FLSA Classifications: Why “Exempt” Misclassifications Get Expensive - Fast

One of the costliest wage-and-hour mistakes employers make is classifying a role as exempt (no overtime) when it should be non-exempt (overtime-eligible). The Fair Labor Standards Act (FLSA) doesn’t care about job titles, org charts, or whether calling someone “salary” feels like a promotion. It cares about what the person actually does and whether they meet very specific exemption criteria (tests).

When an employer misclassifies a position, the bill can include back overtime, liquidated damages (often doubling what’s owed), attorneys’ fees, and sometimes civil money penalties, plus the leadership time and reputational drag of a claim.

In January 2025, the U.S. Supreme Court in E.M.D. Sales, Inc. v. Carrera, unanimously held that employers must prove employee exempt status under the FLSA by a preponderance of the evidence, not the higher standard of "clear and convincing evidence.” Although seen as a win for employers, the bottom line is that employers must still prove the exemption applies.  Below are brief definitions and examples of the different classifications.

The Core Classifications Under the FLSA

1. Non-Exempt (Overtime-Eligible)

• Non-exempt employees must receive overtime pay at 1.5x the regular rate for hours worked over 40 in a workweek. (Some states add more protections, but this is the federal baseline.) (DOL)

• Key point: Non-exempt employees can be hourly or salaried. Being “on salary” does not automatically mean exempt.  If a non-exempt position is paid a salary, any overtime hours are still compensated under state and federal wage-and-hour laws.

  Examples  of typically non-exempt positions:

  • Administrative assistant/receptionist

  • Customer service representative

  • Bookkeeper/payroll clerk (often—depends on duties)

  • Maintenance technician

  • Many “coordinator” roles where the work is primarily execution and support rather than independent discretion.

    
    

2. Exempt (Not Overtime-Eligible) Only If Tests Are Met

• To be exempt under the “white collar” exemptions, employers generally must satisfy:

  • Salary basis/level test:  employee must be paid a set weekly salary that meets the FLSA's minimum salary requirement (can be paid less than weekly, per wage and hour regulations, but must stay the same with few exceptions)

  • Duties test: the duties of the position must meet the exemption requirements set by the FLSA (this is where most employers get burned)

Exempt Job Categories Under the FLSA

The most common exempt categories are Executive, Administrative, and Professional. (There are also exemptions like outside sales and computer employees, discussed below.)

1. Executive Exemption (Example: Department Manager)

Usually fits when the employee:

• Manages a department or the enterprise

• Regularly directs at least two full-time employees (or equivalent)

• Has meaningful input into hiring/firing or advancement decisions

  • Example that may qualify: Store General Manager who runs operations, directs supervisors, owns staffing decisions, and has real authority.

  • Common misclassification risk: “Manager” who mainly covers shifts, runs a register, stocks shelves, and has little authority.

2. Administrative Exemption (Example: High-Level Business Operations)

This is one of the most misunderstood exemptions. It generally covers employees whose primary duty is office or non-manual work directly related to management or general business operations and who exercise discretion and independent judgment on significant matters. (DOL)

• Example that may qualify: HR Manager who designs policy, advises leadership, handles employee relations strategy, and makes independent decisions.

• Typically does not qualify: HR/Payroll coordinator processing forms and following set procedures.

3. Professional Exemption (Learned or Creative)

Often applies to roles requiring advanced knowledge in a field of science/learning customarily acquired by prolonged specialized education (learned professional), or roles requiring invention/originality (creative professional).

• Example that may qualify: CPA, attorney, engineer, many RN roles depending on duties/credentials (state and facts matter).

4. Outside Sales Exemption Outside sales employees are exempt if their primary duty is making sales (or obtaining orders/contracts) and they are customarily engaged away from the employer’s place of business.

• Misclassification risk: “Sales” roles that mostly service accounts, manage inventory, or support orders rather than actually making sales.

5. Computer Employee Exemption

This can apply to certain computer systems analysts, programmers, software engineers, etc., but not to help desk staff or employees who simply use software tools.

6. Highly Compensated Employee (HCE)

This is not a free pass. HCE can be exempt only if they meet compensation requirements and regularly perform at least one exempt duty of an executive, administrative, or professional employee. (Still requires analysis.)

Common Mistakes or False Justifications

1. The #1 Misconception: “Salary = Exempt”

A salary can be a pay method—not a legal classification. In fact, the U.S. Department of Labor specifically calls out a common violation: treating salaried employees as exempt and failing to pay an overtime premium regardless of hours worked. 

2. And No —“It Feels Like a Promotion” Isn’t a Legal Basis

I see this often: an employer wants to reward a strong employee, so they move the person to a salary basis to signal trust or importance. You can absolutely reward someone. But instead of a misclassification that creates a hidden overtime liability, the “reward” could be one of the following:

• a pay increase

• a new title

• a bonus plan

• expanded responsibilities that truly meet exempt duties, and/or

• growth opportunities

3. Misclassifying Employees as 1099 Independent Contractors

Another common wage-and-hour mistake is paying workers as 1099 independent contractors when they do not meet the legal criteria for independent contractor status.

Under federal and state laws, classification is based on the economic reality of the relationship, not how the parties label it. If a worker is economically dependent on the business, subject to company control, and performing work that is integral to operations, they are likely an employee, not a contractor. 

There are even more issues than back pay when this situation arises, as employers may be exposed not only under the FLSA but also under IRS rules, including payroll taxes, Social Security and Medicare withholdings, unemployment insurance, and workers’ compensation.

The Costs of FLSA Misclassification: Here's why “Exempt” Misclassifications Get Expensive Fast

1. Back pay (overtime) exposure - When a role is misclassified as exempt, the most common exposure is unpaid overtime. Employees can typically recover back pay for 2 years, or 3 years for “willful” violations. 

2. Liquidated damages (often double the back pay) - In many cases, the employer can owe an equal amount as liquidated damages—effectively doubling what’s owed.

3. Attorneys’ fees and court costs - Employees who win can recover attorneys’ fees and costs, which often become a significant part of the total exposure.         

4. Civil money penalties (especially repeated/willful violations) - The DOL can assess civil money penalties in certain circumstances, including repeated/willful violations (as DOL announcements regularly reflect).  You can read more on the DOL website.

How Employers Get into Trouble (And How to Prevent It)

1. Misclassification usually happens when:

• Titles drive decisions (“manager,” “director,” “administrator”) instead of duties

• Salary is treated as a status symbol instead of a pay method

• Job descriptions are not updated and don’t match reality

• People “temporarily” cover non-exempt work… permanently

2. Practical prevention checklist

• Audit exempt roles annually (and anytime duties change)

• Compare actual daily tasks to exemption requirements and update the job description accordingly (see more on job descriptions in this post)

• For roles near the line, leave them non-exempt or consider salary/non-exempt if appropriate, but it must be managed correctly

• Train managers: “Off-the-clock” work is still work

• Keep clean documentation on exemption rationale (duties + salary basis/level)

3. If you have a current misclassification issue...

If you have identified that you already have a position misclassified as exempt when it should be non-exempt, contact an employment attorney for assistance in remedying the situation, and ensure your HR department or a qualified HR Consultant assists with updating and adapting your job descriptions.

Bottom Line

Classifying roles correctly is about cost control, legal compliance, and trust-building. If an employee should be non-exempt, paying overtime isn’t a punishment; it’s the law. If you want to elevate the role, do it with a compensation strategy and meaningful scope, not by calling a job “salary” and hoping the employee won’t be the wiser. It is your duty as an employer to ensure that you not only follow the law but also foster an atmosphere and culture that elevates the employee experience and treats everyone in your employ with respect.

Disclaimer: The information provided in this blog is for informational and educational purposes only and should not be construed as legal advice. Laws and regulations vary by jurisdiction and specific circumstances. Employers and individuals should consult with their attorney or qualified legal professional to determine the appropriate course of action for their particular situation.

Roberta Edwards is a Senior HR Consultant with over 20 years of professional experience. Follow Edwards HR Consulting on LinkedIn and Facebook and read more about Roberta here.