Exempt vs non-exempt employees: how to classify them for payroll

The three tests for exempt status

To treat an employee as exempt under the federal white-collar rules, all three must be true:

1. Salary level. At least $684 a week, which is $35,568 a year. Lower levels apply in some territories: $455 a week in the Northern Mariana Islands, Guam, Puerto Rico and the US Virgin Islands, and $380 in American Samoa.
2. Salary basis. A fixed amount each pay period that does not go up or down with the hours worked or the quality of the work. Paying an "exempt" employee by the hour, or docking pay for a slow week, breaks this test.
3. Duties. The main work fits one of the exempt categories below. Job titles do not count; the actual duties do.

Federal salary floor

$684 a week$35,568 a year

Highly compensated

$107,432total pay, with at least $684 a week in salary

California 2027

$72,384state exempt salary floor

Rule in force

2019 levelsrestored May 15, 2026

Exempt vs non-exempt: what changes in payroll

Federal overtime under the Fair Labor Standards Act (29 USC 207) is one and a half times the employee's regular rate for hours over 40 in a workweek. A non-exempt worker paid $20 an hour who works 45 hours earns $800 for the first 40 hours plus $150 for the 5 overtime hours (5 x $30), so $950 for the week. Our 2026 minimum wage by state page has the state floors that apply to non-exempt pay.

The duties tests, in plain terms

The federal rules group exempt jobs into a few categories. This is a summary, not the full regulation; borderline jobs need the text of 29 CFR part 541 or advice on your facts.

• Executive. The main job is managing the business or a department, the person directs the work of other employees, and their views on hiring and firing carry weight.
• Administrative. Office or non-manual work tied to running the business (finance, HR, purchasing, compliance), where the person uses discretion and independent judgment on matters that count.
• Learned professional. Work that needs advanced knowledge in science or learning, usually gained through a specialized degree, such as accountants, engineers and pharmacists.
• Creative professional. Work that depends mainly on invention, imagination or talent in a recognized artistic or creative field.
• Computer employees. Systems analysts, programmers and software engineers doing the specified computer work.
• Outside sales. Employees whose main job is making sales away from your place of business. No salary test applies to this group.

Highly compensated employees who earn at least $107,432 in total pay, with at least $684 a week paid as salary, face a lighter duties test.

What happened to the 2024 salary increase

A 2024 DOL rule would have raised the salary floor toward $1,128 a week and the highly compensated level toward $151,164. It never stuck:

• The Eastern District of Texas vacated it on November 15, 2024, and the Northern District of Texas on December 30, 2024.
• The Fifth Circuit dismissed the appeals on May 5 and May 7, 2026.
• DOL published a technical final rule on May 15, 2026, effective that day, removing the 2024 text and restoring the 2019 levels ($684 a week and $107,432).

That May 2026 document does not propose a new threshold. If you raised salaries in 2024 to meet the higher level, nothing in federal law requires you to keep them there, but state floors may.

State rules that change the answer

States can set a higher salary floor than the federal $684 a week. California is the clearest case in our data: its exempt salary floor rises to $72,384 on January 1, 2027, alongside the state minimum wage moving to $17.40. From 2027, a California employee paid $50,000 is non-exempt under state law even though the salary clears the federal test.

Exempt status also changes how often you may pay. Several states that require hourly staff to be paid at least twice a month let you pay exempt staff monthly:

More state rules are in pay schedules by state and on each page of the payroll tax hub.

What tracking non-exempt hours costs in payroll software

Non-exempt employees need time records that feed payroll. Most payroll providers sell time tracking as an add-on:

Compare full plan costs in our payroll software rankings and what payroll services cost by headcount.

Common exempt vs non-exempt mistakes

• Treating "salaried" as "exempt". Below $684 a week, or with non-exempt duties, a salaried employee still earns overtime.
• Giving a title instead of duties. An "assistant manager" who mostly runs a register likely fails the executive test.
• Docking an exempt employee's salary for a slow week. Pay that rises and falls with hours breaks the salary basis test.
• Using the federal floor in California. The state floor reaches $72,384 in 2027.
• Keeping no hours for salaried non-exempt staff. Without records you cannot show overtime was paid correctly.
• Planning around the 2024 rule. It was vacated; the 2019 levels are the law as of October 2026.
• Mixing this up with contractor status. Exempt employees are still W-2 employees. See W2 vs 1099 for the contractor test, and common payroll mistakes for the other errors that lead to back pay.