Test in Order: Salary → Duties → State

  1. Salary basis and level.
  2. Duties prong by exemption.
  3. Highest state threshold wins.

Pair with Payroll Guide, Multi-State, 1099 vs W-2, and Payroll Year-End.

Controls

  • Timekeeping for non-exempt, no off-clock work.
  • Duties questionnaire on hire and promotion.
  • Threshold watchlist by state, reviewed semi-annually — see Compliance Checklist.
  • Back-pay calculation with preparer/reviewer sign — see Month-End Close.

Link to Wage-Hour Guide for baseline and Internal Controls for remediation.

Duties Tests in Practice (With Examples)

Exemption Duties test (federal) Pass example Fail example
Executive Manage 2+ FTEs, hire/fire authority Engineering manager with 5 reports and firing authority “Team lead” with no reports who only assigns tickets
Administrative Discretion on significant matters HR manager setting leave policy Payroll clerk processing timesheets per script
Professional Advanced knowledge, prolonged study CPA designing tax positions Bookkeeper coding invoices to fixed rules
Computer Systems analysis/programming Software engineer architecting services Help-desk resetting passwords per runbook
Outside sales Customarily away from office selling Field rep calling on customer sites Inside SDR on phones all day

Two traps catch startups: (1) giving a senior title to a junior individual contributor — title never decides; (2) the computer exemption’s hourly-rate alternative, which has its own threshold and still requires duties. Document the analysis per role with actual task percentages, not the job posting — see 1099 vs W-2 for the parallel classification discipline.

State Threshold Watchlist (Check January and July)

State Posture vs federal Action
California Higher salary test + strict duties Re-test every exempt role annually
New York Higher, varies by size/location Track NYC vs rest-of-state
Washington Indexed, rises yearly Calendar July updates
Colorado Higher, migrates toward top Confirm current-year figure
Alaska, Maine, others Above federal at various levels Check on every new hire state — see Multi-State

Put the watchlist in the Compliance Checklist semi-annual review. A single remote hire in a high-threshold state can flip exempt statuses overnight.

Correction Workflow (When You Find a Miss)

  1. Stop the bleeding. Reclassify prospectively from the next pay period; fix timekeeping so hours are captured.
  2. Quantify. Reconstruct hours (time system, badge, calendar, manager attestation in that order of reliability) × 1.5 × regular rate, plus state daily-overtime and meal-period premiums where applicable.
  3. Pay and document. True-up with interest where required, memo root cause (duties drift is the usual one — the role outgrew the exemption), and retain the calculation with preparer/reviewer sign — see Month-End Close.
  4. Prevent recurrence. Duties questionnaire on every promotion and annual re-certification of exempt roles. Voluntary correction before a complaint or audit dramatically reduces penalties — coordinate with counsel on privilege for the memo.

FAQ

Do startups get an exemption?

No size exemption for overtime; small-business coverage rules differ by statute — confirm with counsel.

What documentation survives audit?

Duties analysis, salary records, time logs, and correction memos per Audit Procedures.

Next Steps

  1. Re-test all exempt roles against duties + state threshold now.
  2. Fix timekeeping before next payroll.
  3. Calendar semi-annual threshold review.