LEGAL
Employment & Advisory Contracts
Exempt vs Nonexempt Employees — What Founders Must Know
Exempt employees are not eligible for overtime; nonexempt employees are. Founders must correctly classify employees under labor laws or face backpay and penalties.
Why it Matters
Classifying employees as exempt or nonexempt determines whether they’re entitled to overtime pay and meal/rest breaks.
Misclassification is one of the most common (and expensive) startup HR mistakes — leading to lawsuits, back pay, and penalties.
Founders Checklist
Classify each employee as exempt or nonexempt based on role and salary
Understand federal and state overtime thresholds
Track hours for nonexempt employees — and pay overtime properly
Include classification and compensation terms in offer letters
Periodically reassess roles — responsibilities can evolve over time
Founder Fails
Called everyone “exempt” without duties test > labor claim
Used salaried pay to avoid overtime obligations
Forgot to track hours > no record of compliance
Treated hybrid workers inconsistently across states
When to ask for Help
When setting compensation for new hires
Before moving someone from hourly to salary
If unsure whether job duties qualify as “exempt”
During audits or disputes about overtime pay
If your team is growing across multiple states
Frequently Asked Questions
Q: What’s the difference between exempt and nonexempt?
A: Exempt employees are not entitled to overtime. They’re usually salaried and perform executive, administrative, or professional duties.
Nonexempt employees must be paid overtime (typically 1.5x hourly rate for hours worked over 40/week).
Q: Is salary alone enough to make someone exempt?
A: No. They must meet both a minimum salary and a duties test (based on job function). Paying someone $60K doesn’t automatically exempt them.
Q: Can I just give someone a title and make them exempt?
A: Titles don’t matter. It’s about what they actually do, not what their role is called.
Q: What happens if I get this wrong?
A: You may owe years of unpaid overtime, plus penalties, legal fees, and damages — especially in states like California.