Key Takeaways

  • The exempt salary test determines whether employees are exempt from overtime under the Fair Labor Standards Act (FLSA).
  • The test includes three parts: salary basis, salary level, and job duties.
  • The salary level test sets a minimum threshold that employees must earn to qualify as exempt; this threshold changes periodically.
  • The salary basis test ensures employees receive a fixed, predetermined salary not subject to reduction based on work hours or quality.
  • Job duties tests determine if an employee’s role qualifies as executive, administrative, or professional.
  • State laws may set higher salary thresholds than federal standards; the stricter standard applies.
  • Improper classification can result in back pay, penalties, and legal exposure for employers.
  • Certain occupations—like teachers, lawyers, and doctors—are exempt regardless of pay level.
  • Employers should regularly review compensation policies and state-specific rules to maintain compliance.
  • You can connect with an employment attorney on UpCounsel for tailored FLSA compliance guidance.

What Is the Salary Exempt Test?

The salary exempt test is one of two main tests to determine an exempt or non-exempt status for an employee under the Fair Labor Standards Act(FLSA). The salary exempt test has two individual requirements within it that must be satisfied to be exempt from overtime pay as outlined in the FLSA.

Employees who are categorized as exempt are not entitled to overtime pay protection under the FLSA. Employees who are classified as non-exempt are afforded protection for hours worked over their 40-hour workweek.

The two salary-based tests for exemption status are related to:

  • The structure with which that employee is paid
  • How much an employee earns

While an employee may pass both of the salary tests required for exemption status, they also must pass a duties test which outlines certain job tasks an employee must perform to be exempt from overtime pay. Unless exempt, employees who are covered for overtime pay by the FLSA must be paid at least their regular and one-half their pay rate for all additional hours.

Exempt or Non-Exempt

The classifications of exempt or non-exempt determine an employee's status as outlined in the FLSA. While payment type and rate are two critical tests to determining one's exemption status, so too is the type of work that employee performs.

Most employees in the U.S. are non-exempt from overtime pay. For a majority of instances, employees must meet all of the following conditions:

  • You must earn a salary
  • Your salary must be at least $47,476 annually
  • You must perform exempted job duties

The FLSA goes into much more details about information like youth employment standards, record keeping, hours worked, minimum wage, and overtime pay.

Because there are a lot of flexibility to jobs and company structure, it can be difficult to put every situation into context. Thus, there are exceptions to the rules. For instance, if you own 20 percent or more equity in a business and are engaged in the management of the company, you can be classified as exempt regardless of your salary or job duties.

Exempt employees are not entitled to receive any overtime pay for additional hours worked, whereas non-exempt employees must be paid overtime in the amount of at least one and a half their typical pay rate for each additional hour worked in a pay period.

Exempt Employee Rights

Unfortunately, the Fair Labor Standards Act offer no rights for exempt employees seeking overtime pay. As long as the employee is paid their base salary in full, minus permissible deductions, the employer is not obligated to pay overtime pay to exempt employees.

In fact, the FLSA allows employers to require exempt employees to track their worked hours, make up absences, and work specific schedules dictated by the employer. While the FLSA doesn't cover overtime for exempt employees, there are several other laws and employee-protective regulations that relate to working conditions and employee rights.

Non-Exempt Employee Rights

While the FLSA doesn't protect exempt employees, it does offer protection to non-exempt employees who work overtime for their employer. The act specifies that employers must pay an employee time and a half of their original pay rate for every hour worked over their designated threshold.

For example, if someone is typically paid $20/hour and they work overtime, they'd earn $20 x 1.5 = $30/hour for each additional hour.

Salary Basis Test: How an Employee Is Paid

The first of the salary exempt tests is the salary basis test, which considers exactly how an employee is paid. To qualify for the exemption, one must be paid a salary. In other words, an employee is paid a guaranteed amount of money to perform designated work by an employer. This baseline salary isn't necessarily the only form of compensation they may receive, but it does indicate the minimum total amount that employee will earn annually.

The other forms of payment for employees could include hourly pay which is determined by the total number of hours worked by that employee or commission-based, which could or could not have a salary component, and is based on the quality of work performed.

One test to determine if you're a salaried employee is to see if your pay varies by the number of hours you work for a pay period. If you determine that your pay total fluctuates based on the number of hours you work, you're probably not a salaried employee. Salaried employees receive the same payment amount for a pay period regardless of the hours worked or quality, as long as it aligns with the employer's expectations and approvals.

The FLSA looks at reductions in payment amounts to determine the status using the salary basis test.

Typically, there are no reductions to salaried employees based on the quality or quantity of their production. The base payment to that employee should be consistent regardless of the hours worked, so long as they are within the employer's internal guidelines and expectations.

An employee’s exemption status can be affected by impermissible reductions. The FLSA says that employees that are subjected to impermissible salary reductions are considered non-exempt for overtime payment. It is highly unlikely that an employee will go from exempt to non-exempt based on impermissible reductions, but it can happen.

There are certain job types that are considered exempt regardless of their salary basis. For instance, lawyers, doctors, and teachers are classified as exempt regardless if they are paid hourly or salary.

Permitted Deductions Under the Salary Basis Rule

While salaried employees are generally entitled to receive their full salary regardless of hours worked, the FLSA outlines a few scenarios where deductions are permitted without affecting exempt status. These include:

  • Absences for one or more full days for personal reasons other than sickness or disability.
  • Full-day disciplinary suspensions for workplace misconduct, in accordance with written company policies.
  • Unpaid leave under the Family and Medical Leave Act (FMLA).
  • First or last week of employment, if the employee does not work the full week.

Improper deductions—such as docking pay for partial-day absences or poor performance—can result in the loss of exempt status. Employers should establish and communicate clear payroll policies to avoid unintentional misclassification. 

Salary Level Test: How Much an Employee Earns

The first prong in the salary exempt test is known as the salary level test, which evaluates how much an employee earns. The salary level test helps determine whether that employee is exempt or non-exempt from earning overtime on additional hours worked in a pay period.

The salary level test is updated every three years to represent the 40th percentile of the lowest wage-earning sector of the country, which is currently the Southeast. Thus, on December 1, 2016, this requirement increased from $23,660 annually ($455 weekly) to $47,476 annually ($913 weekly).

Thus, an employee earning a salary more than $47,476 passes the salary level exempt test and continues to the subsequent exemption tests to determine overtime status. For example, if you earn $30,000 a year you would not be considered exempt, but if your salary is $100,000 a year, you would be considered exempt from overtime as outlined in the FLSA.

State vs. Federal Salary Thresholds

While the FLSA sets federal standards for the exempt salary test, several states impose higher salary requirements or stricter exemption definitions. Employers must comply with whichever standard—federal or state—is more protective of the employee.

Examples of state-specific differences:

  • California: Requires a minimum monthly salary equivalent to two times the state minimum wage for full-time employment. As of 2025, this amounts to $66,560 annually for employers with 26 or more employees.
  • New York: Sets thresholds that vary by region—$1,200 per week in New York City, $1,125 in Long Island and Westchester, and $1,064 elsewhere.
  • Washington: The exemption salary must be at least 2.5 times the state minimum wage, one of the nation’s highest.
  • Colorado: Adjusts annually under the COMPS Order, with 2025’s level projected at $57,500 annually.

Because these state laws can significantly impact compliance, employers operating in multiple jurisdictions should review local labor regulations regularly. Failure to meet state-specific thresholds—even when meeting federal requirements—can trigger overtime obligations and back pay liabilities.

Updates to the Salary Level Threshold (2024 Rule)

The U.S. Department of Labor (DOL) proposed updated thresholds to the salary level test that are expected to take effect in 2024. These changes reflect adjustments based on the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region (currently the South), as required by federal guidelines.

Key proposed changes include:

  • Raising the standard salary level from $684/week ($35,568 annually) to $1,059/week ($55,068 annually).
  • Increasing the highly compensated employee (HCE) threshold from $107,432 to $143,988 annually.
  • Implementing automatic updates to the salary level every three years based on wage data to ensure it remains aligned with economic conditions.

These increases are significant and may reclassify a large number of currently exempt employees as non-exempt if their salaries fall below the new threshold. Businesses should proactively evaluate their workforce to determine who may be affected and whether to adjust salaries or reclassify roles. 

Impact of the 2024 DOL Salary Update on Employers

The 2024 Department of Labor rule doesn’t just raise the salary threshold—it fundamentally changes how frequently adjustments occur. The rule introduces automatic updates every three years, linked to national wage data, to ensure the exemption remains relevant amid inflation.

Key implications for employers:

  • Budgeting pressure: Businesses must anticipate regular threshold increases and adjust compensation planning.
  • Reclassification risks: Employees earning near the new threshold may lose exempt status, triggering overtime pay eligibility.
  • Recordkeeping requirements: Employers must carefully track hours for reclassified employees to avoid FLSA violations.
  • Compensation strategy: Some organizations may respond by raising salaries, while others may restructure roles or limit overtime hours.

Small businesses, in particular, should prepare early by conducting pay audits and consulting legal counsel to ensure compliance before enforcement begins.

Modifying the Salary Exempt Test

Both the salary basis test and the salary level test are adjusted every three years based on the lowest-wage section of the country. Because the salary level is a precise number, that number is updated based on the 40th percentile of pay within the lowest-wage sector of the U.S. As mentioned, the baseline for the salary level test increased from $23,660 to $47,476 annually which is more than two times the previous level.

How Employers Can Prepare for Future Adjustments

To stay compliant with evolving exempt salary test standards, employers should establish a proactive compliance process rather than reacting to new rules. Consider these best practices:

  1. Conduct periodic internal audits to confirm all exempt employees meet the salary basis, salary level, and duties tests.
  2. Review state laws annually, since states like California and New York often update thresholds independently of federal changes.
  3. Train HR and payroll staff to recognize improper deductions or misclassifications that could invalidate exemption status.
  4. Document job duties and pay structures clearly to provide evidence in case of audits or wage claims.
  5. Implement pay range forecasting to prepare for automatic salary threshold increases under the new DOL rule.

Employers who treat the exempt salary test as an ongoing compliance responsibility—rather than a one-time review—minimize the risk of penalties and litigation.

Implications of Failing the Salary Tests

If an employee fails either the salary basis test or the salary level test, they are automatically classified as non-exempt, regardless of their job duties. This entitles them to:

  • Overtime pay of 1.5 times their regular rate for hours worked beyond 40 in a workweek.
  • Protections related to minimum wage, youth labor, and recordkeeping, as stipulated by the FLSA.

Employers who misclassify employees by assuming exempt status without meeting all three tests (salary basis, salary level, and duties) risk legal action, including back pay for unpaid overtime, penalties, and legal fees. Regular internal audits and legal reviews are strongly recommended. 

Fair Labor Standards Act

The salary exempt test is a part of the Fair Labor Standards Act (FLSA) which is used to determine whether employees are exempt or non-exempt from overtime pay. The FLSA covers the entire U.S., but most states also have their own regulations and laws dictating overtime exemptions.

The FLSA covers many different types of jobs, but some are not covered because of legal statues. Any jobs that are not covered by the FLSA will not be governed by the overtime rules.

To keep your company in compliance with FLSA, it's recommended that you conduct frequent audits of your employees' wages and make salary adjustments when relevant. This will help prevent you from legal recourse that can happen from not following the FLSA's overtime payment policy.

The United States Department of Labor (DOL) estimates that 35 percent of salaried employees meet the salary requirements outlined in the new rules put forth May 18, 2016. The DOL also anticipates the baseline salary, currently $47,476 annually, to raise to $51,000 by 2020. These changes to the FLSA are designed to improve the working conditions and payment security for employees in the United States.

Enforcement and Penalties for Misclassification

Misclassifying employees as exempt when they don’t meet the salary or duties tests can lead to serious legal and financial consequences. Under the FLSA, employers found in violation may owe:

  • Back pay for unpaid overtime (up to three years for willful violations).
  • Liquidated damages equal to the amount of unpaid wages.
  • Civil penalties imposed by the Department of Labor.
  • Attorney’s fees and court costs if employees pursue private legal action.

The DOL regularly audits employers, especially in industries prone to long work hours, such as healthcare, tech, and hospitality. Employers should maintain transparent wage documentation and consider periodic third-party compliance reviews.

Result of Changes to the Salary Exempt Test

One of the reasons that changes are frequently made to the exempt test requirements in the FLSA is to improve the working conditions for U.S. employees. When the baseline salary increased from $23,660 to $47,476 annually, it put pressure on employers to do one of three things.

  1. Increase the salaries of their employees to meet the minimum salary requirement to pass the salary basis test to make exempt from overtime pay
  2. Leave the salaries of their employees at the current rate and pay the earned overtime pay
  3. Create a more structured process and guidelines for limiting overtime work of their employees

It's important to note that employers are still required to pay overtime pay to employees that work extra hours, even if those additional hours were not approved.

Job Duties Test

Following the salary exempt tests is the job duty test, which determines if employees are exempt based on the tasks they perform for the company. The FLSA has three categories that it looks for with the job duties test to determine if an employee is exempt or non-exempt. These three categories are professional, administrative, and executive.

Professional Duties Test

Employees that work in the professional service industry may immediately be classified as exempt via the FLSA. Some examples of careers that fall into the professional category include:

  • Doctors
  • Dentists
  • Lawyers
  • Registered Nurses
  • Teachers
  • Accountants
  • Architects

The reason these fields are labeled exempt is because the duties required to execute their job effectively are intellectual and skill-based in nature. These careers often require specialized training and higher education, with the job also needing autonomous decision making, personal discretion, and judgment calls.

While the professional careers above are deemed exempt via the Fair Labor Standards Act, there are other, more creative based professions that can also be classified as exempt. Sometimes, creative professionals like artists, designers, actors, musicians, writers, journalists, or composers may be labeled as exempt if their job requires extensive talent, training, originality, and creative imagination.

The professional duties test is usually straightforward, but occasionally, when it involves creative professionals, it can be difficult to classify. Thus, it may be a good idea to seek an expert in labor law to help with your duties test.

Administrative Duties Test

The most difficult duties test is the administrative designation. It's classified as job duties that are office or non-manual in nature that directly impact management or the general business operations of your company or relevant customer. The most important characteristic of administrative duties is one's right to make critical decisions using personal judgment and expertise.

Furthermore, administrative duties are marked for higher-level employees whose role is to dictate the management or success of a business. Their primary role should be supporting the production or operational employees and their daily tasks should reinforce that.

Some common examples of jobs with administrative duties include human resource department, payroll or finance managers, tax and accounting personnel, quality control teams, compliance departments, and occasionally, computer-based roles.

Computer-based designation for administrative duties can be tricky, so you should seek professional counsel if you want to learn more about the administrative duties test for computer-based employees.

Executive Duties Test

The FLSA has a pretty straight forward process for determining executive duties tests to determine exempt and non-exempt status. Executive duties are defined as a role where the responsibilities and decisions made by someone directly impact other employees. This effect could be related to hiring, promoting, firing, assigning, supervising, or any other number of tasks that relate to subordinate employees.

While supervising and controlling other employees is the staple of executive duties, an employee can perform other roles outside of just management. In fact, many employees who meet the requirements of the executive exemption test are department heads or supervisors to a specific area where they also work.

Employees whose input and opinion carries a lot of weight in personnel decisions within an organization are considered executive. The employee does not need to be the one who makes the final decision, they just need to have their input strongly considered.   

Some tasks that are typically performed by someone who qualifies for the executive duties exemption include employee reviews and performance evaluations, interviews, new-hire training, and employee terminations. While not always outlined in the job title or description, employees may be reviewed for executive duties on a case-by-case basis.

Common Misunderstandings About Exempt Roles

Employers often mistakenly assume that paying a salary automatically exempts an employee from overtime. However, title alone does not determine exempt status—the employee’s actual duties and salary basis must align with FLSA standards.

Frequent misclassification examples:

  • “Assistant Managers” who primarily perform manual or clerical work but lack decision-making authority.
  • IT staff whose roles involve troubleshooting rather than software engineering or systems analysis.
  • Office administrators whose tasks are routine and procedural, not strategic or policy-related.

To accurately apply the exempt salary test, employers should evaluate job descriptions against DOL criteria and update them as roles evolve.

Special Exemptions and Industry Exceptions

Certain jobs are treated differently under the FLSA regardless of the salary level test. For example:

  • Outside sales employees are exempt if their primary duty is making sales or obtaining orders, and they regularly work away from the employer’s place of business.
  • Computer professionals may be exempt if paid at least $684 per week or $27.63 per hour and their duties include systems analysis, software engineering, or similar work.
  • Highly compensated employees (HCEs) who earn above the HCE threshold and perform at least one exempt duty (e.g., supervising other employees) may qualify as exempt even if they do not meet all the standard job duties test criteria.

It’s important to review industry-specific rules that may override general salary or duties tests. Consulting an employment attorney is the best way to ensure proper classification, especially for complex roles. 

Highly Compensated Employee (HCE) Rule Clarifications

Under the Highly Compensated Employee (HCE) exemption, employees earning at least $143,988 annually (as per the 2024 DOL proposal) can qualify as exempt if they:

  • Perform at least one exempt duty from the executive, administrative, or professional categories, and
  • Receive a guaranteed weekly salary above the standard salary threshold.

This rule simplifies compliance for senior-level employees but does not override state laws with higher salary requirements. Employers should review whether total compensation includes only nondiscretionary pay (excluding bonuses that vary by performance).

Frequently Asked Questions

  1. What is the difference between the salary basis and salary level tests?
    The salary basis test checks if pay is fixed and guaranteed, while the salary level test confirms the pay meets the minimum threshold set by the FLSA or state law.
  2. Do state laws override the federal exempt salary test?
    Yes. When state requirements are stricter than federal rules, employers must follow the higher state threshold to stay compliant.
  3. Can commissions or bonuses count toward the exempt salary threshold?
    Yes, but only up to 10% of the salary level, and such payments must be nondiscretionary and made at least quarterly.
  4. How can employers verify if an employee qualifies as exempt?
    Employers should evaluate all three components—salary basis, salary level, and duties—and document each to support the exemption classification.
  5. What should I do if my company misclassified an employee?
    Reclassify the employee promptly, pay any owed overtime, and update your payroll records. Consulting an employment attorney can help reduce penalties.

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