Employee classification is more than an HR detail. It affects payroll, overtime, recordkeeping, employee expectations, and compliance with the Fair Labor Standards Act (FLSA). For employers, one of the most important distinctions is whether a worker is classified as exempt or nonexempt.

The difference often comes down to overtime eligibility. However, classification is not based on job title alone. Employers generally need to review how the employee is paid, how much the employee earns, and what duties the employee performs.

What Exempt vs Nonexempt Employees Mean

Under the FLSA, nonexempt employees are generally entitled to minimum wage and overtime pay when they work more than 40 hours in a workweek. Overtime must be paid at a rate of at least one and one-half times the employee’s regular rate of pay.

Exempt employees are not entitled to FLSA overtime pay if they meet the requirements for a recognized exemption. Common exemptions include certain executive, administrative, professional, outside sales, computer, and highly compensated employees. To qualify for many white-collar exemptions, the employee’s salary and job duties must meet Department of Labor (DOL) requirements.

In simple terms, nonexempt employees are typically overtime eligible. Exempt employees are generally not overtime eligible, but only when the applicable exemption requirements are met.

Why Classification Matters For Employers

Misclassifying an employee can create payroll corrections, back wage exposure, tax complications, employee relations issues, and administrative strain. The risk often appears when a business assumes that a salaried employee is automatically exempt.

That assumption can be costly. A salary alone does not determine exempt status. The DOL states that job titles do not determine whether an exemption applies; the employee’s actual job duties and salary must meet applicable regulatory requirements.

For example, an employee with “manager” in their title may still be nonexempt if their primary duties do not meet the executive exemption requirements. Likewise, a highly skilled employee may still be nonexempt if their role does not fit within a recognized exemption category.

The Three-Part Exemption Review

For many executive, administrative, and professional exemptions, employers should review three core factors.

Salary Basis

The employee must generally be paid on a salary basis. This means the employee regularly receives a predetermined amount of compensation each pay period, and that amount generally cannot be reduced because of variations in the quality or quantity of work performed.

There are limited situations where deductions may be permitted, such as certain full-day disciplinary suspensions, unpaid Family and Medical Leave Act leave, and the initial or final week of employment.

Salary Level

As of June 9, 2026, the federal standard salary level for most executive, administrative, and professional exemptions is $684 per week, equal to $35,568 annually. The total annual compensation threshold for certain highly compensated employees is $107,432, including at least $684 per week paid on a salary or fee basis.

Employers should also review state law. Some states have salary thresholds or overtime rules that differ from federal law.

Duties Test

The employee’s actual work must fit the duties required for the exemption. For example, executive, administrative, and professional exemptions each have distinct requirements. The analysis should focus on the employee’s primary duties, level of discretion, decision-making authority, management responsibilities, or specialized knowledge, depending on the exemption being considered.

This is where many classification errors occur. A job description may say one thing, while the employee’s day-to-day responsibilities show something different.

Common Exempt Employee Categories

While each exemption has specific requirements, employers often encounter the following categories.

Executive Employees

Executive employees generally have management as their primary duty, direct the work of at least two full-time employees or the equivalent, and have meaningful authority related to hiring, firing, advancement, promotion, or similar employment decisions.

Administrative Employees

Administrative employees generally perform office or non-manual work directly related to management or general business operations. They must also exercise discretion and independent judgment on matters of significance.

Professional Employees

Professional employees may include learned professionals whose work requires advanced knowledge in a field of science or learning. This often involves specialized academic instruction. Creative professional exemptions may apply to certain roles requiring invention, imagination, originality, or talent in a recognized creative field.

Computer Employees

Certain computer systems analysts, programmers, software engineers, and similarly skilled computer employees may qualify for an exemption if they meet the applicable duties and compensation requirements. The DOL’s current earnings threshold page lists $27.63 per hour as the required compensation for computer employees paid on an hourly basis.

Outside Sales Employees

Outside sales employees may qualify for an exemption when their primary duty is making sales or obtaining orders or contracts, and they are customarily and regularly engaged away from the employer’s place of business. Certain salary requirements do not apply to outside sales employees.

Common Nonexempt Employee Situations

An employee is generally nonexempt when they do not meet all requirements for an exemption. Common examples include:

• Hourly employees who perform operational or support work
• Salaried employees whose duties do not meet an exemption test
• Employees below the applicable salary threshold
• Assistant managers whose primary duties are the same as non-managerial staff
• Administrative support employees who follow established procedures rather than exercise independent judgment on significant matters

 
Nonexempt employees may be paid hourly, salaried, piece rate, commission, or another pay method, but overtime rules still apply when they work more than 40 hours in a workweek under federal law.

Salary Does Not Automatically Mean Exempt

One of the most common misconceptions is that a salaried employee is exempt from overtime. That is not the case.

A salaried employee may still be nonexempt if the employee does not meet the salary level or duties test. In that situation, the employer must track hours worked and pay overtime when required.

This is especially important for businesses that use broad job titles, offer flexible work schedules, or have employees who perform mixed duties. If a role has changed over time, the classification should be revisited.

Recordkeeping & Documentation Considerations

Employers should maintain clear records for nonexempt employees, including hours worked, overtime hours, pay rates, and other wage-related information. The FLSA includes recordkeeping standards, and the DOL notes that employers must keep employee time and pay records.

For exempt employees, employers should keep documentation supporting the classification decision, including job descriptions, compensation details, and notes from classification reviews.

Accurate records can also help management identify workload issues, staffing needs, and payroll trends.

When Employers Should Review Employee Classifications

Classification should not be a one-time exercise. Employers should consider reviewing exempt and nonexempt classifications when:

• A new role is created
• Job duties materially change
• Employees move into supervisory roles
• Compensation plans are updated
• Payroll systems or timekeeping processes change
• State or federal wage and hour rules are updated
• The business grows into new states
• A merger, acquisition, or restructuring occurs

 
A periodic review can help employers identify roles that may need closer analysis before payroll issues become more difficult to address.

Practical Steps For Employers

Employers can take a practical approach to classification by reviewing the following:

1. Job duties: Compare written job descriptions to the employee’s actual day-to-day work

2. Compensation: Confirm whether salary levels meet current federal and applicable state requirements

3. Timekeeping: Verify that nonexempt employees are recording all hours worked

4. Overtime practices: Review whether overtime is calculated correctly and paid when required

5. State law: Check whether any state-specific overtime, meal break, rest break, or salary threshold rules apply

6. Documentation: Keep classification support, job descriptions, and payroll records organized

7. Communication: Help employees understand pay practices, time reporting expectations, and approval processes

How KPM Can Help

Payroll and employee classification issues can affect compliance, employee experience, and business operations. KPM CPAs & Advisors works with organizations across the Midwest on accounting, tax, payroll, and business advisory needs. KPM’s Payroll, Retirement Planning, & Wealth services bring payroll and employee benefits together in a coordinated approach.

If your organization is reviewing pay practices, updating roles, or preparing for growth, now may be a good time to revisit exempt and nonexempt classifications.

Talk with our team to review your payroll process, discuss your current classification approach, and identify next steps for your organization.

Frequently Asked Questions About Exempt & Nonexempt Employees

What is the main difference between exempt & nonexempt employees?

The main difference is overtime eligibility. Nonexempt employees are generally entitled to overtime pay when they work more than 40 hours in a workweek. Exempt employees are not entitled to FLSA overtime pay if they meet the requirements for an applicable exemption.

Are all salaried employees exempt?

No. A salaried employee may still be nonexempt if the employee does not meet the applicable salary basis, salary level, and duties requirements.

Can an hourly employee be exempt?

In limited situations, yes. For example, certain computer employees may be paid hourly and still qualify for an exemption if they meet the required duties and compensation standards. The current federal hourly compensation rate for qualifying computer employees is $27.63 per hour.

What is the current federal salary threshold for exempt employees?

As of June 9, 2026, the federal standard salary level for most executive, administrative, and professional exemptions is $684 per week, equal to $35,568 annually.

Do job titles determine exempt status?

No. Job titles alone do not determine exempt status. The employee’s salary and actual job duties must meet the requirements of the applicable exemption.