Misclassifying employees as exempt from overtime can be a costly mistake for small employers. If an employee is incorrectly classified, the employer may be responsible for unpaid overtime and penalties and face reputational damage. Even when employees initially satisfy the requirements for exemption, changes in pay practices or job duties can jeopardize their exempt status. Here are nine red flags employers should watch for.
KEY POINTS
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Background
The federal Fair Labor Standards Act (FLSA) requires employers to pay most employees overtime pay for all hours worked in excess of 40 hours in a workweek (some states require overtime in additional situations). The FLSA allows for exemptions from the overtime requirement for certain employees who work in administrative, professional, and executive jobs (known as "exempt" employees).
This article focuses on the federal executive, administrative, and professional exemptions from overtime and doesn’t address other exemptions that may apply under federal or state law.
Red Flags
#1: Paying the employee by the hour.
To qualify for one of these exemptions, employees generally must satisfy three tests. One of those tests is the salary basis test, which requires that the employee receive a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
#2: Compensating the employee on a salary basis, but their salary fails to meet the minimum requirements.
Another test is that the employee must also be paid at least a specified weekly salary level (the “salary-level test”). Under federal rules, the minimum salary required for these exemptions is $684 per week. A handful of states require a higher salary to qualify for exemption from overtime under state rules.
#3: Assuming an employee is exempt based on job title or just because they receive a salary.
Many small employers incorrectly assume that paying an employee a salary or giving them a managerial job title automatically makes them exempt from overtime.
In fact, to qualify for one of these exemptions, the employee must also primarily perform executive, administrative, or professional duties as defined in U.S. Department of Labor regulations (the "duties test").
If the employee doesn’t satisfy the duties test, they should be classified as non-exempt from overtime, regardless of their job title and even if they are paid on a salary basis and it meets the minimum requirements.
#4: Changing an employee’s role without reviewing their classification status.
Sometimes roles change dramatically and quickly. Other times, the changes are subtler and occur over time. In either case, an employee’s exemption status could also be affected. As a best practice, review all exempt roles at least annually and after promotions, restructures, or significant changes in duties.
#5: Making improper deductions.
Exempt employees must generally receive their full salary regardless of the quality or quantity of work performed, provided they work any part of the workweek.
Deductions from an exempt employee's salary are permitted in very limited circumstances. Examples of improper deductions include deductions for partial-day absences or reductions based on the amount of work available. Improper deductions can jeopardize an employee's exempt status.
#6: Paying part-time exempt employees less than $684/week
Part-time employees may qualify as exempt, but the federal salary threshold isn’t prorated for part-time schedules. This means a part-time employee must still receive at least $684 per week and satisfy the applicable duties test to qualify for one of these exemptions under federal law. State law may require a higher amount.
#7: Designating an employee a ‘manager’ in title only.
For the executive exemption, the employee’s primary duty must generally be management of the enterprise, and the employee must regularly direct the work of at least two full-time employees or their equivalent. The employee must also have the authority to make employment decisions, or have their recommendations given particular weight.
#8: Classifying an employee as exempt even though they perform routine administrative work.
Not every employee who works in an office or performs administrative tasks qualifies for the administrative exemption. Routine clerical work, data entry, bookkeeping, scheduling, customer service, and similar support duties generally don’t, by themselves, satisfy the administrative exemption's duties test.
#9: Overlooking state requirements
Many states have their own tests and rules for employees classified as exempt from overtime. Generally, if state law is more protective (i.e., requires a higher salary amount or has duties tests that are more difficult to satisfy), then state law must be followed.
As of the date of publication, the following states have minimum salary requirements for exemption that exceed $684 per week (the current federal requirement) for one or more of the exemptions.
- Alaska ($1,120 per week from July 1, 2026 through June 30, 2027)
- California ($1,352 per week in 2026)
- Colorado ($1,111.23 per week in 2026)
- Maine ($871.16 per week in 2026)
- New York ($1,275.00 per week in New York City and Nassau, Suffolk, and Westchester counties and $1,199.10 per week in the remainder of the state in 2026)
- Washington ($1,541.70 per week in 2026)
This means the state’s minimum salary requirement must be met to maintain the state exemption from overtime. These six states also typically adjust their minimum salary requirements annually.
Conclusion
Employee classification errors can lead to significant financial and legal consequences. By understanding the requirements for exempt status, monitoring pay practices, reviewing job duties regularly, and staying current on state-specific rules, small employers can make more informed classification decisions. As a best practice, review the employee's actual duties and applicable federal and state requirements before determining whether an exemption applies.
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