Overtime disputes are rarely about arithmetic. They are about classification. An employer decides that a role is exempt, pays a salary and stops tracking hours, and years later a regulator or a court decides the duties never met the test. The bill includes unpaid overtime, liquidated damages and attorneys' fees, which is why the classification decision deserves more attention than the threshold headline.
The 2026 rule changes the salary floor and, in some readings, the emphasis on the duties analysis. This guide explains how the pieces fit together, which records to keep and how to audit a payroll before a claim arrives. It is general information; the specific standard for your state and workforce may be stricter.
Key facts
- Overtime exemption generally requires both a salary basis and a duties test under the Fair Labor Standards Act.
- The salary threshold is only one part of the analysis; job titles and pay alone do not establish exemption.
- Bonuses, commissions and certain allowances may count toward the salary threshold, but rules are specific.
- Employers must track hours for non-exempt workers and keep accurate payroll records.
- States and some localities may set higher thresholds or broader overtime rights than federal law.
What changed and when
The Fair Labor Standards Act requires overtime at one and a half times the regular rate for hours over 40 in a workweek, unless an exemption applies. The most common exemptions are executive, administrative, professional, computer and outside sales. Each has a duties component, and most require payment on a salary basis.
When a salary threshold changes, employers must decide by the effective date whether to raise a salary, reclassify a role as non-exempt or restructure duties. The decision should be documented. A common mistake is to raise pay without reviewing duties, which fixes the threshold but not the exemption. Another is to reclassify employees as non-exempt without explaining timekeeping, which produces inaccurate records and a new set of claims.
The salary threshold explained
The salary-basis test requires a predetermined amount paid each pay period that is not subject to reduction because of variations in the quality or quantity of work. That does not mean a salary can never change; it means the employer cannot dock pay for a short day or a slow week in the way it might for an hourly worker. Improper deductions can destroy the exemption for the entire period.
Bonuses and commissions can sometimes count toward the threshold, but the rules distinguish between guaranteed and discretionary payments. A nondiscretionary bonus tied to production or hours may need to be included in the regular rate for overtime calculations. An employer that treats every bonus as discretionary is taking a position a regulator may not accept. Read the definitions and, when in doubt, calculate both ways to see the exposure.
The duties test, not just the salary
The duties test asks what the employee actually does, not what the job description says. For the administrative exemption, the role must involve office or non-manual work directly related to management or general business operations, and the exercise of discretion and independent judgement on matters of significance. For the executive exemption, the employee must manage a department or subdivision and have authority over hiring or promotion, or their suggestions must carry particular weight.
The professional exemption covers learned professionals and some creative professionals. The computer exemption has its own criteria and, in some cases, a different pay basis. Titles are not decisive. An "assistant manager" who spends most of the day on the register may be non-exempt, while a "coordinator" who sets policy may be exempt. Document the actual duties, the supervision structure and the decisions the role is authorised to make.
Bonuses and commissions
The regular rate is not simply the hourly wage. It includes most nondiscretionary payments, such as production bonuses, shift differentials and commissions, allocated across the period they cover. Overtime is then paid at one and a half times that rate. Excluding a bonus because it is paid quarterly is a frequent error, and it can understate overtime for every week in the quarter.
Discretionary bonuses are treated differently if the employer retains discretion over both the amount and the decision to pay, and the payment is not promised or tied to a formula. Even then, documentation matters. A plan document that describes a target bonus, a formula or a consistent history of payment can convert a discretionary programme into a nondiscretionary one. Review plan documents and payroll coding together.
Paying someone a salary does not make them exempt. It only makes the mistake more expensive to fix.
Recordkeeping and back pay
Employers must keep accurate records of hours worked, wages paid and deductions for non-exempt employees. Timekeeping should capture start and stop times, meal breaks and any work performed off the clock. Remote work has made this harder: checking email after dinner, answering a message on a day off or attending a mandatory call can all be compensable. A written policy that prohibits off-the-clock work helps only if it is enforced.
If a violation is found, the remedy can include unpaid overtime for the applicable limitations period, liquidated damages equal to the unpaid amount and attorneys' fees. Some states add penalties and a longer lookback. A self-audit that identifies and corrects a classification error before a complaint can reduce exposure, though it does not eliminate every risk. Consult counsel before conducting an audit that may create a written record.
State law can be stricter
The federal rule is a floor. States may set a higher salary threshold, a shorter overtime trigger, daily overtime or broader coverage. California, New York, Washington and others have their own tests and their own enforcement agencies. A role that is exempt under federal law may be non-exempt under state law, especially for lower-paid salaried employees.
Multi-state employers should map each role to the states where it is performed, not to the headquarters. Payroll systems often default to one rule set, which is how a compliant policy becomes a state-specific violation. Review the applicable state agency guidance, the wage orders and any local ordinance. When the standards conflict, the more protective standard generally governs the employee's claim.
A compliance checklist
Start with a role-by-role review: salary level, pay basis, actual duties, supervision and discretion. Confirm that deductions do not violate the salary-basis rule. Check whether bonuses and commissions are included in the regular rate. Audit timekeeping for remote and on-call work. Update job descriptions to match reality and train managers on what they cannot ask employees to do off the clock.
Document the decision and the date. If you reclassify, communicate clearly, set up timekeeping and explain how overtime will be approved. Keep payroll records for the required period and make sure the vendor's system can produce them. Review the classification again when a role changes, not only when the rule changes. Most overtime liability accumulates quietly between audits.
This article is general information, not legal advice. Wage-and-hour rules are fact-specific, and a qualified employment lawyer or your state labour agency can advise on your workforce.
Official source: U.S. Department of Labor — overtime and FLSA guidance. This article is general information, not legal advice.
