does not get overtime pay, no matter how many hours they work.
The Three-Pronged Test
When you think about it, employers naturally want everyone to be exempt. It makes payroll predictable and keeps labor costs down. But you don’t get to just decide someone is exempt. The government decides, based on a very specific three-pronged test.
First, there is the salary basis test. The employee must be paid a predetermined, fixed salary that cannot be reduced based on the quality or quantity of their work. If they work two hours on a Tuesday and go home, you still have to pay them for the whole week.
Second, there is the salary level test. This is the one that trips people up because it changes. As of right now, to be exempt, an employee must make a minimum amount per week (which translates to a specific annual salary). If they make less than that threshold, they are automatically non-exempt and must be paid overtime, regardless of their job title.
Third, and most complicated, is the duties test. Just paying someone a high salary doesn’t make them exempt. Their actual day-to-day job duties must fall into specific categories defined by the FLSA—usually executive, administrative, or professional roles.
If you are looking at your org chart and realizing you might have misclassified some people, it’s better to fix it now before an employee files a complaint. Give us a call at (800) 777-8944 or visit our consultation page to get some expert eyes on your payroll structure.
The Duties Trap
The duties test is where the most lawsuits happen. Let’s go back to that “manager” making $35,000. To pass the executive duties test, their primary duty must be managing the enterprise or a recognized department. They must regularly direct the work of at least two full-time employees, and they must have the authority to hire and fire.
If you give someone the title of “Assistant Manager,” but they spend 90% of their day ringing up customers on a cash register and stocking shelves, they are not exempt. The Department of Labor doesn’t care what’s printed on their business card; they care about what the person actually does all day. This is why having accurate, up-to-date job descriptions is so vital. It’s a core part of basic HR support that many small businesses overlook until it’s too late.
State Laws Add Another Layer
The thing is, the FLSA is just the federal baseline. Many states have their own, much stricter rules regarding exempt status. For example, states like California and New York have salary thresholds that are significantly higher than the federal level. They also have different rules about how overtime is calculated (like daily overtime instead of just weekly).
If you have a remote workforce spread across multiple states, managing these different thresholds is a nightmare. You might have an employee in Texas who is perfectly legal as an exempt worker, but an employee doing the exact same job in California who must be classified as non-exempt because of the state salary threshold. This is a major reason why companies use an employer of record to handle out-of-state hires. The EOR takes on the legal responsibility of ensuring the worker is classified correctly according to their specific local laws.
Getting It Right
At the end of the day, classifying employees correctly isn’t just about avoiding fines; it’s about treating your people fairly. Non-exempt employees are trading their time for money, and if they give you extra time, they deserve the extra money.
The safest approach is to assume every employee is non-exempt and eligible for overtime unless you can definitively prove they meet all three prongs of the exemption test. If there is any gray area, pay the overtime. It might cost a little more in the short term, but it’s vastly cheaper than defending a class-action wage and hour lawsuit down the road.
FAQs
What happens if I misclassify a non-exempt employee as exempt?
If you misclassify an employee, you can be held liable for years of unpaid back overtime, plus liquidated damages (which essentially doubles the amount owed), and attorney’s fees. The Department of Labor can also impose significant civil money penalties.
Can a salaried employee be non-exempt?
Yes. Paying someone a salary does not automatically make them exempt. If their salary falls below the legal threshold, or if their job duties do not meet the FLSA requirements, they are a “salaried non-exempt” employee and are still legally entitled to overtime pay.
Does an employee’s job title determine if they are exempt?
No. The Department of Labor explicitly states that job titles do not determine exempt status. The determination is based entirely on the employee’s actual job duties and their salary level.
