How the FLSA drew the overtime line
The Fair Labor Standards Act of 1938 established the 40-hour week and the right to overtime — time-and-a-half for hours worked beyond 40. But it did not extend that right to everyone. From the start it carved out exemptions for certain white-collar workers — executives, administrators, professionals — on the theory that employees with real authority and independent judgment did not need the law’s hour-by-hour protection. The hard part has always been drawing the line, and the FLSA’s answer combines two things that must both be met: a salary floor (you cannot be exempt below a set weekly salary) and a duties test (you must actually perform exempt-type work).
The salary floor has been the subject of repeated, contested rulemaking. The Department of Labor moved to raise it sharply in 2024 — to $43,888, then $58,656 — and in November 2024 a federal court struck the increase down, reverting it to the 2019 level of $35,568. The court’s reasoning is the key to this whole term: by setting the salary so high, the DOL had created a de facto salary-only test, and the FLSA defines the exemption by the duties an employee performs, not the salary they earn. The number can never replace the duties. That principle — handed down by a court rejecting the government’s own attempt to lean on salary alone — defines the offshore discipline as precisely as any legal ruling ever has.
What is the exempt vs non-exempt distinction?
Exempt vs non-exempt is the Fair Labor Standards Act distinction between employees entitled to overtime pay (non-exempt) and those who are not (exempt). Exempt status requires meeting both a salary threshold and a duties test — the employee must actually perform genuine executive, administrative, or professional work. A job title alone never determines it.
The defining feature is that the determination has two independent parts: a salary level, which is a checkable number, and a duties test, which is a substance judgment about what the employee actually does. Both must be satisfied. Clearing the salary floor only opens the question the duties test answers.
How exempt status works in practice
Non-exempt vs exempt. A non-exempt employee must receive overtime — 1.5 times the regular rate for hours over 40 in a week — plus minimum wage, and their hours are tracked. An exempt employee receives no overtime and is generally not subject to hour tracking.
The three tests for the white-collar (EAP) exemption — all required:
- Salary-basis test. Paid a fixed, predetermined salary not reduced for variations in the quality or quantity of work.
- Salary-level test. Paid at least the threshold — currently $684/week ($35,568/year), the 2019 level, after the 2024 increase was vacated by a federal court.
- Duties test. Primarily performs executive, administrative, or professional duties.
Failing either the salary test or the duties test makes the employee non-exempt, regardless of title or total compensation.
The title does not matter. An “assistant manager” who spends most of the shift doing the same work as hourly staff — taking orders, restocking, cleaning — fails the duties test and is owed overtime regardless of the title or salary.
Salaried is not the same as exempt. An employee can be paid a salary and still be non-exempt, meaning hours are tracked and overtime is owed.
The highly compensated exemption. Very high earners (a $107,432 threshold at the current level) face a relaxed duties test — needing to perform only one exempt duty customarily.
A state patchwork. Many states set higher salary thresholds than the federal floor. The applicable threshold depends on the state and changes over time.
The FLSA rules — verify federal salary level at publish
| Rule / element | Current status | Notes |
|---|---|---|
| Federal salary level | $684/week ($35,568/year) | The 2019 level; 2024 DOL rule raising it to $43,888/$58,656 was vacated E.D. Texas Nov 15 2024. Verify at publish |
| HCE threshold | $107,432 | Relaxed duties test — one exempt duty performed customarily is sufficient |
| Salary-basis test | Fixed salary, no deductions for quality/quantity variations | Stable; limited exceptions (e.g. full-day absence for personal reasons) |
| Duties tests | Executive, administrative, professional — defined by regulation | Stable; the substance of what the employee actually does, not the title |
| State salary thresholds | Often higher than federal | California, New York, and others set their own levels, often rising annually. Verify per state |
| Overtime rate | 1.5x regular rate for hours over 40/week | For all non-exempt employees; some states require daily overtime |
⚠️ PUBLISH-VERIFY: Confirm the federal salary level and state thresholds at publish — both have been in active litigation and regulatory flux.
Where misclassification risk concentrates
| Industry / context | Why exemption risk is high |
|---|---|
| Retail & food service | “Assistant managers” doing mostly line work fail the duties test despite the title |
| Hospitality | Salaried supervisors who perform the same hourly tasks as their teams |
| Healthcare | Mixed clinical and administrative roles near the salary threshold |
| Startups | A tendency to put everyone on salary and assume exemption follows automatically |
| Offices with inflated titles | Titles suggesting authority and independence that the actual duties do not support |
| Genuine professionals & executives | Often clearly exempt — licensed, autonomous, genuinely managerial — low risk when properly evaluated |
How exempt vs non-exempt works in payroll software
Payroll software (Gusto, QBO Payroll) tracks hours and pays overtime for non-exempt employees, and pays salary for exempt employees — based on the status assigned. Time-tracking tools capture the hours that overtime is computed on once a worker is set as non-exempt. HRIS platforms may flag a salary below the threshold (a number), but no system evaluates the duties test, because the duties test is not data — it is a judgment about what the person actually does.
The salary half lives in the system; the duties half lives outside it entirely. A system that marks someone exempt because they earn above the threshold has checked the number, not the exemption.
How CPA firms handle exempt vs non-exempt
For a firm — often with HR or labor counsel on close calls — exemption is a two-part determination. The duties analysis involves judging whether the employee’s actual work meets the executive, administrative, or professional standard. The salary-level check confirms the employee meets the applicable federal or state threshold. Together these settle the status, which the firm then directs into exempt or non-exempt payroll treatment. The firm also advises on risk and reclassification — identifying where titles outrun duties, and correcting status before it becomes a wage-hour claim.
Exempt vs non-exempt and offshore accounting
This term sharpens the payroll cluster’s core lesson by adding a clean structural split. The determination divides neatly into two parts the offshore team must keep separate. One part is a number: is the employee paid at or above the salary threshold for their state? That is checkable, and the offshore team can and should check it precisely, against the right threshold, which varies by state and has moved with litigation. The other part is a substance judgment: does the employee primarily perform genuine executive, administrative, or professional duties? That is not a number and not in any system — it is a characterization of what the person actually does all day, measured against a legal standard.
The characteristic failure mode is mistaking the salary, or the title, for the exemption — concluding that someone is exempt because they earn above the threshold, or because their title is “manager,” and skipping the duties test entirely. The salary version is precisely the error a federal court identified when it struck down the 2024 overtime rule: by leaning too hard on the salary number, the rule had created a de facto salary-only test, and the court held that the FLSA defines exemption by duties, not pay. A well-paid employee doing non-exempt work is still owed overtime. The title version is the same shortcut wearing a name badge: the assistant manager paid above the threshold who spends the shift ringing up customers and restocking shelves is non-exempt regardless of the title.
The split defines the discipline. The offshore team checks the salary-level test — a number against the applicable threshold — and runs the resulting payroll, tracking hours and paying overtime for non-exempt employees. An employee below the threshold cannot be exempt, full stop, and that is a determination the number alone makes. What the offshore team must not do is conclude exemption from the salary or the title, because clearing the salary floor only opens the question the duties test answers. It also acts as a sensor: if a salaried “manager” whose recorded hours and the nature of the operation look like front-line hourly work, the offshore team flags it — “this employee is classified exempt and clears the salary threshold, but the role looks like it may not meet the duties test — worth the firm’s review” — surfacing the mismatch without resolving it.
The recognition to carry: exemption takes both a number and a judgment, and the number can never stand in for the judgment — the salary tells you whether an employee could be exempt; only the duties tell you whether they are. Check the salary, run the payroll, flag the mismatches, and leave the substance determination to the firm.
What are the common misconceptions about exempt vs non-exempt?
- “If an employee is salaried, they are exempt from overtime.” No. Being paid a salary does not make someone exempt. An employee can be salaried and non-exempt — meaning hours are still tracked and overtime is still owed. Exemption requires meeting the duties test too.
- “If someone earns above the salary threshold, they are exempt.” No. The salary threshold is a floor, not a sufficient condition. The employee must also primarily perform exempt duties; a well-paid employee doing non-exempt work is still owed overtime.
- “A manager title makes someone exempt.” No. The title is irrelevant. An assistant manager who spends the shift doing the same work as hourly staff fails the duties test and is owed overtime regardless of the title.
- “Exempt status is a fixed federal number.” The federal salary level is one number, but it has been heavily litigated and many states set higher thresholds — so the applicable floor depends on the state and the current rules.
- “Once exempt, always exempt.” Status can change. If duties shift, salary drops below the threshold, or a state raises its threshold, a previously exempt employee can become non-exempt.
What terms are commonly confused with exempt vs non-exempt?
| Confused with | The key difference |
|---|---|
| Worker Classification | The prior question of whether the person is an employee at all; exempt vs non-exempt applies only once employee status is established |
| Salaried vs Hourly | A pay-method distinction. You can be salaried and non-exempt — they are not the same as exempt vs non-exempt |
| Overtime | The 1.5x pay non-exempt employees receive; exemption is about whether overtime is owed in the first place |
| Minimum Wage | A separate FLSA protection; non-exempt employees are entitled to both minimum wage and overtime |
| Highly Compensated Employee | A relaxed exemption for very high earners requiring only one exempt duty — a different standard, not the same as the standard EAP exemption |
Common client questions about exempt vs non-exempt
My employee is salaried — do I owe them overtime?
Possibly yes. Being salaried does not automatically make someone exempt. To be exempt, they have to be paid above a salary threshold and primarily do executive, administrative, or professional work. If they do not meet the duties test, they are salaried but non-exempt — which means you still track their hours and pay overtime. Salary alone does not settle it.
I pay my assistant manager well above the threshold — they are exempt, right?
Not necessarily. The salary is only half the test. If your assistant manager spends most of their time doing the same work as your hourly staff rather than genuine managerial duties, they fail the duties test and are owed overtime regardless of their salary or title. What they actually do day to day — not the pay or the title — is what decides it.
Your team runs my payroll — do you decide who is exempt?
We can check the part that is a clear number — whether someone is paid at or above the salary threshold for your state — and we run the payroll correctly once the status is set, tracking hours and overtime for anyone non-exempt. But whether someone passes the duties test is a determination the firm makes, because it depends on what the person actually does and on a legal standard. If we see signs that someone is classified exempt but looks like they are doing non-exempt work, we will flag it for review rather than make the call ourselves.
What happens if I classify someone exempt and I am wrong?
You can owe back overtime — often for up to two or three years — plus liquidated damages that can double it, and penalties. Misclassifying employees as exempt is a common and costly wage-and-hour mistake. Where there is doubt about whether the duties test is met, it is worth having it reviewed before it becomes a claim.
Does the federal salary threshold change?
It has, and it has been contested. The Department of Labor raised it in 2024, a court struck that increase down, and it reverted to the earlier level. Several states set higher thresholds of their own. The floor that applies depends on your state and the current rules — worth confirming rather than assuming, especially if you have employees in multiple states.
