Nonexempt vs. Exempt: Common Misclassification Pitfalls (2025)
- Under the FLSA, workers are either nonexempt (entitled to minimum wage + overtime) or exempt (no overtime/minimum-wage coverage) only if the employer proves all three: salary basis, salary level, and the appropriate duties test.
- Job titles and “salary” labels do not control. Actual duties and pay practices do.
- Common pitfalls: title inflation, partial-day docking, relying on discretionary bonuses to meet thresholds, treating production/clerical roles as administrative, and ignoring state overlays.
- Misclassification triggers back overtime, liquidated damages, penalties, and attorneys’ fees—often multiplied across many employees.
Nonexempt vs. exempt: the core framework
Most employees in the United States are covered by the FLSA and are therefore nonexempt. That means they must be paid at least the applicable minimum wage for all hours worked and overtime at 1.5× the regular rate for hours worked over 40 in a workweek. A subset of jobs can be treated as exempt from both minimum wage and overtime—but only where the employer satisfies three separate requirements: (1) the worker is paid on a salary or fee basis; (2) at or above the salary-level threshold in effect; and (3) the worker’s primary duties meet the detailed criteria for a recognized exemption category (e.g., executive, administrative, learned/creative professional, outside sales, or certain computer roles). If any element fails, the worker is nonexempt.
Why misclassification happens
Misclassification often arises from assumptions (“salaried = exempt”), rapid growth (roles shift faster than job descriptions), or manager habits (improper docking or off-the-clock practices). State and local rules can further complicate matters by setting higher salary thresholds or more protective duties definitions. The result: payroll policies that seem reasonable can become costly.
Top misclassification pitfalls (with fixes)
Paying a salary does not decide status. Without the correct duties and salary-level, the worker remains nonexempt.
Fix: Audit duties against the Part 541 tests and verify salary basis/level each pay period.
“Assistant manager” who spends most time as a cashier rarely qualifies as an executive. Supervision of 2+ full-time equivalents and meaningful input on hiring/firing are key.
Fix: Align titles with actual responsibilities; document management decisions.
Administrative exemption requires discretion and independent judgment on matters of significance tied to general business operations—not core revenue-generating production work or routine clerical tasks.
Fix: Distinguish policy/ops roles from production; gather examples of decisions made without step-by-step scripts.
Improper deductions (e.g., dock four hours for being late) undermine the salary basis and can retroactively convert an otherwise exempt employee to nonexempt.
Fix: Use PTO for partial-day absences; allow only permitted deductions and adopt a safe-harbor policy.
Only certain nondiscretionary bonuses or incentives may count toward the salary-level requirement (subject to caps and catch-up rules). Purely discretionary awards, benefits, or reimbursements generally do not count.
Fix: Map compensation plans to the regs; plan for catch-up payments where allowed.
States like California and New York set higher thresholds or different duties concepts. The more protective standard usually governs.
Fix: Maintain a jurisdiction matrix; apply the higher standard for each work location (including remote).
High pay alone is not enough. The Highly Compensated Employee route still needs a salary/fee basis and at least one EAP duty. Manual/blue-collar roles are excluded regardless of pay.
Fix: Track weekly salary basis and total compensation; document at least one exempt duty.
Outside sales requires making sales away from the employer’s place of business; many inside phone/online sales jobs are nonexempt.
Fix: Evaluate where and how sales occur; consider commissioned nonexempt models with overtime.
Not every IT job qualifies. The computer employee exemption covers specific work (systems analysis, programming). Help-desk or routine troubleshooting is often nonexempt.
Fix: Compare duties to the regulation; consider paying hourly at/above the allowed rate if using the computer exemption, or treat as nonexempt.
Nonexempt employees must be paid for all hours suffered or permitted to work, including pre- and post-shift tasks, travel between sites, and certain boot-up/log-in time.
Fix: Train supervisors; enforce accurate timekeeping and approval workflows.
Nonexempt vs. exempt: side-by-side
| Feature | Nonexempt | Exempt (white-collar) |
|---|---|---|
| Wages | At least the highest applicable minimum wage (federal/state/local). | No minimum wage rule if tests are met; pay can be salary or fee basis (outside sales has no salary-level requirement). |
| Overtime | 1.5× the regular rate for hours over 40 in a workweek. | Not owed if exemption is valid. |
| Primary test | N/A; nonexempt by default. | Salary basis + salary level + duties (executive/administrative/professional; plus outside sales and computer employees under special rules). |
| Recordkeeping | Accurate hours worked, rates, and deductions. | Less hour-by-hour tracking required, but employers still keep pay and job documentation. |
| Common risks | Unpaid off-the-clock time; incorrect regular-rate calculations (bonuses, differentials). | Improper deductions; duties drift; titles misaligned; thresholds not met; state law ignored. |
Visual: where misclassification risk concentrates (illustrative)
Approximate relative risk by area if controls are weak (0–100). Use for training emphasis.
Regular rate traps for nonexempt employees
Even when a worker is correctly classified as nonexempt, employers can stumble on the regular rate used to compute overtime. The regular rate generally includes all remuneration for employment except specific exclusions. That means many nondiscretionary bonuses, shift differentials, and certain incentives must be included when calculating the 1.5× rate. Failing to include them produces systematic underpayment.
- Include: production bonuses tied to metrics, sales commissions, on-call stipends (when compensable), shift differentials.
- Exclude (typically): discretionary bonuses, gifts on special occasions, reimbursements, certain benefit plan contributions—subject to rule specifics.
Documentation that wins audits
- Current job descriptions that reflect primary duty and examples of decisions.
- Org charts showing supervision of 2+ FTE where relying on the executive test.
- Compensation letters and plan documents (salary basis, nondiscretionary bonuses, catch-up rules).
- Safe-harbor policy for improper deductions and training records for managers.
- Timekeeping policies and actual time records (including pre/post-shift tasks).
- Regular-rate calculation worksheets for bonuses/commissions.
- Travel, training, and remote-work hour rules; attestations for meal breaks where required.
Remediation playbook (when you find issues)
- Freeze deductions that threaten salary basis; issue reimbursement under the safe-harbor policy.
- Reclassify prospectively with clear communication; convert to nonexempt if tests aren’t met.
- Calculate back wages (including regular-rate adjustments) and consider voluntary self-audit resolution strategies with counsel.
- Update job content or staffing to meet duties (e.g., add genuine supervisory authority if an executive exemption is truly intended).
- Train managers on timekeeping, remote work, travel time, and PTO vs. docking.
- Implement a review cycle (quarterly for thresholds; annual for duties) and monitor state-law changes.
Quick Guide
- Three tests for white-collar exemptions: salary basis, salary level, duties.
- Titles don’t matter—document what employees actually do.
- Administrative = discretion & independent judgment on matters of significance, tied to general business operations.
- Executive = management as the primary duty, 2+ FTE supervision, and hire/fire authority or weighty input.
- Professional = advanced knowledge from specialized study, or creative originality.
- Salary basis means no partial-day docking (outside FMLA) and only limited permitted deductions.
- Check state thresholds and apply the more protective standard.
- Nonexempt overtime uses the correct regular rate (include nondiscretionary bonuses/commissions).
- Use a safe-harbor policy and reimburse improper deductions promptly.
- Audit classifications at hire, at reorgs, and at least annually.
FAQ
Does paying a salary automatically make someone exempt?
No. Exemption requires salary basis, meeting the salary-level threshold, and the correct duties test. If one element fails, the worker is nonexempt.
We promoted a high performer to “manager.” Is that enough?
No. The role must actually involve management as the primary duty, including directing two or more FTE and having meaningful input on employment decisions.
Can we dock an exempt employee’s pay for leaving early?
Generally no (outside of FMLA). Use PTO to cover partial-day absences. Repeated partial-day docking threatens salary-basis compliance.
Can nondiscretionary bonuses count toward the salary level?
Federal rules allow certain nondiscretionary bonuses and incentives to satisfy a portion of the salary-level requirement, subject to caps and a catch-up provision. Confirm the current limits and any stricter state rules.
Are inside sales reps exempt?
Usually nonexempt. The outside sales exemption is for sales made away from the employer’s place of business; inside/phone/online sales typically don’t qualify.
What about IT help-desk roles?
Most help-desk and routine troubleshooting roles are nonexempt. The computer exemption covers specific high-level duties (systems analysis, programming, software engineering) or allows hourly pay at or above a regulatory rate.
How should we handle remote workers in different states?
Apply the state law where the employee performs work. If that state has a higher salary threshold or stricter duties rules, use the more protective standard.
We discovered misclassification. What now?
Reclassify prospectively, pay back wages and overtime, reimburse improper deductions, and update policies. Consult counsel on remediation strategy.
Do we need to track hours for exempt employees?
Not for overtime purposes, but many employers track time for business reasons (billing, leave). Ensure any tracking doesn’t morph into improper docking.
How often should we re-audit classifications?
At least annually, and whenever duties or pay plans change, or when new state/federal thresholds take effect.
Audit checklists you can paste into SOPs
| Audit question | Evidence to collect | Pass/Fail signal |
|---|---|---|
| Does each exempt role meet salary basis and level every week worked? | Payroll registers; deduction logs; safe-harbor policy; state threshold matrix. | Pass if no partial-day docking and pay meets higher of federal/state levels. |
| Are the duties documented and aligned with reality? | Updated job descriptions; org charts; examples of decisions; performance goals. | Pass if primary duty aligns with the selected test and time spent supports it. |
| For nonexempt staff, is the regular rate calculated correctly? | Bonus/commission plans; timesheets; overtime calculation worksheets. | Pass if nondiscretionary pay is included in OT computations. |
| Are remote and multi-state rules applied? | List of work locations; comparison of thresholds; guidance to payroll. | Pass if higher local standard is consistently applied. |
| Do we have a remediation plan? | Template communications; back-pay calculator; counsel playbook. | Pass if leadership can act within 30 days of a finding. |
Legal basis & technical notes (federal)
- Minimum wage & overtime: 29 U.S.C. §§ 206 (minimum wage) and 207 (overtime; regular rate rules at 29 C.F.R. Part 778).
- White-collar exemptions authority: 29 U.S.C. § 213(a)(1).
- Executive, Administrative, Professional duties: 29 C.F.R. §§ 541.100, 541.200, 541.300–.302.
- Salary basis & safe-harbor: 29 C.F.R. §§ 541.602 (salary basis) and 541.603 (improper deductions and reimbursement).
- Salary level & HCE: 29 C.F.R. §§ 541.600 (salary level) and 541.601 (Highly Compensated Employee).
- Outside sales: 29 C.F.R. § 541.500; Computer employees: 29 C.F.R. § 541.400.
An employee is exempt only when how you pay (salary basis), how much you pay (salary level), and what they actually do (duties) all line up—and when any stricter state rule is also satisfied. Misclassification risk falls sharply with clear documentation, manager training, and routine audits.
This material is for general information only and is not legal advice. Always confirm current federal, state, and local requirements for your situation.
Exempt vs. nonexempt
Misclassification
Salary basis
Salary level
Duties test
Regular rate
Outside sales
Computer employees
HR compliance