A Small-Employer's FLSA Classification Audit Playbook (2026)

Pull a full employee census

List every employee: name, job title, current classification (exempt/non-exempt), pay type (salary/hourly), current weekly/annual compensation, and state of primary work location. This is your audit starting dataset.

Check salary thresholds by state

For each exempt employee, confirm their salary clears both the federal floor ($684/week) and the applicable state threshold. Employees in California ($1,352/wk), Washington ($1,541.70/wk), and New York metro ($1,275/wk) face much higher bars. Remote workers are subject to the rules of the state where they primarily work - not where the employer is headquartered.

Review actual duties vs. claimed exemption

For each exempt employee, assess their actual duties against the applicable duties test. Do not rely on job descriptions - those are often written to match a desired classification rather than actual work. The best approach: have the employee complete a job duties questionnaire, then compare against the regulation for the claimed exemption.

Flag the borderline cases

Common red flags: 'manager' titles supervising fewer than 2 FTEs; 'admin' titles without documented real discretion on significant matters; 'IT' or 'technical' titles in helpdesk or support roles; 'professional' titles in roles that do not require a qualifying advanced degree.

For each borderline: decide - reclassify or document

For borderline cases, you have two options: (a) reclassify to non-exempt and start tracking/paying overtime, or (b) document why the exemption applies and retain that documentation as your good-faith defence. If you cannot write a clear memo explaining why the employee qualifies, you should probably reclassify.

Calculate back-wage exposure for each reclassification

For each employee you plan to reclassify, estimate your historical exposure: average overtime hours per week, times their regular rate times 0.5 (the additional half for overtime), times number of weeks in the lookback period. Err toward 3 years for any case where the employee or their manager knew about the issue.

Decide: fix-forward or reach back

Fix-forward is lower cost but leaves historical exposure. Reach-back eliminates historical exposure and shows good faith (which can eliminate liquidated damages) but costs more upfront. For exposure above $50k per reclassification, involve employment counsel before deciding.

Execute the reclassification

Update payroll system, implement time tracking for newly non-exempt employees, notify affected employees clearly ('effective [date], your role is classified as non-exempt under the FLSA; you are now entitled to overtime pay for hours over 40 per week'), and issue any back-wage payments decided in step 7.

Document the audit in writing

Write a memo or summary of the audit: who was reviewed, what was found, what decisions were made, and why. Date and sign it. This is your good-faith defence evidence if the DOL or a plaintiff's attorney comes knocking. An employer who can show it conducted a documented audit and reclassified in good faith is in a far better position than one who never thought about it.