Best Practices for Managing Employee Classifications (Exempt vs. Non-Exempt)

If employee classifications feel like a corporate version of the SATs, you’re not alone. Exempt or non-exempt? It’s a deceptively simple question with significant consequences. Misclassification can lead to fines, lawsuits, and a serious headache. The good news? With the right practices, you can stay on the right side of labor laws and keep your payroll squeaky clean. Let’s break it down.

Understand the Basics

Before diving into best practices, let’s recap the key differences:

Exempt Employees: Paid a fixed salary, don’t qualify for overtime, and must meet specific duties tests under the Fair Labor Standards Act (FLSA).

Non-Exempt Employees: Paid hourly or salaried, but entitled to overtime pay for hours worked over 40 in a workweek (or fewer, depending on state laws).

The FLSA sets the rules, but they’re not as straightforward as they sound. Exemption depends on three factors:

Salary Level: Employees must earn at least $684 per week ($35,568 annually).

Salary Basis: They must receive a predetermined salary regardless of hours worked.

Duties Test: Their job must primarily involve executive, administrative, or professional duties (as defined by the FLSA).

Pro Tip: A job title like “Manager” doesn’t automatically make someone exempt—what they actually do matters.

Conduct a Classification Audit

Don’t assume your current classifications are correct—verify them. Conduct regular audits to:

• Review job descriptions and duties.

• Compare salaries to the FLSA minimum threshold.

• Confirm state and local requirements (because some states have their own rules).

Pro Tip: Make audits a yearly habit or tie them to major changes, like promotions or restructuring.

Write Clear Job Descriptions

Accurate, detailed job descriptions are your first line of defense against misclassification. They should:

Clearly define exempt or non-exempt status.

Include a breakdown of job duties, emphasizing tasks that align with FLSA criteria for exemption.

Stay up to date—if a role evolves, update the description.

Pro Tip: Avoid vague terms like “other duties as assigned” when describing exempt positions. Specificity wins the day.

Train Managers and HR Staff

Your managers and HR team are your eyes and ears on the ground, so they need to understand:

How to classify employees properly.

The consequences of misclassification (spoiler: it’s expensive).

How to monitor and report overtime for non-exempt employees.

Pro Tip: Use real-world examples during training to make the rules stick. (“No, Cheryl, your interns don’t count as exempt just because they make good coffee.”)

Monitor Time and Overtime Accurately

For non-exempt employees, timekeeping is non-negotiable. Best practices include:

Using a reliable time-tracking system to record hours.

Setting clear expectations for clocking in and out.

Paying overtime as required by law (and state laws can vary).

Pro Tip: Avoid unofficial policies like “no overtime allowed.” If a non-exempt employee works overtime—even without approval—you’re legally required to pay for it.

Avoid “Hybrid” Payment Practices

One of the biggest pitfalls? Mixing hourly and salaried payment methods for the same employee. For example:

Paying a non-exempt employee a salary but not offering overtime pay is a compliance landmine.

Similarly, compensating an exempt employee based on hours worked undermines their exemption status.

Pro Tip: Keep payment practices consistent with classification to avoid confusion (and audits).

Stay Flexible for State and Local Laws

Federal laws are the baseline, but state and local governments love to add their own flair. For instance:

Some states have higher salary thresholds for exempt employees.

Others require overtime pay for work over 8 hours a day (not just 40 hours a week).

Pro Tip: If you have employees in multiple states, consider working with an HR partner to stay compliant across the board.

Document Everything

Whether it’s an employee’s classification, time records, or job duties, thorough documentation is your safety net.

Keep records of classification decisions, including rationale.

Store signed acknowledgments of job descriptions and exempt/non-exempt status.

Maintain payroll and timekeeping records for at least three years (or longer, depending on state laws).

Pro Tip: Documentation is your best friend if you ever face an audit or legal challenge.

Address Misclassification Quickly

Mistakes happen, but ignoring them makes everything worse. If you discover a misclassification:

Reclassify the employee immediately.

Calculate and pay any back wages or overtime owed.

Adjust policies or processes to prevent future errors.

Pro Tip: Own up to mistakes before the Department of Labor knocks on your door. Proactive fixes are always better than reactive ones.

Consult an Expert

Labor laws are complex, and even the most diligent business owners can get tripped up. Partnering with an HR consultant or legal advisor can help you:

Navigate gray areas (like hybrid roles or fluctuating workweeks).

Stay ahead of legal changes.

Create scalable processes as your business grows.

The Bottom Line

Managing employee classifications isn’t just about compliance—it’s about fairness and clarity for your team. Proper classifications build trust, prevent costly mistakes, and ensure your employees are compensated correctly. And while it may feel overwhelming, the right mix of audits, documentation, and expert help can simplify the process.

If you’re not sure where to start (or if you’re quietly panicking over your payroll), Peopleish is here to help. Let’s take the guesswork out of classification and keep your business running smoothly—without the fear of fines lurking in the background.