One of the most common and expensive misconceptions in small business hiring is that putting an employee on salary automatically means they're exempt from overtime pay. It doesn't. Overtime exemption depends on meeting specific legal tests around job duties and, in most cases, a minimum salary threshold — simply paying someone a fixed weekly amount instead of an hourly wage doesn't satisfy either requirement on its own, and misclassifying employees is one of the most common sources of wage and hour lawsuits against small businesses.
Understand the Two-Part Test for Exemption
Under federal law, most overtime exemptions require satisfying both a salary basis test (being paid a fixed salary above a minimum threshold, rather than hourly) and a duties test (the employee's actual job responsibilities must fall into specific categories like executive, administrative, or professional work as defined by regulation). Meeting only the salary requirement while the employee's actual day-to-day work doesn't meet the duties test still makes them non-exempt, regardless of their job title or how they're paid.
Job Titles Don't Determine Exemption Status
Calling someone a "manager" or giving them an impressive title doesn't make them exempt if their actual daily responsibilities are primarily non-exempt work like processing orders, stocking shelves, or performing the same tasks as the hourly employees they supposedly supervise. Regulators and courts look at what the employee actually does most of the time, not the title on their business card or offer letter.
Know the Current Salary Threshold and Watch for Changes
The minimum salary required to even be considered for most exemptions is set by federal regulation and has been the subject of significant legal back-and-forth in recent years, with proposed increases facing court challenges. Because this threshold changes and its status can shift with new rules or litigation, verify the current federal minimum directly before classifying anyone as exempt, and check whether your state sets a higher threshold, since state law controls when it's more protective of employees.
State Law Can Be More Restrictive Than Federal Law
Several states set their own overtime exemption salary thresholds well above the federal minimum, and some states apply stricter duties tests than federal law requires. An employee who qualifies as exempt under federal rules alone may still be entitled to overtime under your state's law, so classification decisions need to check both federal and state requirements, not just one.
Audit Job Descriptions Against Actual Day-to-Day Work
A job description written when a role was created can drift significantly from what the person actually does a year or two later, especially in a small business where responsibilities shift often. Periodically compare written job descriptions against how employees actually spend their time, and reclassify if a role has drifted into primarily non-exempt work, rather than assuming the original classification still applies.
Understand the Cost of Misclassification
Misclassifying a non-exempt employee as exempt can result in liability for years of unpaid overtime, liquidated damages that double the amount owed in many cases, and penalties, plus the cost of defending a wage and hour claim or Department of Labor audit. This liability accrues per misclassified employee and compounds the longer the misclassification continues, which is why it's worth catching early rather than assuming it will resolve itself.
When in Doubt, Get a Classification Review
Borderline cases — a role that's partly supervisory and partly hands-on, or a position that doesn't cleanly fit the standard exemption categories — are exactly the situations worth having reviewed by an employment attorney rather than guessing. The cost of a classification review is minor compared to the cost of defending a misclassification claim after the fact.
Salary is a necessary but not sufficient condition for overtime exemption, and getting this wrong is one of the most preventable and expensive mistakes a growing business can make. A periodic classification review, especially as roles evolve, is a small investment against a liability that can grow substantially the longer it goes unaddressed.
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