Stop Guessing: How to Get Employee Classification Right and Protect Your Business

The misclassification of employees is a common snag that puts employers at legal risk. Two big missteps pop up the most. The first is treating workers as independent contractors when they should be employees. The second is calling someone “exempt” from overtime when they don’t actually meet the requirements.

Let’s clear up the confusion. This article shows what the Department of Labor expects, so you can protect your business and the people who help it grow.

This article focuses on the risk of classifying a nonexempt employee as exempt. Our goal is to demystify Department of Labor rules so that employers can avoid costly errors when they decide whether an employee is entitled to overtime pay.

This is not legal advice. How an employee should be classified depends on the specific facts surrounding the employee’s work and compensation. Facts matter, and every workplace is unique. Talk to a lawyer when it’s time to make these decisions.

The Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) governs overtime compensation. Some states also regulate overtime payments, but Florida does not. Florida employers need only worry about the FLSA when they decide whether to classify an employee as exempt from overtime. 

Nearly all employers are covered by the FLSA, but some small businesses that earn less than $500,000 in annual revenues (that is, the money they take in, as opposed to profits) are not covered. Even those small businesses may be required to pay overtime compensation to employees who are engaged in interstate commerce, such as manufacturing goods for interstate sale. 

Never assume you’re out of scope. If you’re not sure, check with a lawyer.

How Does Overtime Work?

The FLSA requires covered employers to pay premium overtime compensation to nonexempt employees who work more than 40 hours in a workweek. Most employees, including nearly all hourly wage employees, are nonexempt. 

Employers compute overtime compensation by determining the employee’s regular rate (the hourly rate they earn from all sources of compensation in weeks when they work 40 hours or less). In addition to wages that the employer pays for all the hours worked during a workweek, employers must pay half the regular rate as additional compensation for hours worked above 40 during the workweek. For example, if an employee who is paid $18 an hour and no other compensation works a 50-hour week, the employee must be paid $900 ($18 x 50 hours) plus overtime compensation of $90 ($9 x 10 hours) for a total wage payment of $990.

There are a few specialized compensation schemes that do not require overtime compensation to be based on a 40-hour week. For example, certain healthcare workers are not entitled to overtime if they work more than 40 hours in a workweek, provided they work no more than 8 hours in a single day and no more than 80 hours in a 14-day pay period. Always check with an employment lawyer before setting up a special pay system.

Consequences of FLSA Violations

Some employees are exempt from the FLSA’s overtime requirement. Misclassifying a nonexempt employee as exempt can be a costly mistake. Even if a nonexempt employee earns a substantial salary, failing to pay overtime compensation to the employee can subject an employer to substantial penalties. 

In addition to a judgment for unpaid overtime compensation, employers can be assessed an equal amount of money as a penalty for violating the law. Employees who prevail in lawsuits based on misclassification are also entitled to recover their attorney’s fees and the expenses they incur to bring the lawsuit. Employers who must pay their employee’s legal fees in addition to their own pay a high price their error.

The Salary Basis Test for Exempt Employees

To decide whether an employee can be classified as exempt from the FLSA’s overtime requirement, an employer must usually apply two tests. The employee is only exempt during workweeks in which both tests are satisfied.

Employers first apply the “salary basis test.” Federal regulations require most exempt employees to be paid on a salary basis. Employers cannot satisfy the salary basis test by paying an hourly wage.

Employers satisfy the salary basis test by paying a predetermined amount of money for a week’s work regardless of the number of hours the employee works. The salary cannot satisfy the test if it is less than the minimum established by FLSA regulations. In 2025, the employee must be paid a salary of at least $684 per week. 

To satisfy the salary basis test, a week’s pay cannot usually be reduced because an employee works less than 40 hours in a workweek. Employers may be allowed to reduce an employee’s pay for missing a full day of work for personal reasons without failing the salary basis test. Missing work due to illness or injury, however, does not entitle the employer to reduce the employee’s pay unless the employee misses work for an entire week.

Making improper deductions from a salaried employee’s pay may cause the employee to lose exempt status for the payroll period in which the deduction is made. When an employee loses exempt status, the employer must pay premium overtime compensation if the employee works more than 40 hours in a workweek and may be subject to penalties for failing to pay that extra compensation.

Job Duties Test for Exempt Employees

Employers next apply the “job duties test” to decide whether an employee performs the kind of work for which the employee can be classified as exempt. The three primary classifications of exempt employees each have their own criteria to determine whether the exemption applies. Job titles do not matter; it is the employee’s actual job duties that determine whether the exemption applies.

Executive Employees

Executive employees either manage the business, manage a department within the business, or manage a subdivision of a department. An employer that operates more than one business establishment can treat each establishment as a subdivision of the employer’s business. 

The department or subdivision must be permanent and have a continuing function. An employer cannot satisfy the job duties test by creating a temporary division that has no function and assigning an employee to “manage” it as a scheme to avoid the payment of overtime compensation. 

Executive employees must regularly supervise the work of at least two other full-time employees. For the purpose of this rule, supervising two part-time employees is the equivalent of supervising one full-time employee. An assistant manager who only supervises employees when the manager is not working does not qualify as an executive employee.

Executive employees must also be authorized to hire and fire other employees or to make recommendations about hiring, firing, and promotion that are given significant weight by the decisionmaker. When employees do not have hiring and firing authority, it can be difficult to know whether their recommendations are given sufficient weight to satisfy the test. Courts consider whether making such recommendations is the employee’s job duty and the frequency with which such recommendations are made and followed.

Administrative Employees

Administrative employees primarily engage in office work that is related to the management or general business operations of the employer. Manual labor does not qualify as office work. For that reason, a lead employee whose primary duty involves work on an assembly line will not qualify for the administrative exemption. Similarly, an employee who does some office work but primarily works on the sales floor will not qualify for the exemption.

Employees perform work related to general business operations when they are responsible for work that helps the business function. Employees who primarily work in marketing, human relations, purchasing, regulatory compliance, accounting, and similar fields might be classified as administrative employees.

The exemption only applies to administrative employees who exercise discretion and independent judgment when performing their primary duties. Giving a secretary the job title of “administrative assistant” will not qualify the employee for the administrative exemption if the employee is told what to do and how to do it by a supervisor. Exempt administrative employees must have the freedom to make significant decisions about how to perform their duties. While those decisions might be subject to review by a supervisor, an exempt administrative employee must be empowered to make those decisions without immediate direction or supervision.

Professional Employees

Professional employees fall into two categories. Learned professionals primarily work in a field that requires advanced knowledge in a field of science or learning that is typically acquired through study in a prolonged course of instruction. A scientist with a doctoral degree in metallurgy who develops materials for use in an employer’s products is an example of a learned professional.

Creative professionals primarily work in a field of artistic or creative endeavor. Music, writing, and acting are examples of such fields. Creative professionals perform their primary duties by using invention, imagination, originality, or talent. A website designer who simply plugs information into a template without creating original content is probably not exempt, but a graphic designer who creates an original design for a website probably is.

Lawyers and doctors are automatically classified as professional employees if they are working in their fields. Teachers who are licensed or certified are usually exempt professional employees if they are employed by an educational institution.

Special Cases

Some highly compensated employees are subject to a less strict job duties test. Salaried employees who earn at least $107,432 per year need only perform one of the exempt duties of an executive, administrative, or professional employee to qualify for an exemption. For example, a highly compensated employee who supervises two other employees is not required to meet the other requirements of the executive exemption.

Two additional classes of employees can usually be classified as exempt, even if they do not satisfy the salary basis test:

• Outside sales employees who are employed to obtain orders or contracts for the employer’s goods or services are exempt if they primarily work away from the employer’s place of business. Outside sales employees are typically paid by commission and need not receive a salary to be classified as exempt.
• ‍Computer employees are usually exempt if they perform skilled work in the computer field, including programming, systems analysis, software engineering, and similar functions. Employees who manufacture or repair computers are not entitled to the exemption. An IT employee may or may not be exempt, depending on the employee’s primary duties. Exempt computer employees need not be paid a salary, but as of 2025, they must be paid at least $27.63 per hour.

A few categories of workers are automatically exempt from FLSA overtime pay requirements, including some agricultural workers, some movie theater workers, and babysitters who only work occasionally. Other categories of workers are covered by other labor laws, including railway workers and truck drivers. Because laws exempting categories of workers from the FLSA are complex and highly technical, employers should generally obtain legal advice before classifying a worker in any of these categories as exempt.

Avoiding Misclassifications

In my practice, the two biggest classification mistakes I see employers make can easily be avoided. First, employers assume that paying a sufficient salary entitles them to classify an employee as exempt. Most exempt employees need to be paid a salary of at least $684 per week, but employees who earn that salary are still misclassified as exempt if their job duties don’t fit the regulatory requirements.

Second, employers give a salaried employee the title of “manager” and declare the employee to be exempt without considering her job duties. Employers get into trouble when they fail to understand that job titles are not the same as job duties. A manager who has no authority to make significant decisions on behalf of the business cannot usually be classified as an exempt executive or administrative employee.

Misclassification of employees can be avoided by obtaining legal advice before declaring that employees are exempt. Prepare a full list of each employee’s job duties, designate which duties are the employee’s primary responsibility, and have an attorney review that list to determine whether the exemption applies. Getting it right before wages are paid can avoid costly litigation and severe penalties after a misclassified employee takes legal action.

If you spot a mistake after the fact, fix it fast – reimburse unpaid overtime before things turn into lawsuits. It can save you money on legal fees and headaches.

Clear details, simple pay rules, and honest conversations with your team build trust and keep your business running strong. That’s good for everyone.

Disclaimer: This blog is for informational purposes only and does not constitute legal advice. For personalized guidance, please consult with a qualified attorney.