When it comes to wage and hour compliance, one of the most costly mistakes an employer can make is misclassifying a worker as exempt from overtime. Too often, employers assume that just because someone is salaried or holds a managerial title, they are automatically exempt. That assumption can trigger audits, lawsuits, and six-figure penalties.
Understanding the difference between exempt and non-exempt status isn’t just a legal technicality—it’s essential to preventing wage theft claims and protecting your business from avoidable risk. Employers who are proactive about proper classification not only avoid lawsuits but also build credibility with their workforce. That credibility fosters stronger retention, better employee engagement, and fewer disputes.
What Does "Exempt" Really Mean?
Under both the Fair Labor Standards Act (FLSA) and New York Labor Law, most employees are presumed to be non-exempt—meaning they are entitled to overtime pay at 1.5 times their regular rate for any hours worked over 40 in a workweek. Non-exempt workers must also track their time, and employers are required to keep accurate records of all hours worked. This includes time spent opening and closing, working through lunch, or finishing up after the scheduled end of a shift.
An exempt employee, by contrast, is excluded from these overtime protections—but only if they meet very specific criteria:
Duties Test: The employee’s actual job duties must primarily involve executive, administrative, or professional work as defined by law. Job descriptions are helpful, but the law evaluates what the person actually does day-to-day.
Salary Basis Test: The employee must be paid a fixed salary, not hourly wages. That salary must be consistent regardless of the number of hours worked.
Salary Level Test: The salary must meet a minimum threshold. Under federal law, that’s currently $684/week, but New York State has significantly higher requirements based on geographic location. The thresholds below have been updated for 2025 and 2026.
Region | 2025 Weekly Minimum Salary | 2025 Annual Equivalent | 2026 Weekly Minimum Salary | 2026 Annual Equivalent |
|---|---|---|---|---|
NYC, Long Island, Westchester | $1,237.50 | $64,350.00 | $1,275.00 | $66,300.00 |
Remainder of NY State | $1,161.65 | $60,405.80 | $1,199.10 | $62,353.20 |
Note: Beginning in 2027, the salary thresholds will increase annually based on the Consumer Price Index (CPI), which is tied to inflation and changes in the cost of living.
These increases are tied to annual cost-of-living adjustments, meaning that after 2026, salary thresholds will continue to rise automatically based on economic indicators unless the state adopts a different framework. Employers should build these increases into their future planning and compensation strategy.
If an employee fails any one of these tests, they’re non-exempt—regardless of their title, schedule, or how they’re paid. Misclassification can also occur when employers shift duties over time without reassessing exemption status.
Real-World Risk: Misclassification in Action
Let’s look at two common misclassification scenarios: one involving salary thresholds, the other involving job duties.
Example 1: Below the Threshold
A small media production company classifies a junior editor as exempt and pays them a flat salary of $800/week. The company relies on federal law, believing that the salary exceeds the $684/week federal threshold. The employee regularly works 45–50 hours per week.
But here’s the issue: the employee works in New York City, where the minimum weekly salary threshold is $1,200/week for exempt status. Since the editor’s salary falls short of the NY requirement, they are automatically non-exempt—regardless of duties. That means they’re entitled to overtime.
This misclassification doesn’t stem from duties, but from failing to follow the state’s higher salary threshold.
Estimated Financial Exposure:
Item | Formula & Description | Amount |
|---|---|---|
Unpaid Overtime | 10 hrs/week × $30 OT rate × 52 weeks × 2 years × 1 employee | $31,200 |
Liquidated Damages (on Unpaid OT) | Equal to unpaid overtime | $31,200 |
WTPA Penalties | $5,000 | $5,000 |
Liquidated Damages (WTPA) | Equal to WTPA penalties | $5,000 |
Total Estimated Exposure | $72,400 |
Example 2: The Duties Don’t Match the Title
A restaurant group labels all its assistant managers as exempt. They’re salaried at $900/week and regularly work 50–55 hours, covering service gaps and filling in as line cooks. They rarely supervise staff or make hiring decisions, and instead spend most of their time doing the same tasks as their hourly coworkers.
On paper, they look exempt. But under the law, their primary duties are manual and hourly in nature—not managerial. The result? A class action lawsuit from six assistant managers. It starts with one disgruntled former employee but quickly snowballs into an audit and court battle.
Estimated Financial Exposure:
Item | Formula & Description | Amount |
|---|---|---|
Unpaid Overtime | 10 hrs/week × $21.60 × 52 weeks × 2 years × 6 employees | $134,784 |
Liquidated Damages (on Unpaid OT) | Equal to unpaid overtime | $134,784 |
WTPA Penalties | $5,000 × 6 employees | $30,000 |
Liquidated Damages (WTPA) | Equal to WTPA penalties | $30,000 |
Total Estimated Exposure | $329,568 |
So Who Is Exempt?
To qualify for exemption, job duties must meet very narrow standards:
Executive: Must manage two or more employees and have authority over hiring/firing decisions. Spending more than 50% of time on managerial functions is usually expected.
Administrative: Must exercise discretion and independent judgment on significant business matters—such as budgeting, compliance, or company operations.
Professional: Must rely on advanced knowledge (often requiring a degree) in a field like law, medicine, accounting, engineering, or science.
Importantly, these duties must be the employee’s primary job function, not occasional tasks or responsibilities listed in a job description. Courts routinely disregard job titles when evaluating exemption status and focus instead on daily activities.
Note: These are the three most commonly used exemptions, but they are not the only ones. Other categories—such as outside sales, computer employees, and certain highly compensated workers—may also qualify under different standards. For brevity, this article focuses on the core exemptions most frequently encountered by New York and New Jersey employers. Additional exemptions will be covered in future articles, including when and how they apply in specialized industries.
Practice Tip:
Titles like "Manager" or "Lead" don’t prove exemption. Courts and agencies look at what the employee actually does, not what they’re called. A front-of-house supervisor who mainly takes orders and wipes down tables is likely non-exempt—even if their title sounds managerial.
Action Steps to Protect Your Business
Note: Misclassification issues don’t always arise from intentional misconduct or negligence. In many cases, businesses evolve, roles shift, and the legal requirements quietly outpace policy updates. This is why classification reviews should be a standing item in every HR audit.
Proper classification isn’t a one-and-done task. As roles evolve and responsibilities shift, employers must periodically reassess job classifications. Here's how to stay on track:
Conduct regular exemption audits: Review employee classifications annually—or sooner if job duties change.
Keep detailed job descriptions: Descriptions should reflect actual responsibilities and be reviewed during audits.
Train managers and HR: Ensure everyone involved in hiring, scheduling, or performance reviews understands the exemption criteria.
Document changes: If an employee’s role changes significantly, document the reason for any reclassification—especially if you’re shifting someone from exempt to non-exempt (or vice versa).
Correct misclassifications quickly: Address errors as soon as they’re identified. Waiting can dramatically increase back pay liability and penalties.
When Good Intentions Create Compliance Risk
Sometimes, overperformers create their own risk. Take the example of a server who begins taking on management-like responsibilities—assigning tables, training new hires, even helping close out cash drawers. Despite their best intentions, if they’re still classified as a tipped, hourly employee, their actions could jeopardize the business’s tip pool integrity or invalidate the use of the tip credit altogether. Employers must be careful not to allow well-meaning hourly staff to morph into unpaid managers.
Want to know how that affects tip credits? We break it down in our related article: [Understanding Tip Credits: How to Stay Compliant and Avoid Penalties].
Another common scenario: a manager was properly classified when their department had three employees, but after a restructuring or resignation, they’re now managing only one person. If they no longer regularly supervise at least two full-time employees, they may fall out of the executive exemption—even if their title and duties haven’t changed on paper. These transitions happen gradually and often go unnoticed until an audit or lawsuit brings them to light.
Keep Fighting the Good Fight
At Jacobs & Associates, we believe employers can run legally compliant, efficient, and respectful workplaces without sacrificing profitability. Proper classification is a foundational step in wage and hour compliance—and one of the most common errors that lead to litigation.
Misclassification doesn’t just affect payroll. It impacts morale, trust, and legal exposure. A misclassified employee who feels overworked and underpaid is not only more likely to sue but also to share their frustration publicly—damaging your brand, your culture, and your bottom line.
The fix starts with clarity: understanding the rules, reviewing roles, and applying the law consistently. If you need help reviewing your job classifications or handling an audit, we’re here to help.
Keep Fighting the Good fight.
