Are Salaried Employees Always Exempt from Overtime? Not Quite

It's a common misconception that salaried employees are always exempt from overtime pay. While salary status is a factor, it's only part of the equation. To determine whether a position is truly exempt under the Fair Labor Standards Act (FLSA), employers must apply three specific tests: salary basis, salary level, and job duties.

Understanding how these exemptions work is critical to avoiding wage and hour violations, back pay claims, and steep legal penalties. Here's what you need to know to protect your business and ensure your team is compensated fairly.

Table of Contents

• The Three-Part Exemption Test
• When Employee Misclassification Becomes a Liability
• Salaried Employees Can Still Be Nonexempt
• Preparing for Overtime Rule Changes
• How Excelforce Can Help
• Frequently Asked Questions (FAQs)

The Three-Part Exemption Test

For an employee to be classified as exempt from overtime, all of the following criteria must be met:

1. Salary Basis Test

The employee must be paid a fixed salary, not an hourly wage. This salary should not fluctuate based on the quality or quantity of work performed.

2. Salary Level Test

As of the current federal rules, the minimum salary threshold for exemption is:

• $684 per week (about $35,568 annually) for executive, administrative, or professional roles

• $107,432 annually for highly compensated employees (with at least $684/week in base salary)

Note: Some states have higher thresholds, so employers must check state-specific labor laws in addition to federal standards.

3. Duties Test

The employee's primary job responsibilities must qualify as executive, administrative, or professional. Titles alone aren’t enough. Manual laborers and non-managerial staff don’t qualify for exemption even if they earn a high salary.

When Employee Misclassification Becomes a Liability

Many companies, especially in fast-growing sectors, unintentionally (or intentionally) misclassify employees as exempt. This often happens through title inflation, giving someone a managerial title even though their job duties don't match.

According to a joint study by Harvard Business School and University of Texas at Dallas, this tactic is widespread and can lead to wage theft, the unlawful denial of earned wages, including overtime pay.

In fact, research from the Economic Policy Institute found that between 2013 and 2023, 82% of wages recovered from FLSA violations were related to unpaid overtime.

Misclassification doesn’t just result in fines. It can lead to:

• Back pay for overtime hours

• Legal fees

• Reputational damage

• Higher turnover due to employee dissatisfaction

Salaried Employees Can Still Be Nonexempt

Some salaried employees are entitled to overtime pay if they fall below the salary threshold or fail the duties test. For example:

• A salaried employee earning $650/week performing clerical tasks is nonexempt.

• A shift supervisor with no real authority who earns $700/week may also be nonexempt if they don’t meet the duties test.

In many cases, employees take on salaried roles thinking it's a promotion. But without overtime compensation, they may end up earning less despite working more hours. Employers should weigh this when structuring compensation and promoting employees.

Preparing for Overtime Rule Changes

The Department of Labor has proposed new rules to raise the salary threshold for overtime exemptions. If finalized, the changes could:

• Require more salaried employees to receive overtime pay

• Prompt businesses to adjust pay structures or reclassify roles

• Lead to $1.5 billion in wage increases, according to DOL projections

However,  according to Morgan Lewis law firm, a federal court in Texas has blocked the implementation of these proposed changes, at least temporarily. That means employers should stay informed on legal developments and be prepared to adjust their policies if the rule eventually takes effect.

Staying ahead of these changes requires regularly auditing your payroll classifications and reviewing job descriptions.

How Excelforce Can Help

Correctly classifying employees is critical to both compliance and employee trust. With Excelforce’s HR Compliance Offerings, experts can review your classifications and help you stay aligned with federal and state wage laws.

Need tools to help track hours, manage time-off, and stay audit-ready? Explore:

• Payroll Services

• Time & Labor

• HR Software 

You can also visit our blog for more:

• HR Audit Checklist to Avoid Risk

• Nonexempt vs. Exempt Employees: What Employers Need to Know

• Sick Leave Policies: What Employers Need to Know

Frequently Asked Questions (FAQs)