They are asking you to take a pay cut to avoid violating labor laws. So it isn't illegal, just incredibly unethical. Basically they want to pay you less for the first 40 hours so they can still pay you 1.5x for over 40 without actually paying you more total. If they were paying you $14 / hour for your first 40 and any OT, they were breaking the law and owe you back pay. They should have payed you $21 for any OT. There is a fair chance a former employee is suing them if that was the case.

I'm not a lawyer, but I deal with this as a manager and there have been lawsuits I was involved in. There is no possibility that you are exempt from overtime pay. Even if you met all the other criteria to be exempt, you don't get paid enough.

Up to you if you want to pursue any potential back pay. You can start with the state department of labor or maybe get a free consult from a labor attorney.