Exempt vs. Non-Exempt Employees: A Refresher on FLSA Classification Rules
Published on by Chaleise Fleming in Tax Services
- Employee classification is based on duties and compensation structure, not simply whether an employee is paid a salary or hourly wage.
- Employees must meet the salary basis, salary level, and duties tests to qualify for an overtime exemption under the FLSA.
- The new overtime deduction does not change employee classification requirements, and employers should not reclassify employees solely to create or avoid overtime eligibility.
- Regular classification reviews can support compliance and accurate overtime reporting as employee roles and responsibilities evolve.
Recent changes related to the tax treatment of overtime pay have prompted many employers to revisit their overtime policies and employee classifications. As part of that review, it is important to understand the distinction between exempt and non-exempt employees under the Fair Labor Standards Act (FLSA).
Many employers assume that salaried employees are automatically exempt from overtime requirements and hourly employees aren’t. However, the compensation method alone doesn’t determine exempt status. Instead, the FLSA focuses on whether an employee’s position meets specific exemption requirements.
Non-exempt employees must receive at least minimum wage and are entitled to overtime pay at one-and-one-half times their regular rate of pay for hours worked over 40 in a workweek. Exempt employees aren’t subject to the FLSA’s minimum wage and overtime requirements.
To qualify as exempt, there are three main tests:
Salary basis test
The employee must be paid a predetermined amount each pay period that’s not reduced based on the quality or quantity of work performed.
Salary level test
The employee’s salary must be at least $684 per week, or $35,568 annually. Even if the other exemption requirements are met, employees paid below this threshold generally don’t qualify as exempt.
Duties test
This test focuses on the employees’ primary job responsibilities. The three most common exemption categories are:
- Executive exemption: The employee’s primary duty is managing the business or a recognized department or subdivision. The employee regularly directs the work of other employees and has authority, or significant input, on hiring, firing, and other employment decisions.
- Administrative exemption: The employee’s primary duty is office or non-manual work directly related to management or general business operations. The role also requires the exercise of independent judgment and discretion on matters of significance.
- Professional exemption: The employee’s work requires advanced knowledge in a field of science or learning typically acquired through specialized education and training.
The availability of the new overtime deduction doesn’t change the requirements for employee classification. Employers can’t convert an employee from salaried to hourly status to create overtime eligibility, nor can they classify an employee as exempt solely to avoid overtime obligations.
Whether an employee is exempt or non-exempt depends on the employee’s actual duties and compensation structure. Employees who don’t meet the applicable exemption requirements generally must receive overtime pay, regardless of whether they are paid a salary.
When do exempt versus non-exempt classifications change?
Promotions, reorganizations, and changes in job responsibilities may require a reassessment of exempt status. Classification decisions should be based on the employee’s role and responsibilities, not the availability of the qualified overtime deduction.
As employers evaluate their workforce classifications, several questions may be worth considering:
- Are employees correctly classified based on their day-to-day responsibilities?
- Do salaried employees meet both the salary basis and salary level requirements?
- Are any salaried employees currently excluded from overtime pay despite not meeting all exempt classification requirements?
- Have any employee roles changed in a way that warrants a review of exempt or non-exempt status?
- Is the payroll system properly tracking both FLSA overtime and qualified overtime amounts for 2026 Form W-2 reporting requirements?
Regular reviews of employee classifications can help organizations maintain compliance with FLSA requirements and ensure employees are classified appropriately as roles evolve.
Next steps
Employee classification decisions can have significant implications for overtime eligibility, payroll administration, and regulatory compliance. As employers navigate new overtime deduction requirements and reporting obligations, now may be the right time to review workforce classifications and related payroll processes.
If you have questions about exempt and non-exempt classifications or would like help evaluating your current workforce classifications, we’re here for you. Our team can work with you to assess employee classifications, review compensation structures, and identify potential compliance concerns. Contact us today to schedule a free consultation.
Additional resources
To learn more about payroll tracking and reporting considerations related to the new qualified overtime deduction, explore our post on preparing for qualified overtime reporting in 2026.
You may also be interested in our IRS guidance on determining the overtime deduction post for additional insight into how qualified overtime is defined and what employers should know as they prepare for upcoming reporting requirements.
And our compensation and benefits benchmarking studies are a great free resource for evaluating how you stack up against the competition, and how you can attract and retain top talent. Even if your industry isn’t represented, they offer valuable regional insights you can apply to make a difference in your success.
