A new overtime rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, was announced by the Department of Labor on April 23, 2024. Under this new rule, fewer employees will be exempt from the overtime pay requirements under the Fair Labor Standards Act (FLSA).  

Background

The FLSA establishes minimum wage, overtime pay, recordkeeping, and youth employment standards for employers in both the public and private sectors. One of the requirements of the FLSA is that employees be paid overtime (one and one-half times the regular rate of pay) for all hours that are worked above 40 in a workweek. There are several exemptions to the overtime pay, including exemptions for executive, administrative, professional, and highly compensated employees. Each of those exemptions has specific and unique elements that an employee must meet in order for the exemption to apply, but all of them require compensation on a salary basis at a set amount.

New Rule Increases Minimum Salary Thresholds to Qualify for Overtime Exemptions

On July 1, 2024, per the new rule, the minimum weekly salary for an exempt executive, administrative, or professional employee will increase from $684 per week to $844 per week. Only six months later, on January 1, 2025, the amount will increase from $844 per week to $1,128 per week. As for the highly compensated employee exemption, an employee must customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative or professional  employee with a total annual compensation requirement of at least $132,964 annually effective July 1, 2024, and $151,164 effective January 1, 2025. 

Significantly, the new rule changes have also built in an automatic mechanism for making changes to the salary thresholds. Beginning as of July 1, 2027, and every three years after, the Secretary of Labor will determine updates to the salary thresholds based on the data available using a revised methodology from prior rule changes.

What Do Employers Need to Know?

Employers would do well to remember the following key points as they contemplate increasing employee salaries in order to retain existing exemptions:

• Ensure that employees currently classified as exempt also meet the primary duties test that establishes their positions as executive, administrative or professional.
• Establish that pay is being made appropriately, as exempt employees must receive a predetermined amount of compensation each pay period on a weekly, or less frequent, basis.
• Appropriately calculate the minimum weekly salary. Recent court decisions have found that employees that are paid a daily rate but are not paid when they do not work are unlikely to meet the weekly salary requirement despite high overall earnings.
• Refrain from making improper deductions from salary, as that could reduce the salary below the minimum threshold required for the exemptions.

Employers should regularly review position descriptions and job duties to ensure proper employee classification as exempt or non-exempt. Remember, all positions start out being entitled to overtime; the employer “exempts” the position from being entitled to overtime and other provisions of the FLSA by applying the exemption tests, including the salary basis portion, allowed by the DOL. Once the employer applies an exemption and classifies the position as being exempt from the FLSA requirements, the employer must remain in compliance. 

Additionally, employers can also consider reclassifying jobs from exempt to non-exempt, if they do not wish to increase employee salaries. This is especially true if the position does not regularly work more than 40 hours per week. Part of the consideration in deciding whether to reclassify the position should include spreading employment duties around by reducing or eliminating work hours of individual employees working over 40 hours per week. Importantly, the new rule does not require employers to convert a salaried worker making less than the new salary threshold to hourly status; employers can pay non-exempt employees on a salary basis and then pay overtime for hours worked beyond 40 in a week. So long as employers pay non-exempt employees overtime for all hours worked over 40 in a workweek, the employees can indeed be paid a salary for a set number of hours.

Employers should not forget that they can  satisfy up to 10 percent of the standard salary requirement ($68.40 per week) with nondiscretionary bonuses, incentive payments, and commissions. Each pay period an employer must pay the exempt executive, administrative, or professional employee on a salary basis at least 90 percent ($615.60 per week) of the standard salary level. The remaining portion of the required salary level (up to 10 percent) may be fulfilled through payment of nondiscretionary bonuses or incentive payments so long as the payments are paid at least annually. While employers  may pay significantly larger bonuses, keep in mind that the amount attributable toward the standard salary level is limited to 10 percent of the required salary amount for the workweek. Employers don’t have to cap bonuses but credit is  limited to 10 percent of the required salary amount.

Proceed with caution.  The FLSA is often misconstrued by employers, many times as a result of an over-emphasis on the salary component of the various exemptions to the exclusion of the other required elements. With the passage of the new rule, and the changes that it requires, it is a good time to consult with an employment lawyer to ensure that all employee exemptions are correct and that implementation strategies remain in compliance. 

This article was published by HR.com in its June 2024 issue of Payroll, HRIS, Time & Attendance Excellence.