Exempt or Non-Exempt? A Small Business Guide to FLSA Employee Classification

If you’re a small business owner or hiring manager, you’ve likely heard the terms “exempt” and “non-exempt” employees. These classifications come from the Fair Labor Standards Act (FLSA), the federal law that establishes minimum wage and overtime requirements for most workers.

In simple terms, non-exempt employees must be paid overtime (at least time-and-a-half) for all hours worked over 40 in a workweek, whereas exempt employees are exempt from overtime pay (they do not receive extra pay for extra hours). Properly classifying your team matters because it determines who is entitled to overtime pay and protects your business from legal trouble. In fact, businesses must properly classify employees as exempt or non-exempt to comply with the FLSA . Misclassification can lead to lawsuits, government fines, back-pay of wages, and damage to your reputation. Don’t worry – this post will walk you through the basics of FLSA classification, so you can get it right.

What Does the FLSA Require and Why Classification Matters

The FLSA requires that most employees be paid at least the federal minimum wage for all hours worked, plus overtime pay for hours over 40 per week. However, the law carves out “white-collar” exemptions for certain executive, administrative, professional, outside sales, and computer-related employees . Employees who fall under these categories and meet specific criteria do not have to receive overtime pay. Every other employee is considered non-exempt and must get overtime when they work extra hours.

Why does this classification matter so much?

Getting it right ensures your employees are paid fairly and legally. If you classify someone as exempt (salaried, no overtime) when they should be non-exempt, you could end up owing them a lot of back overtime wages and penalties down the line. On the other hand, classifying correctly helps you budget labor costs and avoid compliance issues. For small businesses operating on thin margins, surprises in the form of an unexpected overtime lawsuit can be devastating. Proper classification also builds trust with your employees – they’ll know you are following the law and respecting their rights. In short, classifying employees correctly under the FLSA is both a legal requirement and a smart business practice to avoid fines and foster a fair workplace .

Key Criteria: How to Determine Exempt vs. Non-Exempt Status

Under the FLSA, not all salaried employees are exempt, and not all hourly workers are non-exempt – it comes down to specific tests. To legally classify an employee as exempt (overtime not required), three key criteria generally must be met

Salary Basis Test

The employee must be paid on a salary basis (a fixed, predetermined amount each pay period that isn’t reduced based on hours or work quality). In other words, true salaried employees receive their full salary for any week in which they do any work, regardless of the number of hours worked. If you dock their pay for working less or performing poorly, they likely fail this test. (Outside salespeople and certain professionals like doctors or teachers are exceptions who don’t need to be paid on a salary basis.) Being paid hourly typically means an employee is non-exempt, but paying a salary alone isn’t enough – it’s just the first part of the test.

Salary Level Test

The salary must meet a minimum amount set by federal law. As of now, the FLSA regulations require at least $684 per week (equivalent to $35,568 per year) for most exempt employees . If an employee’s salary is below that threshold, they generally cannot be classified as exempt, no matter what their job duties are. (This threshold doesn’t apply to outside sales or certain professions like law and medicine.) Keep in mind some states have higher salary minimums for exemption – and you must follow the stricter standard if state law is more generous to employees . Always ensure your exempt employees’ pay meets the current federal (and applicable state) salary requirements.

Job Duties Test

Meeting the two salary tests alone isn’t enough; the employee’s primary job duties must fit one of the exemption categories defined in the law.

The common FLSA exemptions include:

• Executive Exemption: The employee’s primary duty is managing a business (or a department/subdivision of the business), they regularly supervise two or more full-time employees, and they have genuine input into hiring or firing decisions. For example, a store manager who runs day-to-day operations and oversees staff might qualify as exempt.

• Administrative Exemption: The employee’s primary duty is performing office or non-manual work directly related to the company’s management or general business operations, and they exercise independent judgment on significant matters . An example could be an HR coordinator or accountant who has to make important decisions or recommendations as part of their job.

• Professional Exemption: The job requires advanced knowledge in a field of science or learning (usually evidenced by a specialized degree) or involves creative, original talent. Examples are lawyers, engineers, certified public accountants, or writers and artists . They use specialized knowledge or creative skills rather than performing routine mental, manual, or physical work.

• Computer Employee Exemption: This covers certain high-skilled tech workers (like software engineers, programmers, systems analysts) who are paid at least $684/week or $27.63 per hour and whose duties consist of specific computer systems or software design, development, or analysis tasks.

• Outside Sales Exemption: Employees who primarily make sales or obtain orders away from the employer’s place of business (out in the field) fall here. Outside salespeople are exempt from overtime and have no minimum salary requirement, since they typically earn commissions.

Each exemption has a detailed definition, but the key idea is that the employee’s role must involve a high level of responsibility or knowledge. Job title alone does not determine exempt status – what matters is the actual work the person does. For instance, simply calling someone a “Manager” doesn’t make them exempt if they spend most of their time doing routine tasks and don’t truly supervise or manage as defined by the regulations. You have to look at their day-to-day duties. If an employee does not meet all three tests (salary basis, salary level, and duties), then by default they should be treated as non-exempt (eligible for overtime).

Common Mistakes Small Businesses Make (and How to Avoid Them)

Even well-intentioned small businesses can slip up on FLSA classifications. Here are some common mistakes to watch out for in determining exempt vs. non-exempt status:

• Assuming any salaried employee is automatically exempt: This is a big one. Paying someone a salary does not alone qualify them as exempt. You can have salaried non-exempt employees. For example, if you pay a receptionist a fixed weekly salary but their duties don’t meet an exemption category, you still must pay them overtime for over 40 hours. Nearly 40% of business owners answered incorrectly on an FLSA quiz, thinking that salaried workers never get overtime, which is wrong . If the employee’s salary is below the FLSA threshold or their job duties don’t fit an exemption, they must receive overtime pay – yes, even if they’re on salary. Always remember the motto: “salaried” is not synonymous with “exempt.”

• Putting too much weight on job titles or classifications on paper: Simply giving someone a high-ranking title like “Supervisor” or “VP” and paying them a nice salary doesn’t guarantee they’re exempt. The law cares about substance over form. Slapping the word “Manager” on an employee who has no subordinates or decision-making power won’t pass the duties test  As the Department of Labor emphasizes, job titles themselves are of limited use – it’s the actual job tasks and responsibilities that count . To avoid this mistake, ensure the role’s duties truly align with an exempt classification. Don’t rely on creative titles or job descriptions that don’t match reality. Conduct periodic check-ins or audits to confirm employees’ responsibilities still match their classification (more on audits soon).

• Misapplying the exemptions to roles that don’t qualify: Small businesses sometimes try to classify a position as exempt because they think it “sounds” professional or they want to avoid paying overtime, but not every white-collar office job is exempt. Clerical workers, bookkeepers, help-desk IT staff, inside sales reps, and other roles that involve routine tasks are usually non-exempt. A common error is treating an employee as exempt under the administrative exemption when in fact they perform relatively routine office work without independent judgment – for instance, an administrative assistant who simply follows standard procedures should likely be non-exempt, even if salaried. The Wage and Hour Division has noted frequent misclassification of clerical employees, dispatchers, or inside salespeople as “exempt” when they are not . Always apply the actual FLSA criteria, not what you assume about a job title.

• Not paying overtime (or tracking hours) for eligible employees: Failing to pay overtime to a non-exempt employee is a serious FLSA violation – yet it happens often, especially with salaried employees that employers mistakenly treated as exempt. For example, if you have an assistant manager who doesn’t meet all exemption tests but you pay them a flat salary and never pay overtime when they work 50-hour weeks, you’re on the hook for those 10 extra hours at time-and-a-half (. Another related mistake is not keeping accurate time records for salaried non-exempt staff. All non-exempt employees (hourly or salaried) should be tracking hours, because you need to know if they exceed 40 in a week to pay overtime properly. By law, employers must maintain time records for non-exempt workers (and keep them for at least two years) (. If you haven’t been tracking a salaried employee’s hours because you thought overtime didn’t apply, that’s a red flag. The fix: when in doubt, record the hours. It’s better to have the data in case their status is ever questioned.

• Ignoring state and local laws or updates to federal law: The FLSA sets federal baseline rules, but your state may have its own wage-and-hour laws – such as a higher salary cutoff for exemptions, different overtime calculation (like California’s daily overtime), or stricter duties definitions. One big mistake is assuming federal law always trumps state law; in reality, you must follow whichever law is more favorable to the employee. For instance, if your state requires overtime pay after 8 hours in a day, you need to pay that even if federal law wouldn’t require overtime until 40 hours in a week. Also, keep an eye on changes to the FLSA itself. (The Department of Labor periodically updates the salary threshold – an increase was proposed recently – so you need to stay current so you can adjust salaries or classifications.) To avoid this pitfall, make it a habit to review both federal and state wage laws applicable to your business, or consult with an HR expert, especially when laws change.

By being aware of these common errors, you can double-check your own employee classifications. If any of these sounded uncomfortably familiar, don’t panic – we’ll cover how to correct course with proper steps and tools next.

Consequences of Misclassification: Why You Don’t Want to Get It Wrong

Misclassifying an employee as exempt when they should be non-exempt (or vice versa) can lead to serious consequences for a small business. Here’s what’s at stake if you get it wrong:

• Legal and Financial Penalties: If the Department of Labor investigates or an employee sues, and it’s found you misclassified employees, you will likely owe back pay for any unpaid overtime going back up to two (or even three) years. For example, you might have to cut a hefty check for all those 10-hour overtime weeks that went unpaid. Often, you can also be hit with “liquidated damages,” which essentially double the amount of back wages owed (as a penalty) . On top of that, there can be civil monetary fines for willful violations, and you may be on the hook for the employees’ attorneys’ fees if they took legal action. In short, a misclassification mistake can become very expensive very fast.

• Reputational Damage and Employee Morale: Beyond the direct costs, consider the hit to your business’s reputation. Wage and hour lawsuits are public, and being known as a company that doesn’t pay employees properly can erode trust with customers and make it harder to hire good talent. Employees who feel they were cheated out of overtime or treated unfairly will understandably be upset; it can harm morale and lead to higher turnover. As one legal advisor noted, companies caught misclassifying workers often suffer damage to their reputation, impacting customer trust and employee morale. Small businesses live on their good name—no one wants to be in the headlines for violating labor laws.

• Productivity and Operational Impacts: If you’ve misclassified employees, you might also be making suboptimal decisions operationally. For instance, if you incorrectly treat someone as exempt and don’t track their hours, you might not realize you’re overworking them, leading to burnout. Or you might be unknowingly violating overtime rules by letting a non-exempt employee work off the clock. Discovering a misclassification can force sudden changes (like re-scheduling staff to avoid overtime or increasing salaries to maintain exemption) which can be disruptive if done reactively. In contrast, getting classifications right from the start allows you to manage workloads and compensation smoothly and transparently.

Bottom line: misclassification is risky business. It’s far cheaper and easier to classify correctly upfront than to deal with a costly compliance mess later. Next, we’ll outline proactive steps you can take to ensure each employee is classified properly and stays that way.

5 Steps to Ensure Proper Classification under the FLSA

Getting your classifications right isn’t a one-and-done task – it should be an ongoing part of your HR and payroll process. Here are some actionable steps to help you classify employees properly and keep things compliant:

1. Educate Yourself (and Your Team) on FLSA Rules: First, make sure you or whoever handles HR in your company understands the FLSA basics – especially the three tests (salary level, salary basis, duties) for exemptions. Read the official DOL fact sheets on exemptions or take a short compliance training. Remember, ignorance is not a defense if you violate the law. If you’re unsure about something, consider consulting a labor law attorney or an HR professional. Investing a little time in learning the rules will pay off by preventing mistakes. As the saying goes, “brush up on the classification process under the FLSA,” including how the salary and duties tests work. This knowledge will be the foundation for all your classification decisions.

2. Review Each Job Role Using a Checklist or Worksheet: It helps to evaluate each position systematically. Create an FLSA classification worksheet that lists the criteria for exemption. Go through each employee’s role one by one. Check: Are they paid on a salary basis? Is their weekly salary at or above $684? What are their primary duties, and do those duties match an executive, admin, professional, computer, or outside sales exemption definition? By working through a checklist, you ensure you’re not skipping any part of the analysis. For every role, essentially perform an internal “exemption test”: if they fail any one of the required criteria, classify them as non-exempt. Document the results – note which exemption (if any) you believe applies and why. This way, you have a record of your decision-making. Tip: Don’t forget to account for part-time employees’ salary on a weekly basis (part-time salary must still meet $684/week to be exempt) and double-check any roles you previously assumed were exempt without much thought. A thorough review can catch discrepancies. (Many employers are surprised to find some employees they’ve long treated as exempt should actually be hourly overtime-eligible.)

3. Err on the Side of Caution – When in Doubt, Classify as Non-Exempt: If you find yourself on the fence about an employee’s status, it’s usually safer to classify them as non-exempt. There’s no penalty for paying someone overtime they might not have legally been entitled to, but there are plenty of penalties for failing to pay overtime when it was due. The FLSA’s default assumption is that employees are non-exempt unless proven otherwise. So if an employee’s duties are kind of borderline or their salary is close but not quite at the cutoff, it’s prudent to treat them as non-exempt (i.e., pay overtime) rather than risk misclassification. In practice, this might mean switching a questionable salaried role to hourly, or keeping them on salary but tracking hours and paying overtime when applicable (yes, you can have salaried, non-exempt employees). Conservatively classifying workers as non-exempt ensures compliance and can save you headaches – you can always revisit later if their role changes or regulations shift.

4. Communicate and Train Managers on Classification Rules: Oftentimes, misclassification issues arise from frontline supervisors or managers not understanding the rules – for example, a well-meaning manager might tell a team member “we can’t pay overtime, just finish the project even if it takes extra hours” without realizing that’s against the law for a non-exempt worker. Providing compliance training to anyone who schedules employees or approves timecards is critical. Teach your management team which employees are overtime-eligible and that they must authorize (and budget for) overtime or adjust workloads accordingly. Make sure they know not to unknowingly give comp time (informal time off in lieu of overtime) or allow off-the-clock work – those practices can violate FLSA. Regular training on wage and hour basics helps keep everyone on the same page and reinforces the importance of classification. Managers and HR staff should also stay updated on any changes (for instance, if the salary threshold updates, ensure they know the new number). Having informed people in charge will effectively multiply your compliance efforts .

5. Conduct Periodic Classification Audits: Businesses evolve – job duties shift, new positions are created, laws get updated – so it’s wise to audit your employee classifications on a regular basis. At least once a year (or whenever there’s a significant change in roles or FLSA regulations), take time to review each exempt position and confirm it still qualifies. Maybe that “Marketing Manager” who used to strategize and lead a team is now mostly doing hands-on work and no longer manages anyone – that role might need reclassification to non-exempt. Or if the DOL raises the salary threshold, you’ll need to identify any previously exempt folks who fall below the new cutoff and either raise their salary or start paying overtime. An internal audit can catch these issues early so you can fix them proactively, before an outside investigator does. When conducting an audit, use the same worksheet from step 2 and see if anything has changed. It’s also a chance to ensure your payroll records and overtime calculations have been correct. By regularly reviewing your workforce, you demonstrate a commitment to fair labor practices and can nip problems in the bud. As one compliance expert put it: conducting a comprehensive FLSA audit – checking each employee’s status, pay, and duties – helps you find and fix any misclassifications before they become costly violations.

Following these steps will put you on the right track to classify employees correctly and maintain compliance over time. It may seem like extra work upfront, but it’s far easier than dealing with a misclassification case later.

Tools and Resources to Help with FLSA Classification

You don’t have to tackle FLSA compliance alone – there are some handy tools and practices that can make the process easier and more foolproof:

• FLSA Classification Worksheets or Checklists: As mentioned, using a standardized worksheet or checklist is extremely helpful. The U.S. Department of Labor provides exemption checklists that outline each requirement for the executive, administrative, professional, etc., exemptions. By checking off each criterion for a given employee, you can clearly see if they qualify. This documentation is useful if you ever need to explain your classification decision. It ensures you consider all factors (salary basis, amount, and each duty test element) rather than guessing. Keep these worksheets in your records. If you don’t already have one, search for an “FLSA exemption checklist” – many are available for free. Using such a tool essentially walks you through the legal tests step by step, so you won’t forget a piece of the puzzle.

• Compliance Training and Expertise: Don’t underestimate the value of training and expert guidance. There are short courses and webinars geared towards small business owners on wage-and-hour compliance. Investing a couple of hours in training can prevent major mistakes. Additionally, if you have access to an HR consultant or an employment lawyer, getting their input on tricky roles can be worthwhile. Larger companies often have entire teams for this, but small businesses can leverage external resources as needed. Even the managers on your team can benefit from basic FLSA training, so they know why classification is important and how to handle overtime with their staff Knowledge is a key tool – the more your team understands the rules, the less likely you’ll run into problems.

• Regular Classification Audits (Self-Audits): We’ve touched on this in the steps, but to re-emphasize: make periodic self-audits a tool in your compliance toolbox. Set a calendar reminder maybe every year or two to do an internal check. There are even audit checklists available that go beyond individual employees – covering policies, recordkeeping, etc. During an audit, you might use a list like: Review all job descriptions and titles vs. actual duties, verify salaries meet thresholds, ensure overtime was paid correctly where required, confirm time records are complete, and so on. If you find an issue, you can correct it (e.g. reclassify an employee or pay owed overtime) before it escalates. Demonstrating a good-faith effort by auditing and correcting mistakes can also help if you ever do get investigated – it shows you’re trying to comply. Think of audits as a routine maintenance check for your business’s HR health.

• Time-Tracking and Payroll Tools: Having a reliable time-tracking system is crucial for non-exempt employees. Many modern apps and software will alert you when someone is approaching overtime hours, which gives you a chance to manage it (either approve it or reschedule work). These tools can also differentiate between overtime-eligible and exempt employees in reporting, reducing manual errors. If you decide to reclassify a salaried employee to non-exempt, time-tracking will be your best friend for ensuring they’re paid correctly moving forward. Good payroll software, similarly, will have settings to automatically calculate overtime at 1.5x pay. Utilizing these tools reduces the chance of clerical mistakes in paying overtime or salary. In essence, let technology handle the heavy math and recordkeeping, so you can focus on managing the business.

• Documentation and Written Policies: Finally, maintain clear documentation. Have written policies in your employee handbook about working hours, overtime approval, and timekeeping. For example, a policy that requires non-exempt employees to record all hours worked (and prohibits off-the-clock work) sets the expectation and can protect you. If you conduct a classification review or audit, keep notes of what you decided and why. If you adjusted someone’s status, document when and how. These records can be lifesavers if questions arise later. They’re also helpful for new managers or HR staff coming in – they can read the rationale behind past decisions and ensure consistency going forward.

By leveraging these tools – checklists, training, audits, software, and good documentation practices – you create checks and balances in your process. It makes correct classification more straightforward and helps catch any oversight before it becomes a problem. As a small business owner, you wear many hats; these tools act like extra “team members” to keep your FLSA compliance on point.

Conclusion

Classifying employees as exempt or non-exempt under the FLSA might feel daunting at first, but with a solid understanding of the rules and a methodical approach, it becomes a manageable part of running your business. Always remember the core principles: pay salary and duties define an exemption – and if in doubt, the employee should probably be non-exempt (and overtime-eligible). Avoid the common pitfalls by not making assumptions based on pay or title, and keep an eye on both federal and state requirements. The consequences of misclassification are too costly to ignore, but the steps to get it right are clearly defined and very doable. By following the guidance above, using the available tools like worksheets, training, and audits, and fostering a culture of compliance, you’ll protect your business and ensure your employees are treated fairly.

In the end, proactively classifying your workforce correctly is an investment in your company’s integrity and success. It saves you from legal troubles, unexpected bills, and unhappy employees. So take action – review those job roles, adjust where needed, and pat yourself on the back for stepping up your compliance game. Your future self (and your employees) will thank you for it!