Salary thresholds and figures in this article are current as of October 2026.
“Exempt” and “non-exempt” are two of the most misunderstood terms in employment law, and the confusion is genuinely understandable. Job titles suggest one thing, salary suggests another, and a lot of business owners assume that simply paying someone a salary automatically means they don’t owe overtime. That assumption is one of the most common and most expensive mistakes employers make.
Here’s what overtime exemptions actually mean, how the rules work, and what to watch out for so your business stays on the right side of wage and hour law.
The Basic Rule: Overtime Is the Default
Under the Fair Labor Standards Act (FLSA), the starting assumption is that employees are entitled to overtime pay, calculated at one and a half times their regular rate of pay, for any hours worked beyond 40 in a single workweek. This is the default for the vast majority of workers.
“Exempt” employees are the exception. They’re carved out of overtime protections, and most receive a fixed salary regardless of how many hours they work in a given week. That exemption is intentionally narrow, and the burden of proving an employee genuinely qualifies as exempt sits with the employer.
Myth: “I Pay Them a Salary, So They’re Exempt”
This is one of the most common and costly misconceptions in wage and hour compliance. Paying someone a salary satisfies only one piece of a larger test. A role qualifies for exemption only when it clears every part of that test. Miss even one piece, and the employee is non-exempt, meaning they’re owed overtime for every hour worked past 40 in a week, regardless of their salary or job title.
The Three-Part Test for Exemption
To qualify for the most common overtime exemptions (executive, administrative, and professional roles, often called “EAP” exemptions), a position generally has to pass all three of the following tests.
1. The salary-basis test The employee must be paid a predetermined, fixed salary that doesn’t fluctuate based on the quality or quantity of work performed in a given week. Employers generally cannot dock an exempt employee’s pay for partial-day absences without risking the exemption itself.
2. The salary-level test The employee’s salary must meet or exceed a minimum threshold set by the Department of Labor. As of 2026, the federal threshold is $684 per week, or $35,568 annually. The Department of Labor formally confirmed this figure through a technical amendment announced on May 14, 2026, and published in the Federal Register the next day. The amendment restored the 2019 threshold after a higher threshold adopted in 2024 was vacated by a federal court. If a salaried employee earns less than this amount, they’re non-exempt, regardless of job title or responsibilities.
3. The duties test This is where the most confusion happens. Even if an employee is paid well above the salary threshold, they’re exempt only if their actual day-to-day duties meet the specific criteria for a recognized exemption category. Job title alone carries no weight here. The test looks at what the person genuinely does day to day.
A few categories follow slightly different rules. Outside sales employees are exempt based on their duties alone, with no salary requirement, and certain computer employees can qualify while being paid hourly at a federal minimum of $27.63 per hour.
Why the Duties Test Trips Up So Many Employers
It’s easy to assume a manager-sounding title like “Operations Manager” or “Team Lead” automatically qualifies someone as exempt. The duties test looks past the label to the substance of the role.
For example, the executive exemption generally requires that the employee’s primary duty is managing the business or a recognized department, that they customarily and regularly direct the work of at least two full-time employees or their equivalent, and that they have authority to hire or fire, or that their recommendations on those decisions carry particular weight. A person with the title “manager” who spends most of their time doing the same hands-on work as their team, without meaningful supervisory authority, likely doesn’t meet this test, whatever their paycheck says.
A Quick Word on State Law
The federal $684-per-week threshold is a minimum. Several states set their own, higher salary thresholds for exemption, and many adjust them regularly, often each January. For example, effective January 1, 2026:
- Washington State’s threshold rose to $1,541.70 per week ($80,168.40 annually), calculated at 2.25 times the state minimum wage.
- California’s threshold rose to $70,304 annually (about $1,352 per week), calculated at twice the state minimum wage for full-time employment.
- New York also increased its thresholds for 2026, with the figure depending on where in the state the employee works: $1,275 per week in New York City, Long Island, and Westchester, and $1,199.10 per week in the rest of the state.
Where a state’s requirement is higher than the federal standard, the state rule applies to employees working in that state. This matters for businesses with employees in multiple states, including businesses based in one state with remote employees working from another. An employee who qualifies as exempt under federal rules might not qualify under their state’s threshold, which means they’d still be owed overtime. Because these figures change and vary by state, it’s worth confirming the current threshold for every state where you have employees each year.
What Happens When You Get This Wrong
Misclassification, whether it’s an honest mistake or not, carries real financial consequences. If an employee who should have been classified as non-exempt was instead treated as exempt, the business can be liable for back overtime pay, sometimes going back years, plus liquidated damages and attorney’s fees if the case escalates to a legal claim.
Improper deductions from an exempt employee’s salary can also put the exemption at risk. Under Department of Labor rules, an employer with an “actual practice” of making improper deductions loses the exemption for the period the deductions were made, and that loss extends to employees in the same job classification working for the same managers responsible for the deductions. Isolated or inadvertent deductions generally won’t cost the exemption if the employer reimburses the employee. Even so, sloppy payroll practices can turn a correctly classified exempt role into a non-exempt one.
Common Mistakes Employers Make
Assuming a title determines classification “Manager,” “coordinator,” and “supervisor” are just words. Exemption depends on the actual scope of the role’s duties and authority.
Not reviewing classifications when roles change An employee’s responsibilities often evolve gradually. A role that qualified for exemption when it was created might no longer meet the duties test a year or two later if responsibilities have shifted. Classifications should be reviewed periodically.
Overlooking higher state thresholds Businesses that rely entirely on the federal threshold, without checking state requirements where their employees actually work, are exposed to real risk.
Making improper deductions from exempt salaries Docking an exempt employee’s pay for a partial-day absence, or making other improper deductions, can jeopardize the exemption. This is a common and avoidable payroll mistake.
How to Reduce Your Risk
1. Classify based on actual duties When setting up a new role or reviewing an existing one, evaluate what the person genuinely does day to day against the duties test for the relevant exemption category.
2. Check federal and state thresholds every year Confirm the applicable salary threshold for every state where you have employees working, including states where remote employees are based, and recheck these figures annually since many states adjust them each January.
3. Review classifications at least annually Build a regular habit of reviewing exempt classifications, and revisit them any time a role’s responsibilities change meaningfully, a state threshold increases, or federal regulations shift.
4. Get a second opinion on close calls If you’re unsure whether a role meets the duties test, talk with an HR professional or employment attorney before finalizing the classification.
The Bottom Line
Overtime exemption comes down to a specific three-part test, and every part matters. A role’s title and the way it’s paid are only the starting point. Getting this right protects your business from real financial exposure, and just as importantly, it ensures your employees are paid fairly and correctly for the work they’re actually doing.
For small businesses without dedicated HR or legal support, wage and hour classification is one of the highest-value areas to get right early. Fixing a misclassification years later usually means back pay, damages, and a lot of untangling.
This article is for informational purposes only and does not constitute legal advice. Employers should consult with qualified legal counsel or an HR professional to confirm employee classifications under federal and applicable state law, and to verify current salary thresholds, as these figures are updated periodically.