Beginning in 2026, new state laws, particularly in California, will raise the minimum salary for exempt employees to over $70,000 annually, a change that places millions of workers at risk of misclassification. This shift exposes employers to severe legal and financial consequences, including liability for back pay and significant penalties. The new regulatory environment is prompting calls from legal experts and regulators for immediate employer compliance audits across the nation to mitigate a wave of potential litigation and enforcement actions.
The New Regulatory Landscape of 2026
The updated wage and hour regulations taking effect in 2026 represent a significant challenge for businesses, especially those that have not recently reviewed their employee classifications. Higher salary thresholds combined with a renewed focus on enforcement from both federal and state agencies create a high-stakes compliance environment where errors can be exceptionally costly.
1. Understanding the Salary Threshold Increase
A key driver of this change is California's new exempt salary threshold, which will rise to $70,304 annually effective January 1, 2026. This is part of a broader national trend, with 18 states adjusting their minimum wages and exemption thresholds for 2026. Any salaried employee earning less than the new threshold in their respective state must be reclassified as non-exempt, making them eligible for overtime pay. Concurrently, the U.S. Department of Labor has finalized a new rule to clarify the distinction between employees and independent contractors, signaling a heightened federal focus on reducing misclassification risk.
2. Who is Most Affected by Reclassification?
Job roles most vulnerable to reclassification often include junior managers, administrative staff, sales representatives, and other professionals in industries like retail, hospitality, and technology. A job title alone, such as manager, is not sufficient to determine exempt status; the employee's actual day-to-day duties are the deciding factor. Employers in high-cost-of-living areas like Long Island and California face particularly heightened risks and are being advised to conduct proactive audits before employee complaints or government enforcement actions arise.
Defining Exempt vs. Non-Exempt Status
Determining whether an employee is legally exempt from overtime pay involves a two-part test that considers both their salary and their specific job responsibilities. While the new salary thresholds are a clear-cut benchmark, the duties test is more subjective and a common source of employer error and subsequent litigation.
1. The 'Duties Test': Beyond the Paycheck
For an employee to be legally classified as exempt, their compensation must exceed the new salary threshold, and their job responsibilities must primarily involve executive, administrative, or professional duties as defined by the Fair Labor Standards Act (FLSA). The executive exemption requires that an employee's main duty is managing the business, that they direct the work of at least two other employees, and that they have the authority to hire or fire. The administrative exemption applies to employees whose primary duty is office work directly related to business operations and who exercise discretion and independent judgment. The professional exemption covers employees whose work requires advanced knowledge in a field of science or learning, or is original and creative in an artistic field.
2. Common Misclassification Scenarios
Frequent employer mistakes can lead to costly class-action lawsuits and regulatory penalties. These errors often stem from a misunderstanding of the law or a failure to adapt to changes in an employee's actual job functions over time. Key errors include:
- Relying on Job Titles: Classifying all managers or supervisors as exempt without a detailed analysis of their daily tasks and decision-making authority.
- Ignoring 'Off-the-Clock' Work: Failing to pay non-exempt employees for work performed before or after shifts, during meal breaks, or at home. Data shows nearly one-third of U.S. employees who record their hours report that they sometimes work without logging that time.
- Improper Independent Contractor Classification: Misclassifying workers as independent contractors to avoid paying minimum wage, overtime, and payroll taxes. This practice is a major focus for the IRS and state labor departments, particularly in the gig economy, where high-profile enforcement actions are becoming common.
- Incorrect Overtime Calculation: Paying straight time for overtime hours or failing to include commissions and non-discretionary bonuses in the regular rate of pay when calculating overtime premiums.
3. Expert Insight on Escalating Compliance Risks
The shifting legal landscape for 2026 requires employers to be more vigilant than ever, according to legal experts. The new salary thresholds are a tripwire for businesses that have been passive about compliance.
David Sanford, Chairman of Sanford Heisler Sharp McKnight, noted, "Wage theft enforcement in 2026 is focusing on two areas: timekeeping integrity and worker misclassification. The mechanisms are often quiet—minutes shaved through clock rounding, off-the-clock prep work, edited timecards—but they add up at scale. State attorneys general are actively litigating these issues, California just strengthened wage recovery tools effective January 1st, and the DOL has made independent contractor misclassification a priority. Employers need systems that capture compensable time accurately, not aspirationally."
A proactive audit guided by an experienced wage theft lawyer is no longer optional—it is an essential risk management strategy.
The High Cost of Non-Compliance
The financial and reputational damage from a misclassification finding can be severe. Penalties extend beyond unpaid wages and can include damages, fines, and legal fees that can threaten a company's financial stability.
1. Financial Penalties and Back Pay Liability
Misclassified employees can sue for up to three years of unpaid overtime, liquidated damages that can double the amount owed, and attorney's fees. The scale of the problem is substantial; between 2021 and 2023, government enforcement and class-action lawsuits recovered over $1.5 billion in stolen wages for workers. For an individual, the losses can be significant; a misclassified construction worker could lose over $16,700 annually in income and benefits. Major companies have faced staggering penalties, such as ride-share company Lyft's $19.4 million settlement in New Jersey for misclassifying over 100,000 drivers.
2. Federal vs. State Enforcement Mechanisms
Employers must comply with both federal and state laws, and they are required to follow the law that provides greater protection to the worker. Many states, such as California, have stricter requirements for overtime, meal breaks, and penalties than federal law.
Primary enforcement
- Federal law (FLSA): U.S. Department of Labor (DOL)
- California law: Labor Commissioner’s Office; Private Attorneys General Act (PAGA)
Overtime pay
- Federal law (FLSA): 1.5× pay for hours worked over 40 in a workweek
- California law: 1.5× pay for hours worked over 8 in a day or over 40 in a week; 2× pay for hours worked over 12 in a day
Meal and rest breaks
- Federal law (FLSA): Not federally mandated
- California law: Mandated paid 10-minute rest breaks and unpaid 30-minute meal breaks
Unique penalties
- Federal law (FLSA): Liquidated damages equal to double back pay
- California law: PAGA allows employees to sue on behalf of the state to recover civil penalties; the Labor Commissioner may investigate and remedy tip theft directly
A Proactive Approach to a New Era of Wage Law
As the 2026 deadlines approach, the convergence of higher salary thresholds and aggressive enforcement actions creates a critical juncture for U.S. employers. The financial and reputational risks associated with worker misclassification have never been higher. For employees, the new regulations offer a powerful tool to claim rightfully earned wages. Legal experts anticipate a significant increase in wage and hour litigation, making compliance audits and classification reviews a fundamental business necessity in the coming years.
About Sanford Heisler Sharp McKnight, LLP
Sanford Heisler Sharp McKnight is a premier national civil rights and public interest law firm with offices in New York, Washington, D.C., San Francisco, Palo Alto, San Diego, and Nashville. The firm specializes in high-stakes litigation against powerful interests, having recovered more than $15 billion for its clients. Core practice areas include:
- Employment & Executive Representation: Discrimination, harassment, wrongful termination, and wage theft.
- Institutional Accountability: Sexual violence, Title IX, and victims' rights.
- Financial Integrity: Whistleblower/qui tam, False Claims Act, and ERISA class actions.
The firm is consistently ranked Tier 1 by Best Law Firms® and has been named Civil Rights Firm of the Year by The National Law Journal. In 2024 and 2025, Chairman David Sanford was recognized by Forbes as one of America’s and New York’s top attorneys. For more information, visit sanfordheisler.com.
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