To be exempt from federal overtime, a white-collar employee generally must be paid on a salary basis of at least $684 per week, and the job duties must pass a test too, according to the U.S. Department of Labor’s Fact Sheet #17A. That federal floor has not moved since 2019, but several states now set much higher levels in 2026. In California it is $1,352 a week, and in Washington it starts at $1,541.70.
This gap is where many overtime mistakes start. This guide explains who is exempt and who is not, how to apply the salary and duties tests, how to calculate overtime, and what changed for 2026. It also covers common mistakes and how to fix them.
What Is the Difference Between Exempt and Non-Exempt Employees?
The Fair Labor Standards Act (FLSA) requires most employees to receive at least the federal minimum wage and overtime pay of one and a half times their regular rate for hours worked over 40 in a workweek. A non-exempt employee is covered by those rules. An exempt employee is not.
Exempt status has nothing to do with whether someone is paid hourly or by salary, and job titles do not decide it either. An employee is exempt only when the job meets the specific tests in the law. Many salaried workers are non-exempt, and they are owed overtime.
How Do You Decide If an Employee Is Exempt?
For the most common white-collar exemptions (executive, administrative, and professional), an employee must meet all three tests:
- Salary basis: The employee is paid a fixed salary that does not change with the quality or quantity of work.
- Salary level: The salary is at or above the minimum.
- Duties: The main duties fit an exempt category.
If any one test fails, the employee is non-exempt.
What Is the Salary Basis Test?
An employee is paid on a salary basis when they get a predetermined amount each pay period that is not reduced because of variations in the quality or quantity of work. In general, you cannot dock an exempt employee’s pay for a partial-day absence or because the business is slow. Some deductions are allowed, such as for full-day absences for personal reasons or for certain unpaid disciplinary suspensions. If you make improper deductions, you can lose the exemption. To learn how salaries work in payroll, see our guide on how salary pay works.
You may count nondiscretionary bonuses, incentive payments, and commissions paid at least annually toward up to 10% of the salary level, if you meet the rules.
What Is the Salary Level Test in 2026?
The federal salary level for the standard exemptions is $684 per week ($35,568 per year). A 2024 DOL rule that would have raised it was vacated by a federal court in Texas in November 2024, so the 2019 levels apply. The highly compensated employee (HCE) level is $107,432 a year in total pay, including at least $684 a week paid on a salary basis. The DOL republished these operative figures in May 2026 after removing the vacated language, according to published reports of the DOL’s technical amendment. Check the DOL site for any later change.
Federal law sets the floor only. Where state law is higher, you must follow the higher number. These are the 2026 state levels for the standard exemption:
- California: $1,352 per week ($70,304 per year), for all employers. This equals two times the state minimum wage for a full-time week.
- Washington: starts at $1,541.70 per week ($80,168.40 per year). The level depends on employer size, so check the state Department of Labor & Industries.
- New York: $1,275 per week ($66,300) in New York City, Long Island, and Westchester, and $1,199.10 per week ($62,353.20) in the rest of the state.
- Maine: $871.16 per week (about $45,300 per year).
- Alaska: $1,120 per week from July 1, 2026, tied to the state minimum wage.
Colorado and some other states also set their own levels, and several update each January, so confirm the current number for each state where you have employees. Some exemptions have separate rules, such as the computer professional exemption, which allows either the weekly salary or an hourly rate. Outside sales employees have no salary test.
What Are the Duties Tests?
The duties test looks at what the person actually does most of the time. It is not about the job title.
Executive exemption. All of these must be true:
- The primary duty is managing the business or a department or subdivision.
- The employee regularly directs the work of at least two other full-time employees, or the equivalent.
- The employee has authority to hire or fire, or their recommendations on hiring, firing, or promotion are given particular weight.
Administrative exemption. The primary duty is office or non-manual work directly related to management or the general business operations of the employer or its customers. The employee must also use discretion and independent judgment on significant matters. Routine work that follows set procedures does not count.
Professional exemption. The primary duty is work that requires advanced knowledge in a field of science or learning, gained through a long course of specialized study, or work in a creative field that needs invention, imagination, or talent.
Highly compensated employee exemption. This is a shorter test for office or non-manual workers who earn at least $107,432 and regularly perform at least one exempt duty of an executive, administrative, or professional employee.
Other exemptions. The FLSA also exempts outside sales employees, certain computer employees, and some workers in specific industries such as certain agricultural and transportation jobs. The white-collar exemptions do not apply to manual laborers or blue-collar workers, no matter how much they earn or how skilled they are.
How Do You Calculate Overtime for Non-Exempt Employees?
Overtime pay is one and a half times the employee’s regular rate for hours over 40 in a workweek. The regular rate is not always the base hourly wage. It includes most pay for the week, such as nondiscretionary bonuses and shift differentials.
Example 1: Hourly Employee
Maria earns $18 an hour and works 46 hours in a week.
- Regular pay: 40 hours × $18 = $720
- Overtime rate: $18 × 1.5 = $27
- Overtime pay: 6 hours × $27 = $162
- Total: $882
Example 2: Salaried Non-Exempt Employee
Dan is a salaried non-exempt employee who earns $800 a week for a 40-hour week. His regular rate is $800 ÷ 40 = $20 an hour. In a week when he works 46 hours:
- Salary: $800
- Overtime rate: $20 × 1.5 = $30
- Overtime pay: 6 hours × $30 = $180
- Total: $980
Example 3: Bonus That Raises the Regular Rate
Lee earns $16 an hour and works 45 hours. Lee also earns a $90 production bonus for the week that was promised in advance, which makes it nondiscretionary.
- Straight-time pay: 45 × $16 = $720
- Add the bonus: $720 + $90 = $810
- Regular rate: $810 ÷ 45 = $18
- Overtime premium owed: 5 hours × ($18 × 0.5) = $45
- Total: $810 + $45 = $855
If you pay Lee only 5 hours at $24 on top of the bonus, you shortchange Lee. Check that your payroll system includes bonuses in the regular rate.
Do State Overtime Rules Differ?
Yes. The FLSA counts hours over 40 in a workweek. Some states add daily overtime. For example, California requires overtime after 8 hours in a day and double time after 12, and Alaska, Nevada, and Colorado have daily overtime rules in some cases. Where the state rule is better for the employee, you must follow it. Private-sector comp time in place of overtime pay is generally not allowed under the FLSA.
What Changed for Overtime in 2026?
Two changes matter for payroll teams:
- W-2 reporting of qualified overtime. Starting with tax year 2026, employers must separately report qualified overtime pay in Box 12 of Form W-2 using code TT. Qualified overtime is only the premium portion required under the FLSA, the “half” in time and a half. Employees may deduct up to $12,500 ($25,000 for joint filers) of it on their federal return through 2028, subject to income limits. You still withhold all payroll and income taxes on overtime as usual. Only FLSA-required overtime counts, so pay outside FLSA rules must be tracked separately. This makes correct classification more important, since exempt employees have no FLSA overtime to report.
- State thresholds. Several states raised their exempt salary levels on January 1, 2026, as listed above. Employees who were exempt in 2025 may now need to be treated as non-exempt.
Also keep an eye on the 2026 rules for worker classification, which are covered in our guide on employee vs. independent contractor classification.
What Are the Most Common Classification Mistakes?
- Treating salary as proof of exemption. Salary is one test out of three.
- Relying on job titles. An “assistant manager” who spends most of the shift running the register or doing the same work as hourly staff often fails the duties test.
- Ignoring state levels. An employee who clears the federal floor can still fall short of the state level.
- Docking exempt pay. Improper deductions can destroy the salary basis and the exemption.
- Leaving bonuses out of the regular rate. This undercounts overtime.
- Not tracking all hours. Off-the-clock work, pre-shift setup, and after-hours texts and emails all count for non-exempt staff.
- Treating manual workers as exempt. Skilled trades and shift leads doing production work are generally non-exempt.
- Not reviewing after job changes. Duties change with promotions, layoffs, and restructuring.
Which Roles Are Often Misclassified?
- Retail: Assistant store managers who spend most time on the floor. See payroll software for retail businesses that tracks overtime by role.
- Hospitality: Shift managers, event coordinators, and kitchen leads. Our guide on hospitality HR challenges and solutions covers scheduling pressure, and payroll software for hospitality businesses can help you apply tip and overtime rules correctly.
- Manufacturing: Lead hands, line supervisors, and maintenance techs who do hands-on work. See payroll software for manufacturing businesses with shift differentials built in.
- Cannabis: Cultivation leads and budtender supervisors. Review pay setup with payroll software for cannabis businesses that fits how you operate.
- Office roles: IT support, HR coordinators, inside sales, and junior analysts, who often do routine work rather than exercise independent judgment.
Financial services: Client service associates, operations staff, and junior analysts are often treated as exempt because of their titles, even when the work is routine. Commission-based roles also need extra care with the regular rate. Payroll software for financial services firms can help apply overtime and commission rules by role.
What Happens If You Misclassify an Employee?
You may owe back overtime for the past two years, or three years if the violation was willful. The FLSA also allows an equal amount as liquidated damages, which can double the bill. Employees can file a complaint with the DOL or bring a lawsuit, and a group of employees can sue together. States can add their own penalties and longer look-back periods.
The DOL’s Wage and Hour Division recovered more than $259 million in back wages for nearly 177,000 employees in fiscal year 2025, an average of about $1,465 per worker, according to the DOL data page. Overtime and minimum wage cases are a large part of that work.
If you find a mistake, reclassify the employee, calculate back pay with the correct regular rate, and pay it. Talk to an employment attorney about how to do this and whether to use a DOL self-audit program. Then update your time tracking and payroll settings.
How Do You Audit Your Exempt Employees?
- List every exempt employee with their pay, state, and job duties.
- Check salary against the federal and state levels for the current year.
- Review actual duties, not titles. Ask managers what the person does most of the day.
- Check for improper pay deductions and unpaid time off policies.
- Fix problems going forward and decide how to handle past hours.
- Document the result and repeat the review every January and after major role changes. Use a payroll compliance checklist to keep the schedule.
Frequently Asked Questions
Can I pay an employee a salary and still owe overtime?
Yes. If the salaried employee is non-exempt, you owe overtime for hours over 40. You divide the salary by the hours it is meant to cover to find the regular rate, as in the example above.
Do exempt employees have to get paid for every week they work?
Generally yes. If an exempt employee does any work in a workweek, you owe the full salary for that week, with limited exceptions such as the first and last weeks of employment, where you can pay a proportionate amount.
Can I ask a non-exempt employee to work “off the clock”?
No. All time worked must be paid, including short tasks, and you must keep accurate records. Rounding and automatic meal break deductions can also create unpaid time if they are not applied fairly.
Can I convert an hourly employee to salary to avoid overtime?
Only if the job meets the exemption tests. Changing the pay method does not change the status. If the employee is still non-exempt, you still owe overtime, and you must track hours.
How long must I keep time and pay records?
The FLSA generally requires you to keep payroll records for three years and time cards and wage calculation records for two years. State rules can be longer, so keep records for the longer period.
Are computer employees exempt?
Some are. The computer employee exemption covers certain skilled roles such as systems analysts and programmers who meet the duties test. They can be paid either a weekly salary or an hourly rate, and some states set different pay levels. Help desk and routine support work generally does not qualify.
Conclusion
An employee is exempt only when the salary basis, salary level, and duties tests are all met, and the salary level changes by state. Everyone else is non-exempt and is owed overtime for hours over 40. Review each exempt role every January, include bonuses in the regular rate, track all hours, and prepare your payroll system for the new W-2 overtime reporting in 2026. If a role is a close call, treat it as non-exempt or get advice from an employment attorney.
