Exempt vs. non-exempt: the classification question that isn't about 1099 vs. W-2
When most business owners hear "classification," they think of one question: 1099 or W-2? That's the one everyone talks about. There's a second question for employers who hired people correctly as W-2 employees: does this person get overtime or not? Get it wrong and you can owe back overtime, penalties, and legal fees, even if you never meant to underpay anyone.
Want to check your team as you read? Grab the exempt vs. non-exempt classification worksheet.
The two questions
Question 1: Employee or independent contractor? That's the 1099 vs. W-2 question.
Question 2: Now that they're an employee, are they exempt or non-exempt? Non-exempt employees must be paid at least minimum wage and overtime at 1.5 times their regular rate for hours over 40 in a workweek. Exempt employees aren't entitled to overtime under federal law. This post is about Question 2.
The three tests for exempt status
An employee is exempt only if all three of these are true:
- Salary basis. They're paid a fixed salary that doesn't shrink or grow based on how many hours they work or the quality of the work.
- Salary level. The salary is at least $684 per week, which is $35,568 per year. A higher threshold was set in 2024, but a federal court struck it down in November 2024, so $684 is what applies now. This number has moved before, so check it each year.
- Duties. The work they do most of the time fits a recognized exemption.
The most common exemptions in small businesses are:
Exemption | In plain terms |
|---|---|
Executive | Manages the business or a department, regularly directs at least two full-time employees, and has real say in hiring and firing. |
Administrative | Does office or non-manual work tied to running the business and uses independent judgment on significant matters. |
Professional | Does work that requires advanced knowledge in a field of science or learning. |
Outside sales | Regularly works away from the office making sales. |
Job title doesn't decide any of this. Neither does salary alone. Duties do.
Where small businesses go wrong
"They're on salary, so no overtime." Salaried non-exempt employees still get overtime. Say you pay an office coordinator $48,000 a year, and the salary is meant to cover a 40-hour week. That's about $23.08 an hour. If they regularly work 48 hours, you owe eight hours of overtime at about $34.62, or roughly $277 a week. Over a year, that's about $14,400.
Salaried non-exempt employees still get overtime.
"They have manager in their title." A restaurant assistant manager who spends most of the shift cooking, doesn't hire or fire, and directs one person might not be exempt. What the person does all day is what counts.
Paying straight time for overtime. Paying $23 an hour for worked hour 45 instead of $34.62 is an underpayment.
Not counting all the hours. Pre-shift meetings, setup, closing tasks, and work emails after hours can all be working time for non-exempt employees.
Offering comp time instead of overtime. Private employers generally can't swap time off for overtime pay.
Docking an exempt employee's pay for partial days. It can put the exemption at risk.
Skipping time records. Non-exempt employees need accurate time records. Without them, the employee's version of the hours often wins.
What it costs when it's wrong
Under federal law, an employee can claim unpaid overtime for the past two years, or three if the violation was willful. On top of the back pay, courts commonly add an equal amount as damages, plus the employee's attorney's fees. Virginia also has its own overtime law, which gives employees another way to bring a claim. A small mistake repeated every week across several employees adds up fast.
Under federal law, an employee can claim unpaid overtime for the past two years, or three if the violation was willful.
How to check your team
- List every role, with the person's actual title and pay.
- Check the salary. Is it at least $684 a week and paid as a true salary?
- Read the duties honestly. What do they do most of the time? Not what the job description says.
- Look for docked pay. Are you reducing salaries for partial-day absences?
- Update job descriptions so they reflect what people really do.
- Put it on the calendar. Review classifications every year and any time a role changes.
- Fix problems early. If you find a mistake, talk to an advisor or attorney about how to correct it before someone else finds it.
Check every role on one page. The worksheet runs each role through the three tests, then checks the pay practices that trip employers up.
Keep reading
- PTO policy basics: what small businesses get wrong: includes what to know about exempt employees and time off.
- What is certified payroll, and do you need it?
Not sure who's exempt on your team?
We can walk through each role with you as part of an HR audit, and make sure your payroll matches. Start with a Vibe Check.
This post is for general informational purposes and doesn't constitute legal or tax advice. Classification rules depend on duties, pay, and state law, and thresholds can change. Talk to an employment attorney or HR professional about specific employees.
Common questions
What is the federal salary threshold for exempt employees?
$684 per week ($35,568 per year) under the rule currently in effect.
Are all salaried employees exempt from overtime?
No. Salary is only one of three tests. The employee's duties also have to qualify.
Can I give comp time instead of overtime pay?
Private employers generally can't.
What if I've misclassified an employee?
Talk to an advisor or attorney about how to correct it. Back overtime can go back two to three years.
