You pay them a salary. They have "manager" on their business cards. They work in an office, not on the factory floor. They're professionals with college degrees. Surely they're exempt from overtime, right?

Wrong. Dead wrong. And that assumption just cost a marketing agency $2.3 million in back overtime, liquidated damages, and DOL penalties.

Here's the myth that destroys employers: Paying someone a salary automatically makes them exempt from overtime. The reality is that salary is just one small piece of a complex legal puzzle. Without meeting strict federal tests for job duties, decision-making authority, and salary thresholds, your "exempt" employees are actually non-exempt workers entitled to time-and-a-half for every hour over 40.

The Department of Labor has collected billions in back overtime from employers who confused a salary with an exemption. They thought giving someone a fancy title and a steady paycheck meant they could work them 60 hours a week without overtime. They thought wrong. And with the federal salary threshold already at $58,656 as of January 1, 2025, and expected to jump again to approximately $65,000 on July 1, 2026, thousands of previously "exempt" employees have lost their exemption status, with more to follow.

This isn't about technical violations or paperwork problems. It's about fundamental misunderstandings of federal law that create massive financial exposure. Every misclassified employee represents two to three years of unpaid overtime, plus liquidated damages that double the amount, plus attorney fees, plus DOL penalties. For a single employee working 50 hours a week, that's easily six figures. For a whole department? You're looking at bankruptcy-level liability.

To be exempt from overtime under the Fair Labor Standards Act, an employee must pass ALL three tests. Not one. Not two. All three. Fail any single test and that employee is entitled to overtime, regardless of their salary, title, or how important they feel.

The first test is the Salary Basis Test. The employee must be paid a predetermined amount each week regardless of the quality or quantity of work performed. You can't dock their pay for partial day absences. You can't reduce their salary because business is slow. You can't tie their base pay to hourly productivity. They get the same amount whether they work 35 hours or 55 hours in a week.

The second test is the Salary Level Test, and this is where many employers just got caught flat-footed. As of January 1, 2025, federal exempt employees must earn at least $1,128 per week ($58,656 annually). On July 1, 2026, that's expected to jump to approximately $1,250 per week ($65,000 annually) based on DOL's published methodology. These aren't suggestions or guidelines. Fall one dollar below and the exemption fails entirely. And remember, this is the federal floor. New York City and downstate counties already require $1,237.50 per week ($64,350) as of January 1, 2025, jumping to $1,275 per week ($66,300) on January 1, 2026.

The third test, the Duties Test, is where most misclassifications die. The law doesn't care about job titles. It cares about what employees actually do all day. Executive exemption requires managing the enterprise or a recognized department, regularly directing two or more full-time employees, and having genuine hiring and firing authority. Administrative exemption requires performing office work directly related to management or business operations and exercising discretion and independent judgment on significant matters. Professional exemption requires advanced knowledge in a field of science or learning customarily acquired through prolonged specialized study.

The Fair Labor Standards Act creates a presumption that all employees are entitled to overtime. Exemptions are narrowly construed against the employer, meaning any ambiguity gets resolved in favor of overtime eligibility. This isn't a close-call situation where ties go to the employer. The burden is entirely on you to prove every element of the exemption.

The Executive Exemption requires all of the following: The employee's primary duty must be managing the enterprise or a customarily recognized department or subdivision. They must customarily and regularly direct the work of at least two full-time employees or their equivalent (80 total hours per week). They must have the authority to hire or fire employees, or their suggestions and recommendations as to hiring, firing, advancement, promotion, or other change of status must be given particular weight. The word "primary" means the most important duty, not necessarily what takes the most time. Courts use a holistic analysis considering the relative importance of duties, amount of time spent, relative freedom from supervision, and wage differential with non-exempt employees.

The Administrative Exemption is the most misunderstood and misapplied. The employee's primary duty must be performing office or non-manual work directly related to the management or general business operations of the employer or its customers. This means work that supports the business itself rather than producing what the business sells. They must exercise discretion and independent judgment with respect to matters of significance. This doesn't mean they're unsupervised or experienced. It means they have authority to make independent choices free from immediate direction or supervision on matters that have significant financial or operational impact.

The Professional Exemption comes in two flavors: learned and creative. The learned professional's primary duty must be performing work requiring advanced knowledge in a field of science or learning customarily acquired by prolonged specialized instruction. We're talking about doctors, lawyers, engineers, teachers, and similar professions requiring specialized academic training. The creative professional's primary duty must be performing work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. This covers musicians, composers, actors, and similar artistic professions.

New York adds additional complexity. The state uses a more restrictive interpretation of exemptions, particularly for the administrative exemption. New York Labor Law § 651 defines exemptions more narrowly than federal law. When state and federal law conflict, you must follow whichever standard is more protective of the employee, which in New York is almost always the state standard.

A restaurant chain classified all "assistant managers" as exempt, paying them salaries of $45,000 per year regardless of hours worked. The company assumed that the management title and salary automatically qualified them for exemption. They even put "management responsibilities" in the job description and had the assistant managers attend weekly management meetings.

But here's what these "managers" actually did all day. They spent 80% of their time performing the same duties as hourly employees: serving customers during busy periods, operating cash registers and POS systems, preparing food, cleaning dining areas, and following detailed operational procedures set by corporate. Their "managerial" duties consisted of unlocking the store in the morning, counting registers at closing, filling out corporate-mandated reports, and following step-by-step procedures for inventory and scheduling that left zero room for discretion.

When the DOL investigated, they looked past the title to the reality. These assistant managers had no authority to hire or fire. They couldn't even issue written warnings without corporate approval. They didn't supervise anyone; they worked alongside hourly employees doing the same tasks. Their "management" of the restaurant consisted of following a detailed operations manual that prescribed every decision down to the minute. They exercised no independent judgment because corporate had already made every judgment for them.

The investigation revealed systematic misclassification across multiple locations. Each assistant manager averaged 55 hours per week. At their salary of $45,000, their regular rate was $17.31 per hour. They were owed time-and-a-half for 15 hours per week, or $389.48 weekly in overtime. Over two years, that's $40,426 per employee. Across the enterprise the total exposure easily crosses into the seven figures.

A professional services firm recognized the classification risks and conducted a proactive audit before problems developed. They brought in employment counsel to review every allegedly exempt position, not relying on titles or assumptions but examining actual daily duties.

The audit revealed several surprises. Their "account managers" sounded exempt but actually spent their time executing client requests without discretionary authority. Reclassified to non-exempt. Their "junior analysts" had impressive degrees but performed routine data entry following established procedures. Reclassified to non-exempt. Their "team leads" supervised projects but not people, and had no input on personnel decisions. Reclassified to non-exempt.

For the positions that remained exempt, they documented everything. They created detailed job analyses showing how each position met every element of the applicable exemption. They documented the discretionary decisions these employees made, the authority they exercised, and the independent judgment they applied. They implemented quarterly reviews to ensure duties hadn't shifted over time.

When the DOL eventually audited them as part of an industry sweep, the company was ready. They had documentation for every classification decision. They had already reclassified questionable positions. They had time records for all non-exempt employees. The DOL found zero violations. More importantly, the company avoided the millions in liability that hit their competitors who hadn't been as careful.

Conducting a classification audit isn't optional anymore. It's essential risk management. Start by pulling every allegedly exempt position and examining what employees actually do, not what their job descriptions claim they do. Time studies reveal the truth that titles hide. Have employees track their daily activities for two weeks, categorizing each task as exempt or non-exempt work. The results often shock employers who discover their "managers" spend 80% of their time on non-managerial tasks.

Next, verify that every exempt position meets all three FLSA tests, not just the convenient ones. Check that salaries meet current federal and state thresholds, including the upcoming increases. Document the salary basis to ensure no improper deductions that could destroy the exemption. Most importantly, analyze actual job duties against the strict legal standards, not industry assumptions. Compare your classifications to recent DOL opinion letters and court cases in your industry. The DOL regularly publishes guidance that clarifies exemption standards, and courts consistently narrow interpretations.

For positions that fail any test, reclassification is mandatory, not optional. Yes, employees might resist losing their "exempt" status, viewing it as a demotion. But explaining that non-exempt status means overtime pay usually changes their perspective. Document your analysis thoroughly, showing why each position is classified as it is. This documentation becomes your defense if the DOL comes knocking. Remember to check classifications at least annually and whenever job duties significantly change. What qualified as exempt last year might not qualify today, especially with threshold increases and evolving job responsibilities.

Every industry has its classification blind spots, positions that sound exempt but fail the legal tests. Understanding your industry's common mistakes helps avoid them.

Technology Sector traps abound with impressive titles that mask non-exempt work. Junior developers who only code to specifications without system design authority aren't exempt computer professionals. Technical support staff following troubleshooting scripts aren't exercising independent judgment. QA testers performing routine testing procedures are production workers, not exempt professionals. IT help desk workers, despite their technical knowledge, are typically non-exempt if they follow established procedures without independent problem-solving authority. The key distinction is between creating solutions and implementing them. Only the former supports exemption.

Healthcare Administration creates confusion between clinical and administrative roles. Medical assistants performing administrative duties aren't automatically exempt because they work in healthcare. Department coordinators who schedule and file but don't make operational decisions fail the administrative exemption. Billing specialists following insurance procedures are production workers processing claims, not exempt administrators. Patient service representatives with scripted interactions lack the discretion required for exemption. The healthcare setting doesn't transform non-exempt duties into exempt ones.

Retail Management sees the most exemption failures due to working managers. Store managers who spend most of their time on the sales floor fail the executive exemption's primary duty test. Department supervisors without hiring authority aren't executives regardless of their title. Assistant managers performing cashier duties and stocking shelves are doing non-exempt work. Team leads who can't discipline employees aren't managers in the legal sense. The retail pressure to have everyone "pitch in" destroys carefully crafted exemptions.

Financial Services mistakes credentials for exemptions. Bank tellers with finance degrees aren't exempt professionals. Loan officers following underwriting guidelines lack discretionary authority. Personal bankers meeting sales quotas are production workers. Customer service representatives in investment firms aren't automatically administrative employees. The sophisticated nature of financial products doesn't transform routine processing into exempt work.

Hospitality Industry faces unique classification challenges with its 24/7 operations and "working managers" culture. Restaurant "managers" who spend their shifts serving tables, bartending, and cooking aren't exempt executives just because they lock up at night. Hotel "supervisors" who primarily work the front desk, checking guests in and out, fail the duties test regardless of their titles. Catering "directors" who mainly execute events rather than plan them are performing non-exempt work. The hospitality tradition of everyone "pitching in" during busy periods can destroy carefully crafted exemptions. When managers regularly perform the same duties as hourly employees, courts look at what they actually do, not what their business cards say. The industry's high turnover and variable scheduling make maintaining exemptions even harder.

New York doesn't just follow federal law. It adds layers of additional requirements that trap unwary employers. The state has different salary thresholds depending on location and employer size, all higher than federal minimums. These aren't optional enhanced standards. They're mandatory minimums that override federal law.

In New York City and Nassau, Suffolk, and Westchester counties, the minimum salary for executive and administrative exemptions is $1,237.50 per week ($64,350 annually) as of January 1, 2025, rising to $1,275 per week ($66,300 annually) on January 1, 2026. In the remainder of New York State, it's $1,161.65 per week ($60,405.80 annually) as of January 1, 2025, increasing to $1,199.10 per week ($62,353.20 annually) on January 1, 2026. These scheduled increases are locked in, not estimates. Employers have no excuse for being surprised when these thresholds hit.

But salary is just the beginning. New York applies a more restrictive interpretation of exemption criteria. The state requires exempt executives to customarily and regularly exercise discretionary powers, not just have them available. Administrative employees must perform work directly and closely related to management policies or general business operations at a level of importance and responsibility. Professional employees must consistently exercise discretion and judgment, not just occasionally.

New York also has unique overtime triggers beyond 40 hours. The state requires overtime for residential employees (live-in companions and housekeepers) after 44 hours. It mandates spread-of-hours pay when employees work split shifts exceeding 10 hours. It requires call-in pay when employees report to work but are sent home early. These provisions apply regardless of exemption status and create additional wage obligations.

The state's record-keeping requirements exceed federal standards. Employers must maintain detailed records of hours worked, even for exempt employees. They must provide written wage notices at hiring and with any change. They must issue detailed wage statements with every payment. Failure to maintain these records creates a presumption that the employee's claims about hours and wages are accurate.

Proper employee classification isn't about finding loopholes to avoid overtime. It's about understanding that exemptions are narrow exceptions to the broad protection the FLSA provides to workers. When you get classification right, everyone wins. Employees receive the compensation they're entitled to, employers avoid devastating penalties, and businesses operate with confidence instead of fear.

The salary myth has persisted because it seems logical. You pay someone a salary to avoid the hassle of tracking hours and calculating overtime. But the law doesn't care about administrative convenience. It cares about protecting workers from exploitation. And it assumes every worker needs that protection unless you can prove otherwise.

Every misclassified employee is a ticking time bomb. They might not explode today or tomorrow, but when they do, the damage includes years of back pay, doubled as liquidated damages, plus attorney fees that often exceed the underlying wages. One disgruntled employee's complaint can trigger a DOL audit that examines every exemption in your company. One collective action can aggregate every misclassified employee into a company-ending liability.

But here's the good news: Classification problems are completely preventable. Unlike discrimination or harassment claims that depend on human behavior, classification is a technical analysis you can get right every time. Review actual duties, not job titles. Apply the legal tests, not assumptions. Document your analysis and update it regularly. When in doubt, err on the side of overtime eligibility. It's always cheaper to pay overtime properly than to pay it retroactively with penalties.

The new salary thresholds have reset the playing field. The January 2025 increase to $58,656 disqualified thousands of positions nationwide. The expected July 2026 jump to approximately $65,000 will eliminate even more. Positions that were exempt for decades suddenly aren't. Jobs that seemed clearly administrative now fail the duties test under stricter scrutiny. This isn't the time for assumptions or grandfather clauses. It's time for comprehensive review and proactive reclassification.

Remember: The Department of Labor doesn't care what you intended. They don't care that "everyone in the industry does it this way." They care about one thing only: whether you can prove each element of the claimed exemption. If you can't, that employee is entitled to overtime. Period.

At Jacobs & Associates, we help employers navigate the complex world of wage and hour compliance. Because in today's enforcement environment, the salary myth isn't just wrong, it's expensive.

Keep fighting the good fight.