Your $35,568 Exempt Employee Could Still Owe Overtime — If They Work in the Wrong State

You classified your office manager as exempt last year. Salary is $48,000. Duties look managerial. No overtime tracking. You're done, right?

If that manager works — or even occasionally logs in from — Washington, that $48,000 salary is $32,000 short of exempt status in 2026. Every hour over 40 you didn't track is now back pay, potentially doubled as liquidated damages, plus your state's penalties. The federal $684-a-week threshold didn't protect you because the state threshold does, and five states just raised theirs on January 1.

This guide explains what the federal salary level actually is after the courts vacated the 2024 rule, which states blew past it for 2026, and how to audit your own payroll before an employee — or a Department of Labor investigator — does it for you.

The Federal Floor in 2026: Still $684 a Week​

What the law requires today​

Under the Fair Labor Standards Act (FLSA) section 13(a)(1), an executive, administrative, or professional employee is exempt from minimum wage and overtime only if you satisfy three tests at once:

1. Salary basis — paid a fixed salary that doesn't swing with hours or quantity of work, with very limited deductions allowed.
2. Salary level — that salary meets the dollar threshold.
3. Duties — the actual job duties match the exemption's definition.

Fail any one, and the exemption fails. No partial credit.

The U.S. Department of Labor's current earnings thresholds page lists the federal levels that survived litigation:

• Standard salary level: $684 per week ($35,568 annualized)
• Highly Compensated Employee (HCE) total annual compensation: $107,432 per year, including at least $684 per week paid on a salary or fee basis
• Special rates: $455 per week for Puerto Rico, Guam, the U.S. Virgin Islands and CNMI; $380 per week for American Samoa; $1,043 per week base rate for motion-picture employees (prorated by days worked); and $27.63 per hour for computer employees paid hourly

Those numbers also come with a carve-out: doctors, lawyers, teachers, and outside sales employees are not subject to a salary threshold at all — their exemption turns entirely on duties.

If you're checking a single-state, single-location business operating only under federal law, $684 is your number. If you touch any of the states below, $684 is merely the floor under a much higher ceiling.

The $844 and $1,128 increases that never stuck​

The $684 figure is not new. It arrived in the 2019 rule and never moved. The DOL tried to move it twice in 2024:

• July 1, 2024: raise the standard level to $844 per week ($43,888 annualized) and the HCE threshold to $132,964.
• January 1, 2025: raise again to $1,128 per week ($58,656 annualized) and $151,164 for HCE, with automatic triennial updates thereafter.

On November 15, 2024, the U.S. District Court for the Eastern District of Texas vacated the entire 2024 rule nationwide. The court held the DOL exceeded its authority by effectively making salary the dominant test over duties. The Fifth Circuit appeal was filed, but as of this writing the vacatur stands, so every increase — including the automatic escalation mechanism — has no legal effect.

What that means for your books: if you raised salaries in the second half of 2024 to chase $844, you are not required by federal law to keep them there. If you reclassified people to nonexempt to avoid the increase, you may keep them nonexempt or re-evaluate. But check any employment agreement, offer letter, or state law promise you made along the way — rolling back pay without clear communication creates its own wage-claim risk.

The DOL's own earnings-thresholds page today shows $684 and $107,432 with no footnote about a pending increase, which is the clearest signal you have that those are the federal numbers to plan against for the rest of 2026.

Why Duties Alone Never Saves an Exempt Classification​

Small businesses often audit duties and assume they're safe: "She manages two people, so she's exempt." The three-test structure means a perfect duties match still fails if salary is short.

Here's how the core exemptions actually read when you apply them:

Executive exemption​

• Primary duty is managing the enterprise or a customarily recognized subdivision.
• Customarily and regularly directs the work of at least two full-time-equivalent employees.
• Has authority to hire or fire, or recommendations are given particular weight.

A shift lead who mostly covers the same register as everyone else, even with a title and a $50,000 salary, usually fails the primary-duty element.

Administrative exemption​

• Primary duty is non-manual work directly related to management or general business operations.
• Exercises discretion and independent judgment on matters of significance.

Bookkeepers who follow well-worn reconciliation checklists, customer-service reps who apply a handbook, or office coordinators who keep calendars without authority to set policy often fall outside this one, even at higher pay.

Professional exemption​

• Primary duty requires advanced knowledge in a field of science or learning, customarily acquired by prolonged, specialized intellectual instruction, or
• Creative talent in a recognized artistic field.

Paralegals, bookkeepers, marketing generalists, and many "analyst" roles rarely meet the learned-professional standard without licensure or advanced degree as a job prerequisite.

The computer and outside sales paths​

Computer employees can be exempt on salary ($684/week) or on an hourly basis at $27.63 per hour if their primary duty is systems analysis, programming, or software engineering — not help-desk, hardware installation, or basic IT support. Outside sales employees are exempt only if the primary duty is making sales away from the employer's place of business; inside sales, even if paid heavily on commission, must meet salary and duties or be treated as nonexempt.

In every case, meeting duties without meeting salary is nonexempt. Meeting salary without meeting duties is also nonexempt. Your payroll classification should document both, not just one.

Five States That Raised Their Floor on January 1, 2026​

Federal law is your minimum. State law is your actual obligation wherever the work is performed — and where remote employees sit counts. Six states routinely exceed the federal threshold; five of them increased again for 2026. If you have employees in any of these states, use the state number.

*Rounded published figures vary slightly by release; use the final state wage order for the applicable region. Alaska also maintains a separate threshold above federal law and adjusted mid-year toward a similar range — confirm if you employ there.

How each number is built:

• California ties the exempt threshold to twice the state minimum wage ($17.00/hour in the state wage order for 2026 translates to $70,304). Computer-professional hourly thresholds also rose to $56.97 per hour / $118,657 annualized.
• Washington pegs exempt salary to a multiple of the state minimum wage ($17.13/hour for 2026). That's why it leads the nation — and it's adjusted every January without separate legislative action.
• Colorado sets its threshold by rule and published $57,784 for 2026 with a corresponding highly compensated threshold of $130,014 (2.25× the base). Computer-pro exemption has its own rate.
• New York sets dollar floors by wage order rather than a formula. Confirm the employee's primary work location — the higher downstate rate follows the work site, not the company headquarters.
• Maine publishes an annual salary on a fixed schedule, now $45,300.32.

For multi-state employers, the rule of thumb is blunt and expensive to forget: you owe the highest applicable threshold where the work is performed, not where you incorporated. A Texas company with a remote designer in Seattle owes Washington's $80,168.40 to treat that designer as exempt. A Colorado worker who moves to California mid-year triggers California's level the week duties are performed there.

And the highly compensated shortcut does not rescue a low salary. Colorado and Washington both require the employee to still meet the full weekly salary threshold before the HCE duties-light test matters; you cannot use $107,432 federal HCE logic to bypass a $63,000 shortfall against a state number.

What Multi-State Really Costs When You Miss​

Misclassification exposure stacks quickly because overtime liability multiplies, not adds:

• Back wages: Compute the regular rate (total compensation divided by total hours) and the half-time premium for every overtime hour. Lookback is two years — three if the violation is willful, which courts interpret broadly when an employer knew or showed reckless disregard for the requirements.
• Liquidated damages: Under the FLSA, an equal amount to back pay — effectively doubling federal exposure — unless the employer proves good faith and reasonable grounds.
• State penalties: Waiting-time penalties, wage-statement penalties, and per-pay-period penalties vary by state and can sit on top of FLSA damages. California and New York are particularly additive.
• Attorneys' fees and costs: Fee-shifting means the employer's tab includes both sides when the employee prevails.
• Tax and benefits ripple: Reclassifying to nonexempt changes withholding timing on overtime, workers' compensation codes in some states, and any benefits tied to exempt status.

A single employee misclassified at $48,000 in Washington who averages five overtime hours a week at an effective $30-an-hour regular rate can generate roughly $11,700 in unpaid overtime per year — $23,400 over two years — doubled to $46,800 with liquidated damages before any state penalty or fee award. That math is why an audit now is cheaper than a demand letter later.

Six Steps to Audit Before the Next Payroll​

You don't need outside counsel to find your own exposure, though counsel helps you keep the audit privileged if you expect contested claims. Work from payroll data outward.

1. Pull your exempt roster and current salaries​

Export every employee coded exempt, with annualized salary, work location (not billing address), and primary duties as written — not as titled. Flag every record under the highest applicable state threshold, not just $35,568. If you have a California employee at $68,640 carryover from 2025, she is already below $70,304.

2. Apply duties to every flagged role​

For each flagged employee, re-read the actual duties against the executive, administrative, professional, or computer definitions above. If you cannot articulate in one paragraph why the primary duty meets the exemption, treat that position as a reclassification candidate. Titles and job descriptions you wrote for recruiting do not control — performed duties do.

3. Decide: raise, reclassify, or restructure​

You have three lawful choices for a failing classification:

• Raise to the required salary and document the effective date. Prospective only — it doesn't cure past overtime.
• Reclassify to nonexempt, move to hourly or salaried-nonexempt with overtime tracking, and set a regular rate that absorbs expected overtime without cutting base pay in a retaliatory way.
• Restructure duties so the role genuinely fits another exemption — for example, narrowing an administrative role to policy-level discretion. Do this only if the business actually needs it.

Whatever you choose, apply it consistently across comparable roles or document why one role differs. Inconsistent fixes read as awareness of risk.

4. Fix the salary-basis mechanics​

Exempt means salary basis. The most common bookkeeping foot-gun is docking an exempt salary for a partial-day absence or for low hours in a slow week. Lawful deductions are narrow: full-day absences for personal reasons or sickness under a bona fide plan, offsets for jury or military pay, penalties for major safety infractions, and the first or last week proration. Voluntary extra pay for extra work is fine; paying less for less work in a week breaks the exemption.

Also check non-discretionary bonuses and commissions. Under federal law, up to 10% of the standard salary level can be met with nondiscretionary bonuses and incentive pay if paid at least annually, but many states — California included — do not allow that credit. If you use the 10% catch-up to hit $684, you may still be short under a state's stricter rule.

5. Rebuild time and payroll records before you need them​

If you reclassify, start tracking hours the day the classification changes and keep the records:

• Daily start/stop and total hours, meal breaks where required.
• Regular-rate calculation each workweek, including nondiscretionary bonuses, commissions, and shift premiums.
• California and Colorado require additional daily-overtime tracking (over 8 in a day, seventh-day premiums where applicable).

Retroactively recreating hours when a claim arrives is not credible. The absence of accurate employer records allows the employee's reasonable estimate to control. A clean timekeeping feed into payroll — and a reconciliation report that ties every paycheck back to approved hours — is your best exhibit.

6. Document the decision, not just the outcome​

Keep a short memo for each role audited: duties reviewed, salary tested against which threshold, determination, effective date, and who approved it. Store it with the job description and offer letter. If you consulted counsel, keep privileged and non-privileged versions separately.

Bookkeeping for Overtime Risk: Chart the Liability You Just Found​

Classification is a legal test, but the dollars live in your books. Three bookkeeping habits keep the exposure visible and the fixes defensible.

Separate your wage accounts. Don't bury overtime in "Salaries" as a single line. Use a chart that distinguishes regular wages, overtime premium, double-time where applicable, and nondiscretionary bonuses. That separation lets you compute the regular rate correctly and spot overtime creep before it becomes a claim. In plain-text tools it might look like Expenses:Payroll:Wages:Overtime-Premium and Expenses:Payroll:Bonuses:Nondiscretionary.

Accrue what you owe. If your audit reveals historical underpayment, book a liability — don't wait for a lawsuit to name a number. An entry crediting Liabilities:Payroll:Overtime-Payable and debiting Expenses:Payroll:Overtime-Premium for the estimated back wages (plus a separate accrual for estimated liquidated damages where probable) gives management and your CPA an honest picture and supports any disclosure. Track state penalties in a distinct liability so they don't contaminate federal-only analysis.

Reconcile time to cash every pay run. The best control is boring: a payroll clerk (or you, in a small company) reconciles approved timesheets to the payroll register to the bank disbursement, signs, and files. Capture the approval chain in your ledger or accompanying documentation. For a technical reference on keeping a transparent, auditable payroll pipeline, see the Beancount documentation and the dashboarding approach in Fava.

One more lever: if your overtime risk is real, a modest reserve contribution — parked in a separate operating account and reflected as a designated reserve in your books — signals discipline to a lender and prevents a surprise claim from strangling cash flow. It does not reduce the legal obligation, but it does reduce the operational damage.

If You Reclassify, Handle the Conversation Well​

Reclassification lands better when you frame it as protection, not demotion. Explain that the duties and salary tests changed — especially if a move to California or Washington triggered a new threshold — and that accurate time tracking ensures accurate pay for all hours worked. Keep the salary conversation steady: many employers convert to an hourly rate that, assuming a realistic workweek, preserves weekly pay while making overtime explicit. Avoid implying anyone must "work off the clock" to preserve exempt prestige; that instruction, in writing or verbally, is the fastest path to a willful finding.

For remote and hybrid teams, add one policy line you will actually enforce: work location determines the threshold, and employees must get advance approval before performing work from another state for more than an incidental period. Every system that assigns a tax withholding state should also drive the overtime-threshold lookup — otherwise payroll and compliance will disagree at the worst moment.

The One-Page Review to Run This Quarter​

Set a 60-minute meeting before the next quarter closes and walk this checklist:

• List every exempt employee and current salary by work location.
• Compare to the largest applicable threshold: $35,568 federal or the state figure from the table above.
• Verify salary-basis compliance: no partial-day deductions, proper handling of PTO and bonuses.
• Validate duties for every flagged role against the actual exemption definitions.
• Choose raise, reclassify, or restructure — and set the effective pay-period date.
• Turn on time tracking and regular-rate calculations for any reclassified roles.
• Accrue historical exposure and open a reserve if material.

A small company with five to twenty employees can finish this review in an afternoon. The same review after a complaint, with subpoenaed records and recreated timesheets, takes months and costs multiples more.

Simplify Your Financial Management​

As you bring exempt classifications, overtime accruals, and multi-state thresholds into line, keeping payroll and liability records you can actually audit matters. Beancount.io gives you plain-text accounting that is transparent, version-controlled, and AI-ready — so every payroll decision, from a threshold-driven raise to a reclassification accrual, stays traceable. Get started for free and run your next payroll review on books you trust.