Exempt vs Non-Exempt and Overtime for Small Employers

Under federal law, "non-exempt" employees must be paid overtime — generally time-and-a-half their regular rate for every hour worked over 40 in a workweek — plus at least the applicable minimum wage. "Exempt" employees are carved out of that overtime requirement, but only if they are paid on a salary basis, paid at least a minimum salary level set by the U.S. Department of Labor, AND their actual job duties fit one of a handful of narrow legal categories. Paying someone a salary, calling them a "manager," or having them sign an offer letter that says "exempt" does none of that work by itself. Getting this wrong is one of the most expensive mistakes a small employer can make, because it usually isn't caught until a worker (or the Department of Labor) looks back over years of unpaid overtime.

This page explains the federal framework under the Fair Labor Standards Act (FLSA) and flags where state law is stricter. It's general information, not a substitute for checking current figures at dol.gov or talking to an employment attorney about your specific roles.

The default: almost everyone is non-exempt

The FLSA's baseline assumption is that hourly and salaried workers alike are non-exempt unless an employer can show they qualify for a specific exemption. Non-exempt employees are entitled to:

• At least the federal minimum wage for every hour worked (or the higher state or local minimum wage, if one applies).
• Overtime pay — generally one and one-half times the regular rate — for hours worked over 40 in a single workweek. Federal law does not require daily overtime (extra pay for a long single day) or overtime for hours over 8; some states do.
• Accurate recordkeeping of hours worked, which is the employer's legal responsibility, not the employee's.

Being paid a salary does not remove any of this. A salaried employee who doesn't meet an actual exemption is still owed overtime for hours over 40, calculated from their regular rate.

The three-part test for exempt status

To classify someone as exempt from overtime under one of the FLSA's "white collar" exemptions, all three of the following generally have to be true at the same time:

1. Salary basis test. The employee is paid a predetermined, fixed salary that doesn't go up or down based on the quality or quantity of the work performed in a given week.
2. Salary level test. The salary meets or exceeds a minimum dollar amount set in federal regulations. This figure is set by the Department of Labor, has been the subject of ongoing rulemaking and litigation in recent years, and changes over time — do not rely on a number from memory, an old blog post, or last year's payroll setup. Always confirm the current figure directly at dol.gov before classifying anyone.
3. Duties test. The employee's actual, primary job duties — not their title, not what's written in a job description that doesn't match reality — fit one of the recognized exempt categories, most commonly:
   • Executive — primarily manages the business or a department, regularly directs the work of at least two other full-time employees, and has real input into hiring/firing/promotion decisions.
   • Administrative — primarily performs office or non-manual work directly related to management or general business operations, and exercises genuine discretion and independent judgment on significant matters.
   • Professional — primarily performs work requiring advanced knowledge in a field of science or learning (typically acquired through a prolonged course of specialized study) or work in a recognized creative/artistic field.
   There are also narrower exemptions for certain outside sales employees and certain highly technical computer employees, each with their own duties tests.

Miss any one of the three, and the employee is non-exempt — full stop. A well-paid "assistant manager" who spends nearly all their time ringing up sales and stocking shelves, with little real managerial authority, is very likely still owed overtime, no matter what their pay stub or job title says.

Salary alone never makes someone exempt

This is the single most common — and most expensive — misconception small employers run into. Employers sometimes assume that switching an hourly worker to a flat weekly salary automatically ends any overtime obligation. It doesn't. If the duties test isn't met, or the salary is below the current DOL threshold, that employee is still non-exempt and still owed overtime for hours over 40, regardless of the pay structure you've chosen. "We pay everyone salary" is not a defense in a Department of Labor wage investigation or a private wage lawsuit.

The salary threshold changes — check dol.gov before you rely on it

The minimum salary level for the white-collar exemptions is set by DOL regulation, and it has moved more than once in recent years through a mix of rulemaking and federal court decisions that blocked or unwound prior rules. Because of that back-and-forth, any specific dollar figure printed here could be wrong by the time you read it. Before classifying any employee as exempt, confirm the current salary threshold — along with the separate, higher threshold that applies to certain highly compensated employees — directly on the Department of Labor's Wage and Hour Division site at dol.gov/agencies/whd/overtime/salary-levels. Build a calendar reminder to re-check it periodically, since it can change again.

State law can be stricter — and controls when it is

The FLSA sets a federal floor, not a ceiling. Many states set their own overtime and minimum-wage rules that are more protective of workers than federal law, and where state law is stricter, the employer generally has to follow the stricter rule. Depending on the state, that can mean:

• A higher state minimum wage than the federal minimum wage.
• A higher salary threshold for exempt status than the federal one.
• Daily overtime requirements (extra pay for hours worked beyond a certain number in a single day, not just a weekly 40-hour count) in a handful of states.
• Different or narrower duties tests for exempt categories.
• State-specific rules about meal and rest breaks, final-paycheck timing, and pay stub disclosures that interact with how overtime is calculated and reported.

Because these rules vary by state — and change — confirm the current requirements for every state where you have employees through your state labor department or state department of labor's wage-and-hour division. Don't assume that meeting the federal test is enough; it's only the floor.

Why misclassification is so costly

Misclassifying a non-exempt employee as exempt (or misclassifying an employee as an independent contractor, which is a related but separate problem) doesn't just risk a complaint — it creates back-pay exposure that can go back years. A Department of Labor investigation or private lawsuit can result in:

• Back overtime pay for the full period of misclassification, which can run for years depending on the applicable statute of limitations.
• Liquidated (double) damages under the FLSA in many cases, on top of the back pay itself.
• Additional state-law penalties, interest, and separately calculated damages under state wage laws.
• Attorney's fees if the case is litigated, and potential Department of Labor civil penalties for repeat or willful violations.

Because these claims often involve every employee in a given role, not just one person, a single misclassified job title can turn into a much larger liability than most owners expect. This is exactly the kind of business debt that can follow an owner personally in some circumstances, and it is not the kind of debt that disappears easily even in a business bankruptcy.

What to do

1. Audit by duties, not titles. For every role you consider exempt, write down what the person actually spends most of their time doing — not the job description, the reality.
2. Confirm the current federal salary threshold at dol.gov before you classify or reclassify anyone, and re-check it periodically since it can change.
3. Check your state's overtime and minimum-wage rules through your state labor agency, since they may be stricter than federal law and will control where they are.
4. Keep accurate time records for non-exempt employees, even salaried non-exempt employees — this protects you as much as it protects them if a dispute arises.
5. When a role is close to the line, treat it as non-exempt or get a qualified employment attorney or HR professional to review it before you rely on an exemption. The cost of that review is far smaller than the cost of getting it wrong across a whole job category.
6. Use the Department of Labor's free resources, including its overtime and exemption guidance and elaws advisors, to work through borderline calls.

Frequently asked questions

If I pay someone a salary, do I still owe them overtime?

Possibly, yes. A salary alone does not make someone exempt. If the role doesn't meet the duties test, or the salary is below the current DOL threshold, that employee is non-exempt and is owed overtime for hours over 40 in a workweek, calculated from their regular rate.

Can I just tell an employee they're exempt in their offer letter?

No. Exempt status depends on the actual salary basis, salary level, and job duties — not on what a title, offer letter, or employment agreement says. Calling someone exempt on paper doesn't protect you if the real facts don't meet the legal test.

Does federal law require overtime after 8 hours in a day?

No. The FLSA calculates overtime based on hours over 40 in a workweek, not hours in a single day. Some states have their own daily overtime rules that are stricter — check your state labor agency for your state's rule.

What's the current salary threshold for exempt status?

It changes and has been the subject of recent rulemaking and litigation, so this page won't print a number that could go stale. Confirm the current figure directly at the Department of Labor's Wage and Hour Division site before classifying anyone.

What should I do if I think I've misclassified employees in the past?

Talk to a qualified employment attorney or CPA promptly. Self-correcting and paying back wages voluntarily is generally far less costly than waiting for a complaint or a Department of Labor audit, and an attorney can walk you through the options for fixing prior periods.

This article is general information, not legal, tax, or financial advice.