Exempt vs Non-Exempt Employees: 2026 Rules and Tests

Exempt employees are not entitled to overtime pay under the Fair Labor Standards Act; non-exempt employees are, at one and a half times their regular rate for hours over 40 in a workweek. Whether a role is exempt depends on three things together: how the person is paid, how much, and what they actually do. In 2026 the federal salary floor for most exemptions is $684 a week, but several states set much higher levels, and getting the classification wrong is one of the most expensive payroll mistakes a small business can make.

This guide explains the exempt vs non-exempt tests, lists the 2026 federal and state salary thresholds, works through the overtime cost of a real-looking example, and covers the edge cases that catch employers out. It is general information, not legal or tax advice; for a borderline role, ask an employment attorney or payroll professional.

Exempt vs non-exempt: the key differences

	Exempt	Non-exempt
Overtime under the FLSA	Not required	1.5x regular rate for hours over 40 per workweek
Federal minimum wage	Not applicable (salary floor applies instead)	Required for every hour
Pay method	Usually a fixed salary	Hourly or salary
Time tracking	Not required for FLSA purposes (good practice anyway)	Required: hours worked each day and week
Partial-day pay deductions	Generally not allowed	Allowed for time not worked
Typical roles	Managers, professionals, senior administrative roles	Clerical, production, retail, service, most entry-level roles

The three tests for exempt status

1. Salary basis test

The employee receives a predetermined amount each pay period that is not reduced because of variations in the quality or quantity of work. If they work any part of a week, they generally get the full week's salary, subject to limited permitted deductions.

2. Salary level test

The federal minimum is $684 per week ($35,568 a year). The Department of Labor's 2024 rule raising it was vacated by a federal court in Texas in November 2024, so enforcement reverted to the 2019 level. Up to 10% of the salary level can be met with nondiscretionary bonuses and commissions paid at least annually.

3. Duties test

The employee's primary duty must fit one of the recognized exemptions:

• Executive: managing the business or a recognized department, regularly directing at least two full-time employees or the equivalent, with real input into hiring and firing.
• Administrative: office or non-manual work directly related to management or general business operations, with discretion and independent judgment on significant matters.
• Learned professional: work requiring advanced knowledge in a field of science or learning, customarily acquired by specialized intellectual instruction, such as accountants, engineers and pharmacists.
• Creative professional: work requiring invention, imagination, originality or talent in an artistic or creative field.
• Computer employee: systems analysts, programmers and software engineers doing high-level work; may be paid a salary at the standard level or at least $27.63 an hour.
• Outside sales: primary duty is making sales away from the employer's place of business; no salary test.

Doctors, lawyers and teachers are also exempt without a salary test. The highly compensated employee exemption applies at $107,432 in total annual compensation with a lighter duties test.

State salary thresholds for 2026

When state law is more protective, you must follow it. Several states tie their exempt salary to the state minimum wage, so the thresholds rise most years.

Jurisdiction	Weekly salary	Annual equivalent
Federal (FLSA)	$684.00	$35,568
California	$1,352.00	$70,304
Washington	$1,541.70	$80,168.40
New York City, Long Island and Westchester	$1,275.00	$66,300
New York, rest of state	$1,199.10	$62,353.20
Colorado	$1,111.23	About $57,784

Sources include Proskauer's note on New York's 2026 exempt salary levels and the University of Washington's summary of the 2026 Washington threshold. Other states, including Alaska and Maine, also exceed the federal level. 2027 figures will follow state minimum wage increases; our guide to minimum wage by state 2027 tracks the scheduled rates. Some states also have their own duties tests that are stricter than federal law; California, for instance, looks at whether more than half of working time is spent on exempt duties.

Worked example: what misclassification costs

An illustrative case. A small agency in California pays its office manager a $50,000 salary and treats her as exempt. She regularly works 45 hours a week. Because $50,000 is below California's $70,304 threshold, she is non-exempt regardless of her duties.

Item	Calculation	Amount
Regular rate (salary intended for 40 hours)	$50,000 / 2,080	$24.04 per hour
Overtime rate	$24.04 x 1.5	$36.06 per hour
Weekly overtime owed	5 hours x $36.06	$180.30
Annual overtime owed (50 weeks)	$180.30 x 50	$9,015.00
Three years of back pay	$9,015 x 3	$27,045.00

Under the FLSA, an employer can also owe an equal amount in liquidated damages, plus the employee's attorney's fees, and California adds its own penalties, including daily overtime rules for hours over 8 in a day. With liquidated damages, a claim like this approaches $55,000 before the employee's attorney's fees and any state penalties are added. Fixing the classification going forward, by raising pay above the threshold or paying overtime, is far cheaper.

How to classify a role, step by step

1. Write down the real duties, with an estimate of the share of time spent on each. Our job description template has a format for this.
2. Identify the primary duty, the main and most important part of the job.
3. Match it to an exemption and check each element of that exemption's duties test.
4. Check the salary level against the federal and state thresholds for the employee's work location.
5. Confirm the salary basis: a fixed amount, with no improper deductions.
6. Document your conclusion and review it annually and whenever duties or thresholds change.
7. When in doubt, treat the role as non-exempt. Paying overtime you did not need to is a smaller risk than failing to pay overtime you owed.

Common misclassification traps

• "Salaried means exempt." It does not. Salaried non-exempt employees still need overtime.
• Inflated titles. An "Assistant Manager" who mostly runs a register is not an executive.
• Bookkeepers and administrative assistants doing routine work under set procedures usually fail the administrative duties test.
• Inside sales staff are not outside sales employees.
• Docking pay for partial days can destroy an otherwise valid exemption.
• Forgetting remote workers' state rules. The employee's work location decides which threshold applies.
• Calling a worker a contractor to avoid overtime altogether; see our guide to worker misclassification penalties.

Paying non-exempt employees correctly

For non-exempt staff, record all hours worked, including pre-shift setup, short breaks and after-hours messages. Calculate overtime on the regular rate, which must include nondiscretionary bonuses and commissions, not just the base hourly rate. Our timesheet template is a simple way to capture hours, and our guide to biweekly vs semimonthly payroll explains why workweek-based overtime is easier with a biweekly schedule.

The no tax on overtime deduction

From 2025 through 2028, the One Big Beautiful Bill Act lets eligible workers deduct the premium portion of FLSA-required overtime, up to $12,500 a year ($25,000 for joint filers), subject to income limits. Correct classification therefore matters to employees' tax returns too, because only overtime required by the FLSA qualifies, and employers must report it. Our guide to no tax on overtime explains the reporting.

Exempt vs non-exempt for businesses that bill clients

If you bill clients by the hour, employee overtime affects profitability directly. A non-exempt technician working 50 hours costs 10 hours at time and a half, so your billing rates and contracts should account for it. See how to invoice for overtime for wording that passes the cost on where your contract allows.

Special cases and edge rules

Part-time exempt employees

An exempt employee who works part time must still receive at least the full weekly salary threshold. You cannot prorate a $684 weekly salary down to $342 for a 20-hour week and keep the exemption under federal law; in a state with a higher threshold, the same principle applies to that higher figure.

Retail and service employees on commission

The FLSA has a separate overtime exemption for certain commissioned employees of retail or service establishments, if their regular rate exceeds one and a half times the minimum wage and more than half their pay comes from commissions. It is narrow, and the conditions must be checked for every workweek.

Salaried non-exempt employees

You can pay a non-exempt employee a salary, but overtime is still owed. The regular rate is the salary divided by the hours it is intended to cover. Some employers use the fluctuating workweek method, which requires specific conditions and is restricted or not allowed in several states.

Working managers

Owners of small shops often call their senior employee a manager even though most of that person's day is spent serving customers. Under federal rules, concurrent duties can still qualify if management is the primary duty, but several states, notably California, use a stricter time-based test.

What to do if you discover a misclassification

• Reclassify the role going forward, or raise the salary above the threshold if the duties qualify.
• Calculate potential back overtime for the limitations period (generally two years under the FLSA, three for willful violations, and longer under some state laws).
• Talk to an employment lawyer about how to make back payments and whether to obtain releases.
• Communicate the change carefully; reclassification to hourly can feel like a demotion, so explain that it means overtime pay.

Accurate payroll starts with accurate records of time and work, and the same discipline helps you bill clients for every hour your team delivers. Turn approved hours into a clean client invoice with our free invoice generator, with no sign-up, and download it as a PDF.