Exempt vs. Non-Exempt: A Technical Guide to Salary and Duties Tests

Understanding FLSA Exemptions

Misclassifying employees as exempt is one of the most common and costly errors in payroll administration. To qualify for an exemption from the Fair Labor Standards Act (FLSA) overtime requirements, an employee must generally satisfy three distinct criteria: the salary level test, the salary basis test, and the duties test.

1. The Salary Level and Basis Tests

The salary level test establishes a minimum weekly earnings threshold. As of the most recent Department of Labor updates, employees must earn at least $844 per week ($43,888 annually), increasing to $1,128 per week ($58,656 annually) on January 1, 2025.

The salary basis test requires that the employee receives a predetermined amount of compensation each pay period that is not subject to reduction because of variations in the quality or quantity of work performed. Deductions are only permitted in specific, narrow circumstances, such as:

• Full-day absences for personal reasons other than sickness or disability.
• Full-day absences for sickness if the deduction is made under a bona fide plan (like PTO).
• Unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules.

2. The Duties Test: Primary Categories

Meeting the salary threshold is insufficient; the employee’s actual job functions must meet the criteria for one of the following categories:

Executive Exemption

• Primary Duty: Management of the enterprise or a recognized department/subdivision.
• Supervision: Must customarily and regularly direct the work of at least two or more full-time employees (or their equivalent).
• Authority: Must have the authority to hire or fire, or their recommendations regarding change of status must be given particular weight.

Administrative Exemption

• Primary Duty: Performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers.
• Discretion: The exercise of discretion and independent judgment with respect to matters of significance is the most litigated element of this test.

Professional Exemption

• Learned Professionals: Work requiring advanced knowledge in a field of science or learning acquired by a prolonged course of specialized intellectual instruction.
• Creative Professionals: Work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

3. Operational Compliance Steps

1. Audit Job Descriptions: Ensure descriptions reflect actual daily tasks, not just aspirational titles. Titles do not determine exempt status.
2. Review Pay Stubs: Verify that exempt employees are not receiving hourly-based deductions that violate the salary basis test.
3. Monitor State Laws: States like California and New York have higher salary thresholds and stricter duties tests than the federal FLSA.

Failure to comply results in back-pay liabilities for all overtime hours worked over the past two to three years, plus liquidated damages and attorney fees.