Every employee, in every state, must be classified as either “exempt” or “non-exempt.”
Exempt vs. Non-Exempt Employees
To be classified as exempt, an employee must be guaranteed a certain minimum salary, paid in equal amounts each payday. For 2025 in California, the minimum required salary for an exempt employee is $68,640 (it changes every year). In exchange for receiving this guaranteed salary, the employee waives their right to overtime and certain other wage and hour protections. The resulting arrangement is often viewed as a “win/win.” The employer wins because the employer doesn’t have to pay overtime or track meal or rest periods for that employee. The employee wins because the employee gets paid the same amount every pay period, regardless of how much work they do, while also sparing the employee from having to record their work hours and meal periods every day.
But, paying an employee a salary does not, by itself, make that employee exempt. There are other conditions that must also be met for the employee to be properly classified as exempt.
In California, for example, there are 6 primary exemptions – the Executive exemption, the Administrative exemption, the Professional exemption, the Outside Commissioned Salesperson exemption, the Inside Commissioned Salesperson exemption, the Highly Paid Computer Professional exemption. Each exemption has a multi-prong test that must be met in order for the employee to qualify as exempt under that test.
For example, to qualify an employee as exempt under the Executive exemption in California, the employer must prove all of the following:
- The employee’s duties and responsibilities involve the management of the enterprise in which he or she is employed or of a customarily recognized department or subdivision thereof.
- The employee customarily and regularly directs the work of two or more other employees therein.
- Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status of other employees will be given particular weight.
- The employee customarily and regularly exercises discretion and independent judgment.
- The employee spends at least 50.1% of their time each day engaged in the high-level activities mentioned above.
- The employee earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment, which for 2025 is $68,640.
If the employer cannot show that the employee meets every one of those six criteria, then the employee does not qualify as exempt under the Executive exemption. The employer would then need to check the tests under each of the other 5 California exemptions to determine if the employee can be properly classified as exempt under one of those exemptions.
Why It Matters
When an employer misclassifies a worker as exempt, that employee doesn’t get guaranteed minimum wage, overtime, or meals or rest breaks. If that worker or a governmental agency later successfully challenges the worker’s exempt designation, the employer will be liable for up to 4 years’ worth of back-due wages, overtime, premium pay for missed meal and rest periods, and interest. In addition, the employer must pay a paystub violation penalty of up to $4,000 for not giving that employee a proper pay stub. If the employee has since left the job, the employer will also be responsible for paying “waiting time penalties” equal to 30 days’ pay (30 days X 8 hours per day X the worker’s hourly rate). On top of all this, the employer has to pay the employee’s attorneys’ fees. The total liability for a single misclassified exempt worker can easily reach $100,000 to $200,000, or more if the employee and his lawyer add a PAGA claim as well.
It is important to remember that, in most cases, when an exempt employee later challenges their classification, the employer will have no timecards for that employee. That’s because the employer assumed the employee was exempt and, thus, did not track their hours worked. As a result, the employer will have a hard time defending itself in a later lawsuit or audit. When the employee claims they worked 60 hours a week, and never got a single meal period, the employer will not have any timecards or other records to refute the employee’s claims. This makes misclassification lawsuits particularly difficult for employers – and often very expensive.
How Workplace Legal Can Help
In short, determining when a worker in California qualifies as exempt is complicated, and getting it wrong is devastatingly costly. At Workplace Legal, the attorneys in our Counseling & Preventive Advice practice have been counseling clients on the exempt vs. non-exempt issue for decades. When a client has an incoming employee, we assist the client with an analysis of the multi-prong exemption tests to determine which, if any, exemption the employee falls under. We then draft an offer letter and a job description that speak directly to the factors in the multi-prong test. These documents provide some defense to the client in the event of a later audit or lawsuit that alleges the employee was misclassified.
And, finally, attorneys in our Employment Litigation & Trials practice regularly defend employers in lawsuits brought in state and federal court by former employees who claim that were misclassified as exempt. Our Labor Commissioner Proceedings practice also defends employers in audits, investigations, and hearings being conducted by the California Labor Commissioner and the California Bureau of Field Enforcement (BoFE).
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