Exempt vs. non-exempt employees: the three-part test, the state overlays, and what your records must show

A salaried employee with "Manager" in her title emails to say she has been working sixty-hour weeks since the spring and wants to know why she has never been paid overtime. You pull the file. There is an offer letter with a title and an annual salary, a job description written three years ago by someone who has since left, and nothing at all describing what she actually does with her days. That gap — between the paperwork and the work — is where nearly every classification claim starts, and it is the part an employer controls.

The federal three-part test

Under the Fair Labor Standards Act, an employee is entitled to overtime unless the employer proves an exemption applies (29 U.S.C. § 213). The Supreme Court settled the standard of proof in E.M.D. Sales, Inc. v. Carrera (U.S. 2025): the employer must prove the exemption by a preponderance of the evidence — a real burden, but not a heightened one. For the white-collar exemptions (executive, administrative, professional), the employer must satisfy all three parts of the test in 29 C.F.R. Part 541. Failing any one part ends the analysis; there is no partial credit and no averaging.

1. Salary basis

The employee must receive a predetermined amount each pay period that is "not subject to reduction because of variations in the quality or quantity of the work performed" (29 C.F.R. § 541.602). Deducting a half day because the office was slow, or docking pay for a partial-day absence outside the narrow permitted categories, attacks the exemption itself — not just that paycheck. The regulation does allow full-day deductions for personal absences, certain sickness absences under a bona fide plan, and unpaid disciplinary suspensions for serious workplace-conduct rules imposed in writing.

2. Salary level

The salary must be at least $684 per week — $35,568 per year (29 C.F.R. § 541.600).

One sentence of posture, because the number has moved twice recently: the 2024 rule that would have raised the level to $1,128 per week was vacated nationwide in State of Texas v. U.S. Department of Labor, 756 F. Supp. 3d 361 (E.D. Tex. 2024), and after the Fifth Circuit dismissed the appeals, DOL republished the prior levels by technical amendment (91 Fed. Reg. 27833, May 15, 2026). The operative federal figure today is $684 per week. If a payroll system or a handbook still carries $844 or $1,128, that is a leftover from the vacated rule.

3. Duties

The employee's primary duty must be exempt work — executive, administrative, or professional as those terms are defined in Part 541. A title is not a duty. Neither is a salary, an office, or an org-chart box. The regulation looks at the character of the job as a whole, including the relative importance of the exempt duties, the employee's freedom from direct supervision, and the relationship between the employee's pay and the wages of the non-exempt people doing similar work (29 C.F.R. § 541.700).

The carve-outs people miss

Three exceptions come up constantly and are worth stating precisely:

• Computer employees may qualify on an hourly basis of at least $27.63 per hour instead of a salary (29 C.F.R. § 541.400(b); § 541.600(d)).
• Highly compensated employees need total annual compensation of at least $107,432, which must include at least $684 per week paid on a salary or fee basis, and need satisfy only a relaxed duties test (29 C.F.R. § 541.601). The weekly component is not optional — a person paid entirely in commission does not reach the HCE exemption by clearing the annual number.
• Outside sales employees are not subject to the salary-basis or salary-level requirements at all (29 C.F.R. § 541.500), and teachers, licensed practicing physicians and lawyers are exempt from the salary-level test (29 C.F.R. §§ 541.303, 541.304, 541.600(e)).

Federal is a floor, not the answer

The FLSA sets a minimum. A state may demand more, and where it does, the state rule governs.

California is the sharpest overlay of the seven states this site covers. Exempt salary is fixed at two times the state minimum wage for full-time employment — at $16.90 an hour in 2026 that is $1,352 per week, $70,304 per year (Lab. Code § 515; Lab. Code § 1182.12). The duties test is stricter too: § 515 requires the employee to be "primarily engaged in" exempt duties, which California reads quantitatively as more than 50 percent of actual work time, not the federal qualitative "primary duty" standard. And California recognizes no highly-compensated shortcut — a $200,000 salary buys nothing if the time study says the person spends most of the week doing the same work as the crew. California also has separate hourly exemptions for computer software professionals (Lab. Code § 515.5) and licensed physicians and surgeons (§ 515.6), at rates the DIR adjusts every January — $58.85 and $107.17 an hour respectively for 2026. Our California exempt/non-exempt guide walks the state test in more detail.

Pennsylvania repealed its own higher salary thresholds by Act 70 of 2021, so its white-collar exemptions now track the federal tests (34 Pa. Code § 231.41) — but the overtime math is different, discussed below.

Texas, Arizona and Utah have no state overtime statute at all; the federal test is the whole test there. (The Texas Payday Law governs payment of wages, not overtime; A.R.S. § 23-363 and Utah Code § 34-40-103 set minimum wage only.) Florida likewise has no general overtime statute — but do not state that as an absolute: Fla. Stat. § 448.01 still makes ten hours a "legal day's work" for a person employed to perform manual labor, and absent a signed written contract for different hours that worker is owed extra pay beyond ten hours in a day.

Nevada deserves its own paragraph because the trap is not the exemption, it is the overtime trigger. NRS 608.018 runs on two tracks: an employee earning less than 1.5 times the minimum wage gets overtime after 8 hours worked in any 24-hour period as well as after 40 in a week; an employee at or above that line gets weekly overtime only. At Nevada's $12.00 minimum wage, the line is $18.00 an hour. Nevada also keeps its own list of statutory exemptions in NRS 608.018(3), which does not track the FLSA's — it exempts "outside buyers," not outside salespersons, and employees of business enterprises with gross sales under $250,000 a year. Wage claims go to the Office of the Labor Commissioner (labor.nv.gov), not to any industrial commission. See the Nevada overtime guide for the full two-track breakdown.

The overtime math once someone is non-exempt

Reclassifying is only half the work; paying correctly is the other half.

Overtime is 1.5 times the regular rate for hours over 40 in a workweek (29 U.S.C. § 207). The regular rate is not the base rate — it includes non-discretionary bonuses, shift differentials, and most incentive pay, computed as total straight-time compensation divided by total hours worked (29 C.F.R. § 778.109). A salaried non-exempt employee's regular rate is the salary divided by the hours it is intended to compensate (29 C.F.R. § 778.113).

Two state variations change the arithmetic. Pennsylvania's Supreme Court held the federal fluctuating-workweek half-time multiplier unavailable under the state Minimum Wage Act, so overtime carries a full 1.5x premium (Chevalier v. General Nutrition Centers, 220 A.3d 1038 (Pa. 2019)); the Court did not decide the divisor, and the 2022 regulations fixed it at 40 hours for a salaried non-exempt employee (34 Pa. Code § 231.43(g)). California layers daily overtime over 8 hours and double time over 12 on top of the weekly rule (Lab. Code § 510).

What the exposure looks like. Federally, back pay reaches two years, or three for a willful violation (29 U.S.C. § 255(a)), and liquidated damages can double it (29 U.S.C. § 216(b)).

One California figure circulates attached to the wrong subject, so be careful with it. Lab. Code § 226.8 carries penalties of $5,000 to $15,000 per violation, and $10,000 to $25,000 for a pattern or practice — but § 226.8(i)(4) defines the conduct it reaches as "avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor." That is an independent-contractor statute, and it does not apply to calling an employee exempt. California has no equivalent flat penalty for an exempt/non-exempt error. That exposure is unpaid overtime and interest, liquidated damages on minimum-wage shortfalls (§ 1194.2), wage-statement penalties (§ 226), and waiting-time penalties on separation (§ 203).

What your records must show

The employer carries the burden of proving the exemption, which means the file has to carry it.

1. The basis of pay for every exempt employee. 29 C.F.R. § 516.3 requires the same identifying and payroll data as for non-exempt workers, plus the basis on which wages are paid, in enough detail to compute total remuneration.
2. Hours worked each day and each workweek for every non-exempt employee, with the workweek defined, the regular rate for any week with overtime, and straight-time and overtime earnings stated separately (29 C.F.R. § 516.2).
3. Three years of payroll records and two years of the supporting time cards and wage-rate tables (§§ 516.5, 516.6). State floors can be shorter — Nevada requires two years (NRS 608.115) — so the federal period is the one to plan around.
4. A current, duties-based job description with an actual time allocation, dated, and reconciled against what the person does now. In California this is the evidence that decides the more-than-50-percent question.
5. A record of the classification decision itself — who made it, on what facts, and when it was last reviewed.

What to do

Pick the ten positions where exempt status is closest to the line — newly promoted supervisors, working leads, coordinators, and anyone salaried within a few thousand dollars of the threshold that actually applies to them ($35,568 under the federal rule, $70,304 in California) — and for each one write down the salary, the salary-basis practices actually in use, and a real allocation of the week's hours. Run each against the federal test first, then against your state's overlay. Where the answer is unclear, treat the position as non-exempt while you resolve it — but not because the money comes back. In California you generally cannot recover overtime you paid and did not owe: Lab. Code § 221 makes it unlawful for an employer to "collect or receive from an employee any part of wages theretofore paid," the exceptions in § 224 contain no employer-error carve-out, and the courts have applied that to setoffs and to recouping overpayments by payroll deduction (Barnhill v. Robert Saunders & Co. (1981) 125 Cal.App.3d 1; CSEA v. State of California (1988) 198 Cal.App.3d 374). Nevada, Texas, Pennsylvania and Utah each require a court order, a statute, or the employee's written authorization before you withhold anything (NRS 608.110; Tex. Lab. Code § 61.018; 43 P.S. § 260.3; Utah Code § 34-28-3). Only Arizona lets an employer assert a "claim of debt, reimbursement, recoupment or set-off" against wages in a good-faith dispute (A.R.S. § 23-352). An attempted clawback is a second wage violation stacked on the classification question you were trying to answer.

The reason to default to non-exempt is the asymmetry in what each mistake costs. Overtime you did not owe costs you that overtime and nothing else. Overtime you did owe costs you two or three years of it, doubled, plus wage-statement and waiting-time penalties and the other side's fees. You can also buy the protection without conceding the exemption: under 29 C.F.R. § 541.604(a) an employer may pay an exempt employee extra compensation for hours beyond the normal workweek "on any basis" without losing the exemption, provided the salary guarantee stays intact. If you want to pressure-test a specific fact pattern against the governing statutes, the assistant will cite the controlling section for your state, and the threshold table carries the current figures in one place.

This article is general information, not legal advice. Verify every figure against the primary source before making a compliance decision, and take fact-specific questions to an employment attorney licensed in your state.