Properly classifying employees remains one of the most persistent and expensive challenges in HR compliance, and the regulatory landscape has never been more dynamic.

With remote and hybrid work now a permanent fixture for many organizations, accurate timekeeping and wage compliance have taken on even greater urgency. Employees working across different locations, time zones, and flexible schedules create new complexity around how hours are tracked and how exemption status is evaluated.

The Fair Labor Standards Act (FLSA) overtime requirements make correct classification essential. In recent years, the rules governing “White Collar” exemptions have been in significant flux. The DOL issued a final rule in April 2024 that would have raised the minimum salary threshold for exempt employees in two phases to $844/week by July 1, 2024, and to $1,128/week by January 1, 2025. A federal court struck down that rule in November 2024, invalidating both increases and reverting the federal minimum salary threshold back to $684 per week ($35,568 annually) under the 2019 regulations. HR professionals must stay alert, as this area of law remains unsettled, and the DOL is actively reconsidering its next move.

Regardless of where the salary threshold lands, exemptions from overtime under the “White Collar” categories are generally determined by two factors: salary and job duties. Even when an employee appears to meet the exemption standard, a close reading of the regulations and a thorough understanding of actual job duties is required. Employers must look beyond job titles and descriptions to examine the real-world impact an individual has on an organization’s decisions and operations.

Misclassifying employees is a costly mistake. In fiscal year 2024, the DOL’s Wage and Hour Division recovered more than $149.9 million in back wages for over 125,000 workers due to FLSA violations, the lion’s share, over $126 million, stemming from overtime violations alone. Beyond back wages, employers face the risk of collective action lawsuits, liquidated damages equal to the back wages owed, steep legal fees, and significant disruption to business operations.

Below are four real-world cases where organizations failed to properly classify employees and the lessons each one offers.

Sloane v. Gulf Interstate Field Services

Two welding inspectors sued their employer on behalf of themselves and a class of similarly situated workers, claiming they were improperly classified as exempt and denied overtime pay.

Gulf Interstate argued the inspectors qualified for the FLSA’s highly compensated employee (HCE) exemption based on their pay levels. The Sixth Circuit initially dismissed the case, finding the employees met the HCE criteria. However, on appeal, the court reversed that decision — pointing to the employees’ offer letters, which specified pay at $337.00 per day worked on a schedule of six 10-hour shifts per week. Because compensation was tied to days worked rather than a guaranteed weekly salary, the amount paid could vary from period to period. The court ruled the employees failed the salary-basis test and should have been classified as non-exempt.

Employer Takeaway: The DOL may examine all employment documentation, offer letters, memos, promotion notices, and probation letters when evaluating classification decisions. Employers should audit their offer letter language to ensure pay structures align with exemption requirements, and retain documentation that can protect the company if classification is ever challenged.

Blum v. Merrill Lynch

Two financial adviser trainees sued Merrill Lynch on behalf of themselves and approximately 9,500 similarly situated trainees for failure to pay overtime. The trainees were required to work more than 60 hours per week, including weekends, during a demanding multi-stage training program.

Merrill Lynch argued the trainees qualified for the outside sales exemption because generating leads and attending client events were core job functions. A New York federal judge rejected this argument and granted conditional class certification, forcing a settlement. Each of the 9,500 ex-trainees received $1,000 plus legal fees, resulting in a $14 million payout for Merrill Lynch.

Employer Takeaway: Employees in training programs, regardless of whether the training occurs during orientation or outside regular hours, are generally not performing managerial or exempt-level duties. Compensating trainees on a non-exempt hourly basis is the safer, more defensible approach.

Lee v. Activision Blizzard

A senior artist at Activision Blizzard sued for employee misclassification and unpaid overtime. The employee’s primary responsibilities involved creating and integrating graphic images into video games.

Activision Blizzard argued the role qualified for the creative professional exemption because the work required “invention, imagination, originality, or talent in a recognized field of creative endeavor.” The employee’s six-figure salary also would have met the HCE threshold. Nevertheless, a California judge approved a $1.5 million class settlement on behalf of 128 senior artists who were found to have been wrongly classified as exempt.

Employer Takeaway: Creative roles require ongoing analysis. The fact that a job involves creative work doesn’t automatically satisfy the exemption; the nature, level, and discretion involved in the work matters. When in doubt, consult employment counsel before finalizing classification decisions.

Paganas v. Total Maintenance Solution LLC

A building manager at St. John’s University sued his employer, Total Management Solutions, for misclassification and unpaid overtime. The employee supervised between 5 and 16 staff, attended management meetings, and ensured building cleanliness and event setup across on- and off-campus locations, with an annual salary of $80,000.

The employee contended he spent approximately 90% of his time on non-managerial tasks. The case was initially dismissed, as the court found his primary duties were managerial and that he had authority to recommend hiring and firing. On appeal, however, the court ruled in the employee’s favor. Total Management Solutions could not substantiate its claims about the employee’s managerial authority. The company produced only one example of a disciplinary recommendation, and the employee denied ever having meaningful authority to hire, fire, or promote.

Employer Takeaway: A “manager” title or having direct reports does not, on its own, make an employee exempt. Employers must be able to document and demonstrate the actual managerial authority and primary duties of an employee, not just assert them.

Key Considerations for HR

Employee classification has never been a “set it and forget it” exercise. With salary thresholds in legal flux, the additional duties and salary basis tests required by the FLSA must still be met for an employee to qualify for an overtime exemption Utah State University, regardless of where the threshold ultimately lands. Conducting regular classification audits, reviewing employment documentation, and partnering with legal counsel when classification decisions are unclear are essential practices for staying compliant and avoiding costly litigation.