Understanding the distinction between exempt and nonexempt employees is not just a legal formality, it’s a foundational piece of your payroll compliance strategy. With updates to federal guidelines and ongoing changes in state laws, employers need to stay sharp on classification rules to avoid costly penalties, employee disputes, and compliance issues.
In this guide, we’ll break down the essential facts about exempt vs. nonexempt employees, recent regulatory updates, and how you can stay compliant while protecting your business.
A nonexempt employee is entitled to protections under the Fair Labor Standards Act (FLSA), including:
Minimum wage: Must earn at least the federal or state minimum wage (whichever is higher)
Overtime pay: Required to receive 1.5x their regular rate for hours worked beyond 40 in a workweek
Most hourly workers are classified as nonexempt, but employees can also be nonexempt while being paid by salary, commission, or piece rate. The key is not how they’re paid, but whether they are eligible for overtime.
Warehouse associates
Customer support agents
Interns and entry-level administrative staff
Retail and restaurant employees
Data processors
Tracking actual hours worked is crucial. Even if a nonexempt employee is salaried, their effective hourly rate must be calculated to ensure overtime is paid properly. Note: paid time off, like sick days or holidays, should not be counted toward overtime thresholds unless actual work occurred on those days.
Want to streamline time tracking and avoid costly overtime missteps?
An exempt employee is excluded from FLSA requirements for minimum wage and overtime. Instead, they are paid a consistent salary regardless of how many hours they work. But not every salaried employee is exempt. Classification depends on two key tests:
Salary Threshold: Employees must earn at least a minimum set salary
Duties Test: Their job duties must fall within specific categories (executive, administrative, professional, etc.)
Employees who do not meet both tests must be classified as nonexempt, regardless of job title or salary level.
In 2024, a Texas federal court vacated the Department of Labor’s planned update to the salary threshold for exempt employees. As a result, the previous 2019 rules remain in effect, meaning:
Executive, administrative, and professional employees must meet the older salary and duties criteria
Highly compensated employees must meet a higher threshold with minimal job duty qualifications
Pro Tip: Rules around exempt status can change quickly. Employers should review roles annually, especially after promotions, restructuring, or regulatory changes.
Employee misclassification can trigger:
Wage violations (unpaid overtime, missed breaks)
Back pay obligations going back up to three years
Fines and penalties from the Department of Labor
Class action lawsuits, especially in industries with large hourly workforces
Some industries, such as agriculture, railroads, and movie theatres, may have their own exemption rules. Employers should consult legal counsel for state-specific nuances.
Want to take the guesswork out of classification and compliance?
While the FLSA sets federal standards, state and local laws may offer more generous protections for employees. For instance:
California requires overtime after 8 hours in a day, not just 40 hours in a week
New York has higher salary thresholds for exempt status than the federal level
Some cities, such as Seattle and Denver, have their own minimum wage rates
In cases of conflicting laws, employers must follow whichever rule is most favorable to the employee.
According to the Economic Policy Institute, over 8.6 million workers are misclassified each year, costing businesses billions in lost wages and benefits.
It’s worth noting that independent contractors and freelancers are generally not covered by the FLSA’s wage and hour provisions. However, misclassifying someone as an independent contractor instead of an employee can create just as many legal headaches.
Use caution when assigning contractor status, especially if the individual is working regular hours, using company equipment, or receiving direct supervision.
If you're unsure about contractor vs. employee status, we recommend reading our post on Navigating Contractor Classification.
The classification line between exempt and nonexempt employees is not always clear. But here's what we know for sure:
Pay attention to both salary and duties
Track hours diligently for nonexempt workers
Review roles regularly, especially after raises or reassignments
Apply the most protective laws when federal, state, or local rules differ
Correctly classifying employees is more than a paperwork issue, it’s a financial and legal safeguard. As the workforce evolves, employers must stay current on labor laws, train managers, and adopt systems that support compliance.
©2025 - Content on this blog is intended to provide helpful, general information. Because laws and regulations evolve, please consult an HR professional or legal expert for guidance specific to your situation.