Misclassifying employees as exempt from overtime is one of the most expensive mistakes a small business can make. Back-pay claims, penalties, and attorney fees add up fast. Here’s how the rules actually work.
This is general information, not legal advice. Overtime thresholds have been subject to federal rulemaking — verify the current U.S. Department of Labor figures before classifying anyone.
The two tests for exemption
To be exempt from federal overtime requirements, an employee must pass both tests:
- The salary basis test — the employee is paid a fixed salary (not hourly) of at least the federal threshold.
- The duties test — the employee’s actual job duties fit one of the exemption categories.
Fail either test and the employee is non-exempt: you owe overtime at 1.5x the regular rate for hours over 40 per week.
The salary threshold
The long-standing federal salary threshold has been $684 per week ($35,568 per year). Federal rulemaking has attempted to raise it, and court challenges have followed — so check the current DOL figure before you rely on any number you read online, including this one. Some states set higher thresholds than the federal floor.
The duties tests (simplified)
- Executive — manages a department, supervises two or more full-time employees, and has real authority over hiring and firing.
- Administrative — office work directly related to running the business, exercising independent judgment on significant matters.
- Professional — work requiring advanced knowledge in a field of science or learning (or creative/original work in a recognized artistic field).
- Computer — certain systems analysis and programming roles paid at least $684/week or $27.63/hour.
- Outside sales — regularly works away from the employer’s place of business making sales.
- Highly compensated — total compensation above the federal threshold performing at least one exempt duty (check the current figure).
The mistakes that get businesses in trouble
- “They’re salaried, so they’re exempt.” Paying a salary does not make someone exempt. Both tests must be met.
- “Their title says manager.” Job titles mean nothing — duties decide.
- Docking an exempt employee’s pay for partial-day absences can destroy the exemption.
- The working supervisor trap. A “manager” who spends most of their time doing the same non-exempt work as their team (running a register, cooking, stocking) usually fails the executive duties test.
- Ignoring state law. States can be stricter than federal rules. The stricter standard wins.
What to do this week
- List every employee you’ve classified as exempt.
- Check each against the current salary threshold and the duties test.
- Write (or update) job descriptions that reflect actual duties.
- Make sure non-exempt employees track all hours worked — including “quick” after-hours emails.
Pair this with a solid Employee Handbook Template that documents your overtime and timekeeping policies.