In terms of employment law, employee classification of salary exempt from overtime vs. non-exempt isn’t just a payroll formality, it’s a legal requirement under the Fair Labor Standards Act (FLSA), and Misclassifying Employees as Salary Exempt (or as independent contractors) can expose your business to significant risk. Misclassification is one of the most common, and costly HR compliance issues facing employers today, especially as labor laws evolve at both the federal and state levels.
What’s the Difference Between Salary Exempt vs. Non-Exempt?
- Exempt Employees are not eligible for overtime pay. They are typically salaried and must meet strict duties and salary threshold tests.
- Non-Exempt Employees are entitled to overtime pay (1.5x regular rate) for all hours worked over 40 in a workweek, regardless of their job title or pay structure.
However, job titles alone do not determine salary exemption status. The FLSA lays out clear rules that must be met for an employee to qualify as exempt from overtime.
FLSA Exemption Tests:
To classify an employee as exempt from overtime under the FLSA, three key tests must be satisfied:
1. Salary Basis Test
- The employee must be paid a fixed salary that does not fluctuate based on quality or quantity of work.
2. Salary Level Test
- The federal minimum salary threshold is $684 per week ($35,568/year).
- Some states, including California, New York, and others may have their own specifications. Please reach out to your HR Consultant for more details.
3. Duties Test
- The employee must primarily perform exempt duties, such as executive, administrative, professional, computer-related, or outside sales tasks.
Example: A salaried IT employee must perform high-level systems’ analysis, programming, or software engineering duties to qualify under the Computer Employee Exemption (29 C.F.R. § 541.400).
What are the Consequences of Misclassifying Employees as Exempt?
Consequences of misclassifying employees as exempt can lead to significant legal issues. Employers who misclassify employees, either by mistake or to avoid paying overtime, can face:
- Back pay for unpaid overtime (up to 3 years retroactively)
- Penalties and fines from the Department of Labor (DOL)
- Class-action lawsuits
- Unpaid taxes and benefits miscalculations
Even well-meaning employers are not immune. Misclassification can happen during
reorganizations, title changes, or hiring for hybrid roles without proper duty reviews.
How HRDelivered’s Compliance Services Can Help:
Our HR team provides the tools and insight needed to help employers stay compliant, including:
- FLSA Exemption Checklists
- Job Description and Duties Analysis
- State-specific Wage & Hour Reviews
- Policy Templates and Training
To proactively protect your business and ensure employees are classified correctly, reach out to your designated HRDelivered Consultant today. We’ll schedule a compliance review tailored to your workforce, industry, and state.
References:
- U.S. Department of Labor: Exemption Criteria