PunchExempt vs. Non-Exempt Employees: A Small Business Guide (2026)
Exempt vs. Non-Exempt Employees: A Small Business Guide (2026)
The short answer: Exempt employees are not entitled to overtime. Non-exempt employees are. To be exempt under federal law an employee has to clear all three parts of a test, not just one: a fixed salary (salary basis), at least $684 per week or $35,568 a year in 2026 (salary level), and job duties that actually fit an executive, administrative, or professional role (duties test). Paying someone a salary does not make them exempt. Most people on a small field or service crew are non-exempt, which means you owe them overtime and you need an exact record of their hours. A time-tracking app like Punch records every punch to the minute and calculates overtime for you, so the classification you got right on paper is backed by the hours to prove it.
Misclassification is one of the most expensive mistakes a small employer can make, and it almost always comes from the same wrong assumption: that a salary buys you out of overtime. It does not. Here is how the two categories actually work.
What Exempt and Non-Exempt Mean
The terms come from the Fair Labor Standards Act. "Non-exempt" means an employee is not exempt from the FLSA's overtime and minimum-wage protections, so they must be paid at least the minimum wage and time-and-a-half for hours over 40 in a workweek. "Exempt" means the FLSA's overtime rule does not apply, so those employees can work 45 or 50 hours with no extra pay.
The default matters here. Under the FLSA, every employee is non-exempt unless the employer can prove they meet a specific exemption. The burden is on you, not the worker. If you cannot show the exemption applies, the law treats the person as non-exempt and overtime is owed.
That default is why "non-exempt" describes the vast majority of hourly workers, and a fair number of salaried ones too.
The Three-Part Test for Exemption
The most common exemptions are the "white collar" ones for executive, administrative, and professional employees. Per U.S. Department of Labor Fact Sheet #17A, an employee has to satisfy all three of these to be exempt. Fail any one and they are non-exempt.
1. Salary basis. The employee is paid a fixed, predetermined amount each pay period that does not drop based on the quantity or quality of their work. Docking pay for a slow day breaks salary basis.
2. Salary level. The salary has to meet a minimum threshold. In 2026 that federal floor is $684 per week, which is $35,568 a year. The Department of Labor's 2024 rule that would have raised this to $1,128 per week was struck down in federal court in November 2024, and in May 2026 the DOL formally restored the 2019 level of $684, per Littler. So the threshold is the same as it has been since 2020.
3. Duties test. The employee's actual day-to-day job has to fit the exemption. An executive employee manages the business or a department and directs at least two other people. An administrative employee does office work directly related to management and exercises independent judgment on significant matters. A professional employee does work requiring advanced knowledge, usually from a degree.
The duties test is where owners get caught, because it is about what the person actually does, not their title. Calling someone an "office manager" and paying a salary does not make them exempt if their real job is running the front desk and answering phones.
There is also a highly compensated employee shortcut: someone earning at least $107,432 a year who performs at least one exempt duty can be treated as exempt. That figure was also confirmed at its restored level for 2026.
Why a Salary Alone Does Not Make Someone Exempt
This is the single most common misclassification, so it is worth stating plainly. Putting a worker on salary changes how you pay them. It does not change whether they are owed overtime.
Picture a small landscaping company that promotes a lead crew member to "crew supervisor," bumps them to a $52,000 salary, and stops paying overtime. On paper that clears the salary level. But if the supervisor spends the day mowing, edging, and hauling alongside the crew and does not manage anyone or make real business decisions, they fail the duties test. They are non-exempt. Every hour over 40 they worked without overtime is now back pay the company owes, and the Department of Labor can reach back two years, three if the violation is willful.
The pattern repeats across every trade. A salaried restaurant "assistant manager" who mostly runs food and buses tables. A salaried "office coordinator" who mostly files and answers the phone. The title says exempt. The duties say non-exempt. The law follows the duties.
If you are not certain an employee clears all three parts of the test, treat them as non-exempt and track their hours. It is far cheaper than losing that bet later.
The State Layer Makes the Threshold Higher in Places
The $684-a-week federal floor is a floor, not a ceiling. Roughly fifteen states, plus the District of Columbia, set stricter rules, and when a state gives the employee more protection, the state rule wins.
California is the clearest example. To be exempt there, an employee has to earn at least twice the state minimum wage for full-time work. With the 2026 California minimum wage at $16.90 an hour, that pushes the exempt salary threshold to $70,304 a year, per the California Workplace Law Blog. That is roughly double the federal number. California also applies a stricter duties test that generally requires the employee to spend more than half their time on exempt work.
If you operate in more than one state, a worker who is exempt in one place can be non-exempt in another at the same salary. The only reliable way to stay right is to know each state's threshold and, for anyone close to the line, keep the hours.
Non-Exempt Means You Owe Overtime, So You Need the Hours
Once someone is non-exempt, the rest is arithmetic, but only if you have accurate hours to run it on. Federal law requires time-and-a-half for hours over 40 in a workweek. States like California add daily overtime after 8 hours and double time after 12. None of that math works if the underlying hours are guessed at.
This is the practical reason classification and time tracking are the same conversation. The FLSA also requires employers to keep accurate records of hours worked for non-exempt employees. A paper timesheet filled in from memory at the end of the week is exactly the kind of record that falls apart in a wage claim, because the burden is on you to show what was worked.
An accurate, timestamped record does two jobs at once. It proves you paid non-exempt workers correctly, and it makes the overtime calculation automatic instead of a Friday-afternoon guessing game.
How Punch Keeps Non-Exempt Hours Airtight
Punch is built for the non-exempt reality most small crews live in, where hours are the pay and the hours have to be right.
- Every punch is exact. Employees punch in and punch out from a phone, a browser, or a shared iPad, and each moment is recorded to the minute. Nothing is rounded, so the hours reflect what actually happened.
- Overtime is calculated for you. Punch applies the correct overtime rules automatically, including daily and double-time rules in states that have them, and it ships overtime presets for more than 50 countries. You are not doing time-and-a-half by hand.
- Lunch is a real punch. Meal breaks are punched out and back in, so paid hours stay net of the break and your overtime base is honest.
- Approvals lock it in. A manager reviews and approves each pay period before payroll, and every shift carries an audit trail, so the record is reviewed up front instead of reconstructed after a complaint.
- The record is permanent. Timesheets and hours are stored for the long haul, which is what you want the day a classification question turns into a records request.
When the hours are settled, Punch pushes approved time straight to QuickBooks Online or exports a clean spreadsheet, so the non-exempt overtime you calculated is the number that reaches payroll.
If your crew works from job sites, Punch confirms location with a geofence at punch-in only. It is a boundary on a map, never a camera in anyone's face, and punch-out and lunch are never gated by location. Classification is about paying people correctly, not surveilling them.
Frequently Asked Questions
What is the difference between exempt and non-exempt?
Non-exempt employees are entitled to minimum wage and overtime pay for hours over 40 in a workweek. Exempt employees are not entitled to overtime. To be exempt, an employee has to meet all three parts of the FLSA test: a fixed salary, at least $684 per week in 2026, and job duties that fit an executive, administrative, or professional role.
Does putting an employee on salary make them exempt?
No. A salary satisfies only part of the test. The employee also has to earn at least the salary threshold and perform exempt job duties. A salaried worker whose real job is hands-on labor or routine tasks is non-exempt and owed overtime, regardless of the title.
What is the exempt salary threshold in 2026?
Under federal law it is $684 per week, or $35,568 a year, the 2019 level that the Department of Labor restored in May 2026. Some states are higher. California requires $70,304 a year in 2026, because its threshold is twice the state minimum wage.
If I am not sure how to classify someone, what should I do?
Default to non-exempt and track their hours. The FLSA presumes employees are non-exempt unless the employer proves an exemption applies, and misclassifying an exempt-eligible worker as non-exempt costs nothing, while the reverse can mean years of back overtime.
How do I track hours for non-exempt employees?
Have them punch in and out for every shift and meal break so each has an exact start and end. A time-tracking app like Punch records punches to the minute, calculates overtime automatically, and keeps a permanent record for every shift.
Get the Classification Right, Then Prove It
Exempt versus non-exempt is a decision you make once per role and live with for years. Get it wrong and the fix is back pay, penalties, and interest. Get it right and the only thing left is keeping the hours that back it up.
Punch records every punch to the exact minute, calculates overtime correctly for your state and country, keeps paid hours net of breaks, and stores a timestamped history reviewed at approval time. Owners are always free, every plan includes every feature, and the price is flat per workspace instead of per employee, so the bill does not grow every time you hire. The 14-day free trial starts on signup, no credit card required.