Exempt vs Non-Exempt Employees: What Determines Status
The three tests for exempt status
All three must be true for an employee to be classified as exempt:
1. Salary Basis Test
Employee is paid a fixed salary each pay period, not docked for partial-day absences or quality/quantity of work.
2. Salary Level Test (2026)
- Standard threshold: $58,656/year ($1,128/week)
- Highly Compensated Employee (HCE) threshold: $151,164/year
- Below the salary level threshold = automatically non-exempt regardless of duties
3. Duties Test
Employee must perform specific exempt-category duties as their primary function. The five main categories:
- Executive: manages a department, supervises 2+ employees, has hiring authority
- Administrative: office work directly related to management; exercises discretion + judgment on significant matters
- Professional: learned professional (advanced knowledge, requires degree) or creative professional
- Computer: systems analysts, programmers, engineers (specific computer duties)
- Outside sales: customarily and regularly works away from employer's place of business
Common misclassifications
These are the most-litigated misclassification scenarios:
- "Office manager" with no direct reports: probably non-exempt (no executive duties)
- Inside sales rep paid salary: usually non-exempt (no outside sales)
- Junior associate earning $50K salary: non-exempt (below salary threshold)
- IT helpdesk: usually non-exempt (computer exemption requires higher-level duties)
- Salaried construction foreman: depends on actual duties (paperwork ≠ executive)
Why this matters: real cost of misclassification
If you misclassify a non-exempt employee as exempt, the consequences:
- Back overtime owed for 2 years (3 if willful)
- Liquidated damages = double the back wages
- Attorneys' fees + court costs
- State penalties (CA, NY can add another 100%+)
One $60K salary employee misclassified for 2 years working 10 hours of overtime/week could owe ~$45K in back wages + damages + fees. Multiply by every misclassified employee.
Salary thresholds across history
| Year | Annual Salary Threshold |
|---|---|
| 2004 | $23,660 |
| 2020 | $35,568 |
| 2024 (July) | $43,888 |
| 2026 | $58,656 (proposed/finalized) |
Related terms
FLSA →FICA →1099 vs W-2 →Paid Sick Leave →
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Book Your Free Demo →FAQs about Exempt vs Non-Exempt
Can I just call everyone "salaried" to avoid overtime?
No. Salary alone doesn't determine exempt status. You must meet all three tests (salary basis + salary level + duties). Many salaried employees are still non-exempt and owed overtime.
What if my state has different salary thresholds?
States can set higher thresholds. California requires $66,560/year for exempt status (2024+; 2× state minimum wage × 2080). NY uses geographic-specific thresholds. Always use the higher of federal or state.
What about commission-only sales?
Inside sales reps paid commission are usually non-exempt and owed overtime unless they meet the salary level threshold via guaranteed weekly salary. Outside sales reps are typically exempt under the outside sales category if they spend >50% of time away from the office selling.
Can a part-time employee be exempt?
In theory yes if they meet all three tests, but the salary level threshold is the same regardless of hours worked. A part-timer earning a pro-rated $30K salary fails the salary level test even if their full-time-equivalent would qualify.
How does MyCo handle exempt vs non-exempt classification?
MyCo flags potential misclassifications during onboarding: employees with salaries below the federal threshold are auto-classified as non-exempt. We surface the duties test as a checklist for managers. Once classified, overtime is calculated correctly for the non-exempt and skipped for the exempt.