What is the difference between exempt and non-exempt employees?

Non-exempt employees are covered by the FLSA's minimum wage and overtime rules: time and a half after 40 hours in a workweek, and the employer must keep a record of their hours. Exempt employees are excluded from those rules because they meet a salary test and a duties test for one of the exemptions (executive, administrative, professional, computer, outside sales).

What is the salary threshold for exempt employees in 2026?

$684 a week ($35,568 a year) under federal law, paid on a salary basis, plus $107,432 in total annual compensation for the highly compensated employee exemption. The 2024 rule that would have raised the thresholds was vacated by a federal court in November 2024 and formally removed from the regulations in May 2026. Several states set higher floors: California $70,304 a year in 2026, New York $1,275 a week in New York City.

Can an hourly employee be exempt?

Almost never. The executive, administrative and professional exemptions require payment on a salary basis. The exceptions are computer employees, who may be paid hourly at $27.63 or more, and outside sales employees, who have no salary requirement. Doctors, lawyers and teachers are also outside the salary test.

Can a salaried employee be non-exempt?

Yes. A salary alone does not make anyone exempt; the duties test has to be met too. A salaried assistant manager who mostly runs the register is non-exempt and is owed overtime after 40 hours, calculated from the salary converted to an hourly rate.

Do exempt employees have to clock in?

Federal law does not require time records for exempt employees, and the employer cannot dock their salary for a short day. Many employers still track exempt hours for scheduling and paid leave. Non-exempt employees must have their hours recorded.

What happens if an employee is misclassified as exempt?

The employer owes back overtime for every week over 40 hours, typically for two years (three if the violation was willful), often doubled as liquidated damages, plus the employee's legal fees. Because no time records were kept, the employee's own estimate of hours is usually accepted.

Exempt vs non-exempt: the 2026 test, explained

The short answer

Every employee covered by the Fair Labor Standards Act is either non-exempt or exempt.

Non-exempt employees are owed at least the minimum wage for every hour and time and a half after 40 hours in a workweek, and the employer must keep a record of their hours. This is the default. Hourly staff in retail, restaurants, warehouses and clinics are non-exempt; so are many salaried people.
Exempt employees are excluded from the overtime and minimum wage rules because they meet both a salary test and a duties test for one of the exemptions: executive, administrative, learned or creative professional, computer employee, or outside sales.

The federal salary floor in 2026 is $684 a week ($35,568 a year), paid on a salary basis. The 2024 rule that would have raised it to $1,128 a week was vacated by a federal court on November 15, 2024, and the Department of Labor removed it from the regulations in May 2026, so the 2019 figures apply. Highly compensated employees are exempt at $107,432 a year in total compensation with a lighter duties test.

The label is not a choice. It follows from pay and duties, and getting it wrong is one of the most expensive payroll mistakes there is.

Test 1: the salary basis and salary level

An exempt employee (other than outside sales, computer employees paid hourly, and doctors, lawyers and teachers) must be paid:

at least $684 a week, and
on a salary basis: a fixed amount each pay period that does not go down because of the quality or quantity of work. Docking a day's pay because the store was slow, or an hour because the person left early, breaks the salary basis and can cost the exemption for everyone in the same job.

Permitted deductions are narrow: full days off for personal reasons, full days of sickness under a bona fide plan, unpaid FMLA leave, disciplinary suspensions of full days for serious misconduct, and the first and last week of employment.

Up to 10% of the $684 can be paid as non-discretionary bonuses or commissions paid at least annually.

Test 2: the duties

Salary gets an employee to the door. Duties decide. Job titles do not count; what the person actually does most of the time does.

Executive. Primary duty is managing the enterprise or a recognised department; customarily and regularly directs the work of at least two full-time employees (or the equivalent); and has the authority to hire or fire, or their recommendations on hiring, firing and promotion carry particular weight. A store manager who runs the store, sets the schedule and has a say in hiring usually qualifies. An "assistant manager" who spends most of the shift on the register and has no say in hiring usually does not.

Administrative. Primary duty is office or non-manual work directly related to the management or general business operations of the employer or its customers, and it includes the exercise of discretion and independent judgment on matters of significance. HR, finance, purchasing, marketing strategy, compliance. Following a manual, entering data or handling routine customer service is not it, however senior the title.

Learned professional. Primary duty requires advanced knowledge in a field of science or learning, customarily acquired by prolonged specialised intellectual instruction: registered nurses, accountants, engineers, pharmacists. Licensed practical nurses and bookkeepers generally do not qualify.

Creative professional. Invention, imagination, originality or talent in a recognised artistic or creative field.

Computer employee. Systems analysis, programming, software engineering and similar, paid at least $684 a week on a salary basis or $27.63 an hour. Help desk and hardware repair do not qualify.

Outside sales. Primary duty is making sales away from the employer's place of business. No salary requirement. Inside sales and retail floor sales are not outside sales.

Highly compensated. Total annual compensation of at least $107,432 (including at least $684 a week on a salary basis), office or non-manual work, and one of the executive, administrative or professional duties performed customarily and regularly.

What the states add

Federal law is the floor. Several states set a higher salary level or a stricter duties test, and the stricter rule applies:

California: the salary must be at least twice the state minimum wage for full-time work: $70,304 a year in 2026 ($16.90 × 2 × 2,080). The duties test is also stricter: the exempt work must take more than half of the employee's time.
New York: $1,275 a week in New York City, Long Island and Westchester in 2026, lower in the rest of the state, for the executive and administrative exemptions.
Washington, Colorado, Alaska and Maine set their own thresholds above the federal figure, indexed each year.

A store manager exempt in Texas on $40,000 is non-exempt in California on the same salary.

What each status changes on the schedule

Non-exempt: hours are the product.

Every hour must be recorded: start, end, unpaid meal periods. The time card calculator and the timesheet templates do the arithmetic; a time clock records it.
Overtime after 40 in the workweek, and after 8 in a day in California and a few other states. The schedule should show the running weekly total per person before it is published.
Breaks follow state law (the map), and short breaks are paid.
Salaried non-exempt staff still get overtime: divide the weekly salary by the hours it is meant to cover to get the regular rate, then pay half again on top for each overtime hour (or time and a half if the salary covers 40).

Exempt: hours are not the product, and cannot be docked.

No federal requirement to track hours; many employers still do, for scheduling, leave and project costing.
A 55-hour week and a 35-hour week pay the same. Sending an exempt manager home early cannot reduce the salary.
Exempt staff can be asked to cover shifts and open and close; the cost is retention, not overtime.
Paid time off can be deducted from a leave balance in partial days, but the salary itself cannot be.

The three misclassifications that come up most

The salaried assistant manager on the floor. Paid $700 a week, runs the register 30 hours out of 45, no hiring authority. Non-exempt: 5 hours of overtime a week owed, back two years.
The "administrator" who follows the procedure. Office work, but no discretion on matters of significance. Non-exempt.
The exempt employee whose pay was docked. A salary reduced for a slow Tuesday is not a salary. The exemption can fall for the whole class.

The exposure is back overtime for two years (three if willful), usually doubled as liquidated damages, plus legal fees, and because no hours were recorded, the employee's estimate of the hours is normally what a court uses.

A short checklist

List every salaried position and write down the actual primary duty, not the title.
Check the salary against $684 a week and against the state figure where the person works.
Apply the duties test for the exemption you are relying on. If it is close, treat the role as non-exempt.
For non-exempt staff, salaried or hourly, record hours and show the weekly total on the schedule.
Review when a job changes, when someone moves state, and every January when state thresholds move.

Squadra records hours for the people who need them recorded, shows each person's weekly total as the schedule is built so the 40-hour line is visible, and marks who is salaried so a manager does not schedule an exempt person as if their hours were free of consequence. Free up to 10 employees: see the pricing.

Related: overtime pay and the 40-hour rule, how many hours is full time, banked hours and comp time (private employers cannot substitute comp time for overtime).

*Sources: U.S. Department of Labor, Fact Sheet 17A and 17G (exemptions, salary level $684); DOL, "Earnings thresholds for the EAP exemption" (2019 levels enforced after the 2024 rule was vacated on November 15, 2024; technical amendment effective May 15, 2026); California DIR, minimum wage $16.90 from January 1, 2026; New York State DOL, wage orders 2026. Rules current as of September 2026. General information, not legal advice.*

Exempt vs non-exempt employees: the salary and duties tests in 2026, and what each status changes on the schedule

In short