The core idea
Worker classification: three gates, in order.
Exempt, non exempt, hourly, salaried, contractor, temp. Six words that get used as if they were one list of six choices. They are not. They sit on three separate questions, and you have to answer them in sequence. This is how to hold them straight in a live client conversation.
Work top to bottom · never skip one
Almost every classification mistake comes from answering a later gate first. Someone says “she’s salaried” and stops, as if that settled overtime. It settles nothing. Work the gates in order and the six terms fall into place.
1
Gate 1 · Worker status
Is this person our employee at all?
EmployeeIndependent contractor
This is the highest stakes question in the whole stack. Get it wrong and the exposure is unpaid overtime, unpaid payroll taxes, unpaid workers comp premiums, unemployment liability, benefit plan claims, and penalties, going back years, for every worker in the same bucket. Everything below Gate 1 only applies to employees.
The rule that surprises clients
A signed agreement titled “Independent Contractor” does not create a contractor. The actual working relationship controls, and agencies look at practice over paper.
2
Gate 2 · Overtime status
If they are an employee, are they exempt from overtime?
ExemptNon exempt
Non exempt is the default. Exempt is a narrow carve out the employer has to affirmatively earn by meeting every part of a test. Non exempt employees get minimum wage, get overtime, and must have their hours tracked. Exempt employees do not get overtime.
The rule that surprises clients
Job title is irrelevant. “Manager,” “Coordinator,” “Analyst,” and “Assistant Director” prove nothing. What the person actually does most of the time is what decides it.
3
Gate 3 · Pay method
How do we mechanically pay them?
HourlySalaried
This is a payroll administration choice, and it is the axis people confuse with Gate 2. Gate 2 constrains Gate 3 in one direction only: an exempt white collar employee generally must be paid on a salary basis. But paying a salary never makes anyone exempt. Salaried non exempt is entirely legal and very common, and those employees still get overtime.
The rule that surprises clients
“We put her on salary so we don’t have to pay overtime” is the single most common and most expensive misconception in small and mid market HR.
×
Not a gate · Duration and sourcing labels
Temp, seasonal, fixed term, part time, intern, PRN
No legal classification
These describe how long someone is around or where they came from. They sit on top of the answers to Gates 1, 2, and 3, and they never substitute for them. A temp is still either an employee or a contractor, and if an employee, still either exempt or non exempt. “Temp” is not a status that removes obligations.
The rule that surprises clients
There is no legal expiry date on employee rights. A six week temp and a six year veteran doing the same job have the same overtime status.
Term by term
What each word actually means.
Each term below is tagged with the gate it belongs to. If two terms carry different tags, they are answering different questions and cannot be traded for one another.
Gate 2 · Overtime status
Non exempt
- What it means
- Covered by wage and hour protections. Entitled to minimum wage and to overtime at 1.5x the regular rate for hours over 40 in a workweek under federal law, plus any stricter state rule. Hours must be recorded.
- Can be paid
- Hourly or salaried. Either is fine.
- Not the same as
- Hourly. Plenty of non exempt employees are salaried.
Gate 2 · Overtime status
Exempt
- What it means
- Falls inside a specific statutory exemption, most often the executive, administrative, or professional exemptions, and is therefore owed no overtime.
- How you qualify
- All three tests must pass: salary basis, salary level, and duties. Fail one and the person is non exempt.
- Not the same as
- Salaried, senior, trusted, or hard to schedule.
Gate 3 · Pay method
Hourly
- What it means
- Paid a rate per hour worked. A pay mechanic, nothing more.
- Practical effect
- Almost always signals non exempt, because the salary basis test blocks hourly pay for most exemptions.
- Narrow exceptions
- Certain computer employees paid at or above the federal hourly threshold, licensed physicians, and lawyers can be hourly and still exempt.
Gate 3 · Pay method
Salaried
- What it means
- Paid a fixed, predetermined amount each pay period that does not go up or down with hours or output.
- Practical effect
- A prerequisite for most exemptions, and by itself proof of nothing.
- Watch for
- Docking an exempt employee’s salary for partial day absences or slow weeks. That can break the salary basis and collapse the exemption for the whole group.
Gate 1 · Worker status
Independent contractor
- What it means
- A separate business providing services. Paid on invoice, reported on 1099‑NEC, no withholding. No minimum wage, no overtime, no employer benefits, generally outside workers comp and unemployment.
- Who decides
- Not you and not the contract. The IRS, the Department of Labor, and the state each apply their own test to the same relationship, and they can reach different answers.
- Strongest signals of a real contractor
- Sets their own methods and schedule, serves other clients, uses their own tools, can profit or lose on the engagement, engaged for a defined project.
Gate 1 and beyond
Temp
- Two very different things
- Agency temp: a W‑2 employee of the staffing agency, placed with the client. The agency runs payroll and classification. The client can still be a joint employer and pick up liability.
- Direct fixed term hire: your own W‑2 employee with a planned end date. Gets everything any employee gets, and still needs a Gate 2 answer.
- Where it bites
- Benefit plan eligibility language and ACA hours testing do not care what you call the role. Long running temps doing core work are a standard audit and litigation trigger.
Gate 2 in detail
The three exemption tests.
For the executive, administrative, and professional exemptions, the employer has to satisfy all three. This is the part clients most want to shortcut.
| Test | What it asks | Where it goes wrong |
|---|---|---|
| Salary basis | Is the person paid a fixed, predetermined amount each period, not reduced for variations in quantity or quality of work? | Improper deductions. Partial day docking, deductions for cash register shortages, unpaid disciplinary suspensions of less than a week. |
| Salary level | Does the salary meet or beat the applicable floor? Use the higher of the federal and state figure for the state where the person works. | Nobody re‑runs it on January 1 when state thresholds rise. The exemption is lost the day the new rate takes effect, not the day payroll notices. |
| Duties | Do the person’s actual primary duties fit the exemption claimed? Executive means managing, directing two or more staff, and real authority over hiring or firing. Administrative means office work directly related to management or general business operations with discretion and independent judgment on significant matters. Professional means advanced knowledge in a field of science or learning, usually via a specialized degree. | Classifying off the job description instead of the real job. A “supervisor” who spends 80 percent of the shift doing the same line work as their team is non exempt. |
Two exemptions that break the pattern
Outside sales has no salary requirement at all. Highly compensated employees can qualify on a much lighter duties showing if total annual compensation clears the federal figure and the weekly salary floor is still met. Do not generalize either one to other roles.
Current thresholds
The numbers, as of August 11, 2026.
These change. Federal moved in May 2026 and state figures reset every January 1. Treat this panel as perishable and re‑verify before quoting it to a client.
Federal · FLSA
Floor, never a ceiling- Minimum wage$7.25 / hr
- Overtime trigger40 hrs / week
- Overtime rate1.5x regular rate
- EAP salary level$684 / wk
$35,568 / yr - Highly compensated employee$107,432 / yr
plus $684 / wk salary - Computer employee, hourly option$27.63 / hr
California · 2026
If any employee works here- State minimum wage$16.90 / hr
- Exempt salary, 2x min wage$1,352 / wk
$70,304 / yr - Computer professional$58.85 / hr
$122,573.13 / yr - Licensed physician$107.17 / hr
- Daily overtimeover 8 hrs / day
- Double timeover 12 hrs / day
Multi state clients
Classification follows where the employee actually works, not where the company is headquartered. California, Colorado, New York, Washington, Maine, and Alaska set exempt salary thresholds above the federal floor, and several set separate figures for computer professionals. Local city minimum wages can raise the hourly floor without raising the exempt salary threshold, which catches people out. For a remote workforce, build the classification list state by state.
Gate 1 in detail
Three tests, one relationship.
There is no single national contractor test. The same worker gets examined under different standards depending on who is asking, and the strictest applicable test is the one that sets your risk.
| Who is asking | Test | What tips it toward employee |
|---|---|---|
| IRSPayroll tax, withholding | Common law test across three categories: behavioral control, financial control, and the type of relationship. | You direct how the work gets done, you supply the tools, the arrangement is open ended, the work is core to your business, the person gets employee style benefits. |
| US Department of LaborMinimum wage, overtime | Economic reality test. The federal standard is unsettled right now: the 2024 rule is on the books but is not being enforced, and a proposed replacement centering on control and opportunity for profit or loss has not been finalized. Courts apply their own circuit case law regardless. | Economic dependence on your business rather than operating an independent business. Control and no genuine chance of profit or loss are the heaviest factors under either version. |
| StateWage orders, UI, workers comp | Often stricter. California and a number of other states use the ABC test, under which the worker is presumed an employee unless the hiring entity proves all three prongs. | Under ABC, prong B is where most arrangements die: the work has to fall outside the usual course of your business. A marketing agency cannot make its marketers contractors. |
Do not answer this one on the call
Because the federal standard is mid change and states diverge, a live contractor classification question is not something to resolve conversationally. Explain the framework, take the facts, and route it. See On the Call for escalation triggers.
Fast answers
What clients say, and what to say back.
These eight cover most of what comes at you unprompted. The wording on the right is safe to say out loud without deciding anything.
| They say | You say |
|---|---|
| “She’s salaried, so no overtime.” | Wrong Salary is a pay method. Overtime depends on the duties test and the salary level. Salaried non exempt is legal and common, and those employees are owed overtime. |
| “He’s a manager, so he’s exempt.” | Wrong Titles carry no weight. What matters is what he actually does most of the time, whether he directs two or more people, and whether he has real authority over hiring and firing. |
| “Can a non exempt employee be salaried?” | Yes Track hours, pay overtime on the regular rate derived from the salary, and be clear in the offer letter that the role is non exempt. |
| “Can we pay an exempt employee hourly?” | Almost never Most exemptions require salary basis. The narrow exceptions are certain computer employees, licensed physicians, and lawyers. |
| “He signed a contractor agreement.” | Not determinative The practice controls, not the paper. Agencies read the working relationship. A contract can help document intent, and it cannot rescue a relationship that functions like employment. |
| “She’s a temp, so no benefits.” | Depends If she is the staffing agency’s employee, the agency owns it, and you can still be a joint employer. If she is your direct fixed term hire, your plan documents and ACA hours testing govern, and the word “temp” does not exempt her. |
| “Let’s move him to 1099 for the same job.” | Stop Converting an employee to a contractor for identical work is one of the cleanest misclassification fact patterns there is. Escalate before anything changes in payroll. |
| “We’ll give comp time instead of overtime.” | Wrong for private employers Private sector non exempt overtime is paid in money, in the workweek it was earned. Averaging across two weeks does not work either. |
Pattern recognition
Red flags to catch in passing.
These often surface in a conversation about something else entirely. Notice them and log them.
- Everyone in a job family is exemptBlanket classification by department or title, with no role by role duties analysis on file.
- An exempt salary sitting just under a thresholdEspecially in January, and especially in a state that just raised its floor.
- A contractor with a badge, a company email, and a standing team meetingIntegration into the org is a control signal.
- A contractor who has been there over a year on renewalsOpen ended duration undercuts the project based story.
- Temps doing the same work as employees, side by side, long termJoint employment and benefits eligibility exposure.
- Unpaid interns doing productive workThe bar for an unpaid internship at a for profit employer is high and rarely met.
- Off the clock work by non exempt staffAnswering messages after hours, working through unpaid breaks, prep before clock in.
- Remote employees in states nobody has checkedSomeone moved and payroll never revisited the classification or the wage rules.
In the conversation
How to run a classification question live.
Explaining the rules is support. Deciding a classification is a legal call with back pay exposure attached. These five steps keep you on the right side of that line.
- Establish Gate 1 first. Is this a W‑2 employee, a 1099 contractor, or a worker on someone else’s payroll? Do not proceed until you know.
- Collect facts, not conclusions. Ask what the person does on a normal day, how much of the day goes to each activity, who directs the work, whether they supervise anyone, whether they can hire or fire, what they are paid and how, and which state they work in. Write down what they told you, verbatim where it matters.
- Name the framework without ruling. Walk them through the gates. This is genuinely useful to a client and it commits nobody to an answer.
- Flag the threshold check. Give them the applicable salary floor for their state and note that it resets January 1.
- Escalate anything that would change someone’s pay, status, or classification. Explaining the rules is support. Deciding a classification is a legal call with back pay exposure attached.
When you do not know
“That one I’m not going to answer off the cuff, because getting it wrong is expensive and the rules changed this year. Let me take down exactly what the role does and what they’re paid, and I’ll come back to you with a real answer rather than a guess.”
Escalate, do not resolve
Any reclassification of a current employee. Any employee to contractor conversion. Anything with back pay or unpaid overtime already accrued. Any contractor arrangement in a state using the ABC test. Any employee working in a state the client has not reviewed. Anything where the client has already made a decision and wants you to validate it.
Currency and scope
Where these numbers come from.
Re‑verify before quoting anything in this tool to a client. Next scheduled review: January 2027, or sooner if the federal rulemaking finalizes.
Sources
- Federal salary level. The 2024 increase was vacated in litigation, the appeals were denied, and in May 2026 the Department of Labor issued a technical amendment restoring the 2019 figures. $684 per week is the governing federal standard, with $107,432 for highly compensated employees. The Department has signaled it may propose a new rule, and nothing further is on the books as of this date.
- Federal contractor standard. The 2024 rule remains on the books but is not being enforced following a May 2025 field assistance bulletin. A proposed replacement published February 2026 would restore a five factor economic reality test weighting control and opportunity for profit or loss. Comments closed April 2026 and the rule was still pending as of the Department’s July 2026 rule list.
- California figures. Based on the $16.90 state minimum wage effective January 1, 2026, giving a $70,304 annual exempt salary threshold, and the Department of Industrial Relations 2026 computer professional and physician rates.
- Confirm per client. Verify which states each client has employees in before applying any threshold. The federal figure is a floor and several states sit above it.
Scope
Internal training and support aid for the Konnect team. It explains classification frameworks so the team can have informed client conversations. It is not legal advice, it does not classify any specific worker, and it does not replace employment counsel. Classification determinations and any reclassification go to counsel.
Owner: Konnect · Document QR‑01 v1.0 · Current as of August 11, 2026 · Next review January 2027