Is Your Payroll Ready for 2026? Three State-Level Traps to Audit Now

As we head into 2026, relying on federal wage and hour laws is no longer enough. A complex patchwork of state-level regulations is creating significant new compliance risks for employers. If you haven’t audited your pay practices and job classifications recently, you could be exposed to costly misclassification claims.

Under federal law, exempt employees are generally paid on a salary basis, meaning they receive a fixed salary regardless of hours worked, and must satisfy both a salary threshold and a duties test under the Fair Labor Standards Act (FLSA). You can find a detailed overview of these federal exemption tests from the U.S. Department of Labor [here]. However, while federal standards provide the baseline, state laws are increasingly setting much stricter requirements.

Based on new legal analysis, employers should immediately prioritize three key areas:

The Soaring Salary Threshold for Exempt Employees

The federal salary threshold for an exempt “white-collar” employee ($684/week) is quickly becoming irrelevant. Several key states are mandating much higher minimum salaries to qualify for exemption, with major increases taking effect in 2026.

If you have exempt employees in these states, their pay must meet these new, higher standards:

Washington: $1,541.70/week ($80,168.40 annually)
California: $1,352.00/week ($70,304 annually)
New York (NYC & suburbs): $1,275.00/week ($66,300 annually)
New York (Rest of State): $1,199.10/week ($62,353.20 annually)
Alaska: $1,120.00/week ($58,240 annually)
Maine: $871.16/week ($45,300.32 annually)

An employee who is legally exempt in one state might not be in another, based on salary alone. You must audit your exempt roles, location by location, to ensure they meet these new thresholds.

State-Specific “Duties Tests” That Defy Federal Rules

This is the most dangerous trap for many employers. To be exempt, an employee must not only meet the salary threshold but also perform specific job duties. The problem? States are rejecting the federal “primary duty” standard and imposing their own, stricter tests.

The 50% Rule: States like California and Maine require an employee to spend more than 50% of their time on exempt-level work—a much higher bar than federal law.
Stricter Definitions: New York and Oregon have tighter rules for the administrative exemption, disqualifying duties that relate to customers rather than internal business operations.
Unrecognized Exemptions: Some states, like Connecticut, don’t even recognize the federal “highly compensated” exemption.

A job description that passes a federal audit may still fail a state one. You must analyze the actual, day-to-day tasks of your employees against the specific laws of the state where they work.

The Widening Gap Between State and Federal Minimums

In 2026, 30 states (plus D.C.) will have minimum wages higher than the federal rate. This isn’t just a compliance issue for your non-exempt workforce; it has a powerful ripple effect.

Salary Compression: When the minimum wage rises, it squeezes the pay bands between new hires and veteran employees, or between non-exempt staff and their frontline managers. This can damage morale and increase turnover.
Exemption Calculations: In states like Washington, the exempt salary threshold is tied directly to a multiple of the state minimum wage. As the minimum wage goes up, so does the exempt salary requirement.

You can’t just adjust pay for your lowest earners. You must review your entire compensation structure to maintain internal equity and ensure your exempt salary thresholds are still compliant.

A state-by-state compliance check is essential to mitigate wage-and-hour exposure in 2026. If your team needs support in understanding these changes or developing an implementation strategy, get in touch here.