The short answer: After two years of regulatory whiplash, the federal overtime exemption threshold is back where it was in 2019: $684 a week ($35,568 a year). But the salary number is only one of three tests — the employee must also be paid on a salary basis and actually do exempt duties. Small businesses lose overtime cases on the duties test, not the salary test: calling someone a “manager” doesn’t make them exempt if they spend their days running the register. And several states set higher thresholds than the feds — check yours before you classify anyone.
Reclassifying workers as non-exempt changes what they cost — run the new numbers through our true-cost-of-employee calculator before you finalize the budget, not after.
This guide is educational, not legal advice. Exemption analysis is fact-specific and state-specific — job titles don’t determine exempt status, and neither does this guide.
The threshold saga, in one paragraph
The Labor Department tried to raise the exemption threshold twice in 2024 (to $844/week, then $1,128/week). A federal court in Texas vacated the rule in November 2024; the appeals died in 2026; and DOL’s May 2026 technical amendment scrubbed the vacated language from the regulations and restored the 2019 thresholds: $684/week ($35,568/year) for executive, administrative, and professional exemptions, and $107,432/year for highly compensated employees (DOL, verified October 2026). That’s the federal floor today. It may not be the floor that applies to you — read on.
The three tests (all three, every time)
An exemption requires all three — fail any one and the employee is non-exempt, owed overtime at 1.5× for hours over 40:
- Salary basis — paid a fixed salary that doesn’t fluctuate with hours worked or quality/quantity of work (with limited exceptions for things like full-day personal absences).
- Salary level — at least $684/week. (Certain workers — doctors, lawyers, teachers, outside salespeople — are exempt from the salary-level test by statute.)
- Duties — the employee’s actual primary duty must match the exemption: managing a department with real authority over other employees (executive), exercising independent judgment on significant matters (administrative), or work requiring advanced specialized knowledge (professional). (DOL Fact Sheet 17T, verified October 2026.)
The duties test is where small businesses actually lose. Common failures: the “manager” who has no authority to hire or fire and spends 90% of their time doing the same work as the crew; the “administrator” whose “independent judgment” is following a detailed procedures manual; the salaried worker whose pay gets docked for partial-day absences (which can destroy the salary-basis test too). Job titles are evidence of nothing. Auditors read job descriptions and then watch what the person actually does.
State thresholds that beat the federal number
Several states set their own, higher salary thresholds on independent schedules — and they index upward annually. If you operate in any of these states, the state number is your real threshold:
| State | 2026 threshold | Basis |
|---|---|---|
| California | $1,352/week ($70,304/yr) | 2× state minimum wage |
| Washington | $1,541.70/week ($80,168/yr) | 2.25× state minimum wage |
| Colorado | $1,111.23/week ($57,784/yr) | State COMPS Order |
| New York | $1,275/week ($66,300/yr) NYC/LI/Westchester; $1,199.10/week ($62,353/yr) rest of state | State regulation (executive & administrative; professional follows federal) |
| Maine | $871.16/week ($45,300/yr) | 3,000× state minimum wage |
Sources: CA DIR, WA L&I, CO CDLE (2026 COMPS Order), NYSDOL (via corroborating secondary sources — no current agency threshold page located; verify with NYSDOL), Maine DOL (via corroborating reports). All verified or corroborated October 2026. Because these index with minimum-wage increases, recheck annually — last year’s number is not this year’s number.
The practical trap: a $45,000-a-year “manager” is exempt under federal law ($35,568 threshold) but non-exempt in California, Washington, Colorado, and New York. Classify by the highest applicable threshold, not the federal one.
What misclassification costs
Overtime violations are among the most expensive mistakes in this cluster because the remedies stack:
- Back wages for all unpaid overtime, going back two years — three if the violation was willful.
- Liquidated damages equal to the back wages — the bill doubles, unless the employer proves good faith.
- On top: the DOL can seek injunctions, and willful or repeat violations carry civil and criminal exposure.
A single misclassified employee working 10 overtime hours a week for two years, at a $25/hour regular rate: 10 × $12.50 × 104 weeks = $13,000 in back wages, doubled to $26,000 with liquidated damages — for one employee. Multiply by headcount and watch owners go pale.
New for 2026: the federal overtime tax deduction
Separate from all of the above — and widely misunderstood — the 2025 budget law created a federal income-tax deduction for overtime pay (tax years 2025–2028). What it is and isn’t:
- It does NOT change who must be paid overtime. The FLSA rules above are untouched. This is purely a tax break for workers who earn qualifying overtime.
- Only the “half” is deductible — the premium portion above the regular rate (the extra 0.50 in time-and-a-half), and only FLSA-required premium pay.
- Caps: $12,500 per return ($25,000 joint); phaseout begins at $150,000 MAGI ($300,000 joint).
- Reporting: employers must report qualifying overtime in W-2 Box 12 with code TT starting with tax year 2026 (for 2025, the IRS granted transition relief allowing Box 14 reporting).
(IRS guidance, verified October 2026.)
For owners, the action item is payroll-system readiness: make sure your payroll provider tracks qualifying overtime premium separately for the 2026 W-2s. For workers, it’s a tax return line — not a reason to reclassify anyone.
The exemption audit: five questions
Before you call anyone exempt, answer these in writing:
- Is the salary at least $684/week (or your state’s higher number)?
- Is it a true salary — no docking for partial-day absences, no hourly math underneath?
- Does the primary duty genuinely match an exemption category — not the title, the work?
- For executive exemption: do they actually supervise two+ full-time employees and have real input on hiring/firing?
- Would you bet $26,000 per employee on these answers surviving a DOL audit?
If question 5 makes you uncomfortable, that’s your answer — classify them non-exempt and pay the overtime. Certainty is cheaper than litigation.
Methodology
Federal thresholds ($684/week; $107,432 HCE) from DOL’s May 2026 technical amendment materials, verified on dol.gov in October 2026. State thresholds from CA DIR, WA L&I, and CO CDLE primary sources; NY and Maine from corroborating secondary sources with the NYSDOL/Maine DOL provenance noted — recheck with the state agencies before relying on them. The three-test structure from DOL Fact Sheet 17T. Back-wage/liquidated-damages mechanics are FLSA statutory remedies (29 U.S.C. §216(b)). The OBBBA deduction from IRS newsroom guidance (2025–2028; caps; Box 12 code TT from tax year 2026). The $26,000 worked example is illustrative arithmetic, labeled as such. This page is educational, not legal advice — exemption status turns on actual job duties, not titles.
Sources
- DOL technical amendment (May 2026) — dol.gov ($684/week; $107,432 HCE), verified October 2026
- DOL FLSA overtime exemptions — dol.gov (three-test structure), verified October 2026
- 29 U.S.C. §213(a)(1) — uscode.house.gov (statutory exemptions)
- CA DIR 2026 exempt salary — dir.ca.gov ($70,304/yr), verified October 2026
- WA L&I overtime rules — lni.wa.gov ($80,168.40/yr), verified October 2026
- CO 2026 COMPS/PAY CALC Order — cdle.colorado.gov ($57,784/yr), verified October 2026
- IRS OBBBA overtime deduction FAQs — irs.gov (2025–2028; caps; reporting), verified October 2026
Frequently asked questions
My employee wants to be salaried/exempt. Can we agree to that? No. Exempt status is a legal conclusion from the three tests, not something the parties can contract into. An “agreement” to be exempt is worthless in an audit — and suggests you knew the classification was shaky.
Do I owe overtime to salaried employees who earn over $684/week? Only if they’re non-exempt under the duties test. Salary level is necessary but not sufficient — a $50,000-a-year worker doing non-exempt duties is owed overtime like anyone else.
What about comp time instead of overtime pay? Private-sector employers generally cannot substitute comp time for overtime pay — that’s a public-sector rule (with strict conditions). Private employers owe the 1.5× premium in wages.
My state threshold is higher than federal. Which do I follow? The higher one. Federal law is the floor; when state law is stricter, state law governs. This is the single most common overtime mistake for businesses in CA, WA, CO, NY, and ME.
Does the new tax deduction mean I should reclassify people as hourly? No — and don’t confuse the two systems. The deduction rewards workers who earn overtime; it doesn’t change who’s entitled to it. Classification follows the three tests, full stop.