Salary Exempt vs. Hourly: Are You Classifying Employees Correctly in 2025?
One of the biggest compliance challenges for businesses in 2025 is properly classifying employees as salary exempt or hourly. Many companies assume that if they pay an employee a salary, they are automatically exempt from overtime and other wage protections—but that’s not how labor laws work.
The salary exempt classification is based on both minimum salary requirements and a job duties test. If an employee does not meet both criteria, they must be classified as hourly, which means they are entitled to overtime pay and meal/rest breaks in certain states.
Misclassification can lead to underpaid wages, compliance issues, and employee frustration. Now is the time to double-check that employees are classified correctly.
What Does "Salary Exempt" Really Mean?
To qualify as exempt from overtime under federal and state laws, an employee must:
Earn at least the minimum salary threshold set by federal or state law.
Perform job duties that meet the exemption criteria (executive, administrative, professional, or highly compensated employees).
If either of these criteria isn’t met, the employee should be classified as hourly, which means they are entitled to:
✔️ Overtime pay when working over 40 hours a week (or over 8 hours daily in some states)
✔️ Paid meal and rest breaks where required
✔️ Accurate tracking of all hours worked
2025 Minimum Salary Requirements: Are You Paying Enough?
Each year, some states increase the minimum salary threshold for exempt employees. If an employee’s salary falls below the threshold, they must be reclassified as hourly—even if their job duties previously met the exemption criteria.
Federal vs. State Salary Minimums
The federal salary threshold is currently $684 per week ($35,568 annually).
California’s 2025 exempt salary minimum is $66,560 annually for businesses with 26+ employees and $63,440 annually for businesses with fewer than 26 employees.
Some states (New York, Washington, and others) set their own, higher salary minimums—meaning businesses must comply with the most restrictive rule that applies to them.
🔹 Quick Check: If any salaried employees are earning below the minimum in their state, they must be classified as hourly and receive overtime pay.
Common Misclassification Mistakes in 2025
Many businesses unintentionally misclassify employees—not out of bad intent, but because the rules are complicated. Here are some of the biggest mistakes:
1. Assuming a Job Title = Exempt Status
Just because someone is called a manager, supervisor, or director doesn’t mean they meet the duties test for exempt status. The actual work they perform is what determines classification.
2. Paying a Salary Below the Minimum Threshold
If an exempt employee earns less than the state-required salary minimum, they must be reclassified as hourly and become eligible for overtime pay.
3. Not Tracking Hours for Salaried Employees
If an employee is exempt, tracking hours isn’t legally required—but if an employee is misclassified, businesses might not have the records to prove proper wage payments. Tracking hours for all employees is a good business practice.
4. Overlooking Remote and Hybrid Work Hours
As more businesses offer remote and hybrid work, some exempt employees may be working extra hours beyond expectations. If they are misclassified and actually should be hourly, these extra hours may count as unpaid overtime.
How to Audit Your Employee Classifications
For Employers
✔️ Review all exempt employees—do they meet both the salary and job duties test?
✔️ Check the 2025 salary thresholds—are any exempt employees being paid below the minimum?
✔️ Clarify job descriptions—ensure they reflect actual duties and match exemption requirements.
✔️ Track hours for borderline cases—even for exempt employees, tracking hours can help avoid disputes.
✔️ Update employee handbooks—clearly define exemption criteria and wage policies.
For Employees
✔️ Check your pay structure—are you salaried and exempt, or should you be hourly?
✔️ Compare your job description vs. actual duties—does your role truly fit the exempt classification?
✔️ Review overtime eligibility—if you're working long hours but classified as exempt, it may be worth reviewing with HR.
Final Thoughts
Misclassification is often unintentional, but small payroll mistakes add up over time. The best way to avoid issues is to audit employee classifications annually, especially when salary thresholds change.
If you’re unsure whether your business is classifying employees correctly, now is a good time to review your policies. It’s always easier to fix things proactively rather than reactively.
Want help reviewing employee classifications or updating your payroll policies? Let’s connect.