Is Your Employee Properly Classified in DOL’s Overtime Exemption Ruling?
In partnership with Managing Partner, Catherine Losey, Losey Law PLLC
Update: A federal judge in Texas has overturned the Department of Labor’s final rule to increase the overtime exemption salary threshold for white-collar workers. This decision vacates the rule that took effect on July 1, 2024 and applies to the January 1, 2025 increase.
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Exemption, mostly, has meant avoiding the headache of calculating overtime pay, but that’s changed at the federal level on July 1, 2024 for some white-collar employees as the Biden administration goes to bat for workers’ rights.
Unless properly classified as exempt, employees covered by the Fair Labor Standards Act (FLSA) must receive at least time and one-half their regular pay rate over 40 hours in a workweek. Since the ruling, HR has been faced with determining the best course of action in either reclassifying employees or raising their salaries to meet the threshold. In this case, the stakes are high enough that every detail of the regulation is relevant to determine a proper classification.
What Happened?
Starting July 1, 2024, employers will be required to pay overtime, which is time and one-half not including weekends or holidays, to salaried workers who make less than $844 per week ($43,888 a year). This new salary level represents an increase in the threshold by $8,320 from $35,568/year ($684/week).
When Will it Take Effect?
On July 1, 2024, the following increases go into effect:
| FLSA Exemptions | Salary Threshold |
| Executive, Administrative, and Professional Employees | $844/week ($43,888/year) |
| Highly Compensated Employees | $132,964/year from $107,432/year |
Another set of increases goes into effect on January 1, 2025:
| FLSA Exemptions | Salary Threshold |
| Executive, Administrative, and Professional Employees | $1,128/week ($58,656/year) |
| Highly Compensated Employees | Increase to $151,164/year |
Beginning July 1, 2027, the salary thresholds will automatically update every three years.
The Three-Prong Approach
Among other exemptions, the FLSA excludes executive, administrative, and professional employees from receiving overtime based on a three-prong approach: whether the employee is paid on a fixed salary basis, the amount of the weekly salary, and the employee’s duties.
Note: Employees classified under a select subset of the learned professional exemption that do not have salary requirements (e.g., lawyers and doctors) are not impacted by the new law.
What to Watch
Determining whether employees are properly classified as exempt is not as straightforward as paying all salaried employees $43,880 starting on July 1, 2024 and $58,656 starting on January 1, 2025. Employees must primarily perform executive, administrative, or professional duties as provided in the relevant Department of Labor regulations. To be properly classified as a white-collar exempt employee under the FLSA, an employee needs to meet the three-prong test:
- 1
Employees must have a fixed salary, which means no fluctuations in pay based upon the quality or quantity of work performed.
- 2
Employees must be paid the minimum salary of $844 per week ($43,888 annualized) by July 1, 2024 and the employer should continue to plan for the salary increase on January 1, 2025.
- 3
Employees must primarily perform all of the duties listed below for either the executive, administrative, or professional exemption.
Listed Duties for Executive, Administrative, and Professional Exemptions
a. Executive
- The employee’s primary duty must be to manage the enterprise, or a subsect similar to the enterprise.
- The employee must customarily and regularly direct the work of at least two or more full-time employees.
- The employee must have the authority to hire or fire other employees or their recommendations as to hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.
b. Administrative
- The employee’s primary duty is to perform office or non-manual work directly related to management or operations of their employer; and
- the employee’s primary duties must include independent discretion and judgment for significant matters.
c. Professional
- Learned Professional
- The employee’s primary duty of work involves an advanced type of knowledge, which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment. In other words, more than a manual labor gig.
- The employee’s advanced knowledge must be in a field of science or learning (some examples are law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy and other occupations that have a recognized professional status); and
- The advanced knowledge must be customarily acquired after a prolonged course of specialized intellectual instruction.
d. Creative Professional
- The employee’s primary duty involves performing work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. Some examples are actors, musicians, composers, and writers.
Recommended Options
Employers have more options at their disposal to navigate these rules. Managing Partner at Losey Law, Catherine Losey, has some suggestions to review with your legal counsel:
- If employees fall below the salary threshold, consider a pay increase.
- If you can’t increase pay, convert this employee to nonexempt status and manage overtime costs by reducing or eliminating hours that would be counted as overtime or reducing the employee’s base pay to account for the overtime to be worked.
- The employer will be required to maintain the employee’s time records, among other records, in accordance with the FLSA.
- If the employee still wants to be paid on a salary basis but the salary does meet the exemption threshold, set the number of weekly hours to 40 for a set pay; however, the employee will still need to be paid time-and-one-half for work in excess of 40 hours in a workweek.
- The employee would be classified as nonexempt, and the employer would have the adhere to FLSA record-keeping requirements.
Resources
- U.S. Dept. of Labor Wage and Hour Division Timesheet App
- Record-keeping Requirements under the FLSA: Fact Sheet #21 from the Department of Labor
You’ll also want to review your employee’s state law because some states, such as California, have higher salary thresholds for employees to be classified as exempt.
When considering these options, it’s most important for employees to perceive they are still receiving a consistent pay, so ensure you stay transparent about any changes and communicate these changes carefully. Compensation or status adjustments have the potential to cause misunderstandings with your staff, as they may think it’s related to performance or other factors, unless you’re transparent about the new FLSA rule.
The information provided does not, and is not intended to, constitute legal advice. All information and materials are for general informational purposes only. Contact your attorney to obtain advice with respect to any legal matter.
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