It sounds simple: classify workers as exempt or non-exempt, cut the checks, and move on. But in reality, when it comes to employee pay, one wrong label can cost millions. Missteps in employee classification are among the costliest mistakes businesses make, and a single error can trigger cascading liability—unpaid wage claims, overtime disputes, government penalties, and even class action lawsuits.
What looks like a simple paperwork issue can quickly snowball into a financial and legal headache. Understanding the difference isn't just about compliance—it's about protecting your business from costly missteps. Employers who take a proactive approach—by auditing roles, staying current on legal updates, and seeking guidance when in doubt—turn compliance into a competitive advantage.
In today's environment, the most successful businesses know that when it comes to wage and hour laws, prevention pays.
The Current Legal Landscape: Where We Stand in 2025
The question of who is—and who is not—exempt from overtime pay has never been more pressing for businesses. With evolving federal regulations, litigation trends, and new rulings affecting the Fair Labor Standards Act (FLSA), businesses must revisit how they classify employees.
A recent federal court decision has rolled back the Department of Labor’s (DOL) attempt to raise the salary threshold for exempt workers. While that may seem like a reprieve, it’s actually a wake-up call: businesses must not assume exemption based on pay alone. For example, businesses often believe that "salary = exempt," but that is not always true. The DOL and courts look closely at the duties performed, not just the pay structure.
In April 2024, the DOL issued a final rule significantly increasing the minimum salary required to qualify for the “white collar” exemptions under the FLSA. The rule was set to raise the threshold from $684/week ($35,568/year) to $844/week in July 2025, and to $1,128/week in January 2026. But in November 2024, a federal judge in Texas struck down the rule, holding that the DOL had exceeded its authority. For now, the threshold remains at $684/week, and the duties test remains the core component of exemption classification.
Bottom line: Even highly paid workers may be misclassified if their job duties don’t meet the criteria set by the FLSA. And if they are misclassified, employers could owe years of back pay, liquidated damages, and attorneys’ fees.
Common Misclassification Pitfalls
When classifying employees as exempt vs. non-exempt, businesses frequently trip up in a few key areas:
- Inflated Job Titles: overexaggerating job duties that the employee does not actually perform or calling someone a "manager" or other high-level position, regardless of actual job duties.
- Underpaid Salaried Workers: paying less than the applicable federal or state minimum salary threshold or making improper salary deductions for partial-day absences or work slowdowns.
- Failure to Apply the Duties Test: assuming salary or a high-level job title alone means the employee is "exempt".
- Failure to Monitor and Account for Remote Work and Off-the-Clock Time: failing to account for time worked remotely and/or off-the-clock and failing to apply the proper state law for remote employees, which may have stricter, more protective wage-and-hour requirements than the employer's state.
Litigation Exposure and Financial Risk
FLSA violations can carry steep penalties, including:
- Back pay for unpaid overtime (up to three years if the violation was willful)
- Liquidated damages (often doubling the amount owed—or in some states, tripling)
- Attorneys’ fees and costs for prevailing employees (which can exceed the amount of unpaid wages in class or collective actions)
- Class/collective action exposure if multiple employees are misclassified
- Civil money penalties for repeated violations or willful misclassification
- Additional state penalties and reputational harm with employees and regulators (DOL/State DOL audits)
Risk Management and Best Practices for Employers
To stay compliant and avoid legal exposure, employers should adopt a proactive and ongoing strategy, including the following:
- Conduct an Internal Classification Audit. Businesses should review exempt employee classifications throughout the year, as needed, and update classification status based on actual duties the employee is performing. Businesses should not rely on pay structure or job titles alone; confirm that both the salary threshold and the duties test are met for each exempt role. Track where remote employees work to ensure the correct state law is applied.
- Maintain Current and Accurate Job Descriptions. Businesses should maintain accurate job descriptions aligned with actual duties performed in the role. Update job descriptions and pay structures when responsibilities change.
- Reclassify When Necessary—But Strategically. If an error is discovered, fix it going forward, but consider legal advice before making retroactive pay adjustments to mitigate risk. Document exemption decisions and rationale for each role. Communicate reclassifications before changes take effect. Businesses should revisit pay structure at least annually to ensure compliance with updated thresholds. Businesses should also seek legal review before classifying "borderline" roles such as "assistant managers" or "project coordinators," which are often at the center of lawsuits.
- Train Management. Educate and train supervisors and managers regarding exemption requirements, the importance of time tracking and maintaining accurate records of hours worked by non-exempt employees, and prohibiting "off-the-clock" work, as necessary.
- Monitor Regulatory Updates. To ensure compliance with the evolving wage-and-hour landscape, designate HR, legal, or compliance staff to monitor federal and state DOL updates. Businesses are encouraged to work with legal counsel to catch nuanced changes (for example, case law shifting "primary duty" interpretations). Ensure payroll systems are updated in time so employees are not underpaid if thresholds increase.
Conclusion: proactive compliance is the best defense
Employee misclassification isn’t just a technical error—it’s a major legal liability that can damage a company’s finances and reputation. Businesses must focus on both salary and job duties, keep up with evolving legal standards, and maintain accurate documentation. Businesses should treat classification as an ongoing compliance process, not a one-time decision. Now is the time to reevaluate classifications, train managers, and build a defensible framework to handle exemption issues confidently.
With litigation on the rise and regulations shifting, businesses that invest in compliance today can avoid costly lawsuits tomorrow.
We encourage employers and business owners who have specific questions about employee classification or any other employment law topics to contact Haley Harrigan, the author.
Click here to read Haley's article published by the Phoenix Business Journal.
About the Author
Haley Harrigan represents and counsels individuals, small businesses, franchised operations, and large companies on a wide range of employment issues, ranging from internal compliance to wage-and-hour litigation. She serves as chair of the firm’s employment and labor law department.