Businesses often assume that paying an employee a salary means they don’t have to worry about overtime. That’s a costly mistake. The Fair Labor Standards Act (FLSA) sets strict requirements for classifying employees as exempt from overtime pay, and salary is just one piece of the equation. A recent court decision on the Department of Labor’s (DOL) salary threshold changes has added another layer of confusion, making it more important than ever for employers to get it right.
The FLSA’s Two-Part Test for Exempt Employees
To qualify as exempt from overtime under the FLSA, an employee must meet both of the following:
- The Salary Test: The employee must be paid a minimum salary. Currently, that threshold is $684 per week ($35,568 per year).
- The Duties Test: The employee’s actual job responsibilities, not just their title, must align with one of the FLSA’s exempt categories. These include:
- Executive – Manages a business or department, directs at least two employees, and has authority over hiring and firing.
- Administrative – Performs high-level office work related to business operations, requiring independent judgment.
- Professional (Learned or Creative) – Requires advanced knowledge in a recognized field (e.g., law, medicine, engineering) or creative work in the arts.
- Computer – Includes software developers, systems analysts, and other highly skilled tech professionals who meet specific criteria.
Failing to meet either of these requirements means the employee is entitled to overtime pay—regardless of whether they are on salary.
The Texas Court Case That Shook Up Salary Thresholds
In 2016, the DOL attempted to raise the salary threshold for exempt employees from $23,660 to $47,476 per year. A federal court in Texas struck it down, ruling that the DOL overstepped its authority by placing too much weight on salary rather than job duties.
That decision left businesses uncertain about what to follow. The DOL eventually revised the rule, setting the current threshold of $684 per week in 2020. While this provided temporary clarity, discussions around increasing the threshold continue, meaning businesses need to stay alert for future changes.
Misclassification Is a Risk Employers Can’t Afford to Ignore
Misclassifying employees as exempt when they don’t meet both the salary and duties tests is more than a compliance headache—it’s a financial disaster waiting to happen. The FLSA imposes strict penalties, including:
- Back pay for all unpaid overtime (which can stretch back up to three years).
- Automatic liquidated damages, effectively doubling or tripling the unpaid wages.
- Mandatory attorney’s fees for the employee, which can quickly exceed the damages owed.
Even one misclassified employee can lead to a lawsuit that snowballs into a class action, putting businesses at risk for massive payouts.
Contractors vs. Employees
Another trap businesses fall into? Misclassifying contractors as independent when they should be treated as employees. If a contractor is reclassified as an employee—whether voluntarily or by government enforcement—it can trigger FLSA wage obligations, including overtime.
If an employer starts paying a former contractor a salary, they must confirm whether that employee meets the FLSA’s exempt criteria. Otherwise, they could owe back overtime, just as they would for a misclassified salaried worker.
Stay Compliant and Avoid Costly Mistakes
Wage and hour compliance is not a guessing game. Employers must carefully evaluate both salary and job duties before classifying employees as exempt. The risks of misclassification, such as back pay, penalties, and lawsuits, far outweigh the effort required to get it right upfront.
For businesses that need guidance on FLSA compliance, misclassification risks, or transitioning contractors to employees, Baker Jenner offers strategic counsel to help mitigate risk and ensure compliance. Call (404) 400-5955 to discuss how to protect your business.
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