A final rule issued by the Department of Labor (DOL) revises the salary requirements for determining minimum wage and overtime pay exemptions under the Fair Labor Standards Act (FLSA). This article reviews the rule changes and shares some practical steps small- and medium-sized businesses (SMBs) can implement to ensure compliance with the rule changes.
Under the FLSA, non-exempt employees must be paid at least the federal minimum wage and at least 1.5 times their regular pay rate for each hour of overtime worked more than 40 hours in a workweek. Section 13(a)(1) of the FLSA provides an exemption from minimum wage and overtime pay for a “bona fide executive, administrative, or professional” (EAP) employee.
The DOL applies three tests to determine the EAP exemption:
- Job duties test: The employee must primarily perform executive, administrative, or professional duties
- Salary basis test: The employee is paid on a salary basis, meaning the employee receives each pay period on a weekly or less frequent basis a predetermined amount of compensation
- Salary level: The salary must not be less than a minimum salary threshold amount
Job duties test explained
The final rule does not change the DOL’s job duties test. To satisfy the duties test for executive exemption, the duties test still requires that:
- The employee’s primary duty must be “managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise”;
- The employee must “customarily and regularly direct the work of at least two full-time employees”; and
- The employee has authority for personnel actions, such as hiring or firing other employees, or whose recommendations as to “hiring, firing, advancement, promotion, or any other change of status of other employees are given particular weight.”
To satisfy the duties test for the administrative exemption, the employee’s primary duty must be performance “directly related to the management or general business operation of the employer’s customers”; and includes “the exercise of discretion and independent judgment with respect to matters of significance.”
The professional exemption duties test covers two categories of professionals:
- Learned professionals: For learned professionals – such as scientists and physicians – the duties test requires that the employee performs work requiring “advanced knowledge” in a field of science or learning that is “predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment.”
- Creative professionals: For creative professionals – such as musicians, artists, and writers – the duties test requires that the employee performs work “requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.”
Certain outside sales employees are also exempt. To qualify, primary duties must include “making sales,” or “obtaining orders or contracts for services or the use of facilities for which a consideration will be paid by the client or customer.” Additionally, the sales employee must be engaged in work away from the employer’s physical places of business. Employees who don’t meet the outside sales exemption may still be exempt under one of the other FLSA exemptions, provided they meet the criteria for the exemption.
Lastly, exemptions also apply to certain computer-related occupations – such as computer systems analysts, computer programmers, and software engineers – as long as they meet the duties test for this occupation.
Revised salary exemptions
While the job duties test remains unchanged, the final rule revises the salary requirements for the EAP exemption. For an employee to meet the EAP exemption, the minimum weekly salary threshold has increased from $684 per week to $844 per week ($43,888 annually), which took effect July 1. Effective January 1, 2025, it will increase to $1,128 per week ($58,656 annually).
Highly Compensated Employee test
Additionally, the final rule increases the total annual compensation requirement for highly compensated employees (HCEs). Employees who pass the HCE test must have primary duties including performing office or non-manual work; and customarily and regularly performing at least one of the duties of an exempt EAP employee.
As of July 1, the HPE is deemed exempt if the employee earns total annual compensation of at least $107,432, including at least $684 per week paid on a salary or fee basis. The prior threshold was $132,964 in annual compensation. On January 1., 2025, it will increase to $151,164.
“Nondiscretionary bonuses and incentive payments, including commissions, may be counted toward the total annual compensation threshold requirement, but the employer must pay at least the full standard salary level per week – not including such bonuses or incentive payments – on a salary or fee basis to meet the HCE test,” the DOL explained in its Small Entity Compliance Guide.
The final rule also makes it so that earnings thresholds will be updated every three years, starting July 1, 2027, to “ensur[e] that employers can adapt more easily because they’ll know when salary updates will happen and how they’ll be calculated,” Jessica Looman, administrator for the DOL’s Wage and Hour Division, explained in a blog post.
Criticisms of the DOL Overtime Rule
The notice of proposed rulemaking generated approximately 33,000 comments. The U.S. Small Business Administration’s Office of Advocacy and the National Federation of Independent Business (NFIB) expressed concerns with the rule, mainly that the DOL underestimated the economic impact of the overtime rule on small businesses.
“Small entities have commented that this rule will have detrimental impacts on their operations and increase their payroll,” the SBA stated in a comment letter. “Small entities cannot afford these extra labor costs, as they face a difficult business environment post-pandemic including inflation, supply chain disruptions, shutdowns, and tighter labor markets.”
The NFIB expressed concern that the time it takes to read, comprehend, and implement the changes unduly burdens small businesses. “The compliance associated with employee classification, timekeeping, and recordkeeping mandated by the FLSA will fall more often than not on the busy business owner or, in some small businesses, an employee who handles back office and administrative tasks,” the NFIB comment letter stated. “These individuals are generally not experts in wading through regulatory text, so familiarization time is greater than for large companies.”
Compliance measures for SMBs
Even as the DOL rule faces legal challenges, businesses should prepare by reevaluating their employees’ job roles, salaries, and pay policies and procedures now. “Employers have a range of options for responding to the updated thresholds established in this rule,” said Bridget Dutton, a program specialist within the DOL Wage & Hour Division, during a DOL webinar discussing the rule changes.
For example, for each employee affected by the increased earnings threshold, an employer may:
- Increase the salary of the employee to at least the new salary level to retain their exempt status;
- Pay an overtime premium of 1.5 times the employee’s regular rate of pay for any overtime hours worked;
- Reduce or eliminate overtime hours; or
- Reduce the amount of pay allocated to the employee’s base salary, provided that the employee still earns at least the applicable hourly minimum wage to offset new overtime pay.
Compliance officers, alongside the business, should ensure managers and payroll departments are informed of the rule change, as well as any salary or policy changes that the business makes in response. For additional information, SMBs should review the “ Small Entity Compliance Guide” provided by the DOL, which describes in more detail the exemptions that apply, and how to ensure compliance with the rule.
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