Update: As a result of the November 15, 2024, Federal court decision in Texas overturning this ruling, the new changes to the exempt employee salary threshold are no longer in effect. More information can be found by clicking here.
This article still includes the current thresholds and offers valuable guidance for determining whether employees are classified as highly compensated, salary exempt, or non-exempt.
Please reach out if you have any further questions.
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The landscape of employment laws is continually changing, significantly affecting both employers and employees. One notable change is the adjustment of the salary exempt threshold on July 1, 2024. This is crucial in determining which employees qualify for overtime pay under the Fair Labor Standards Act (FLSA). Let’s delve into what these changes involve and how they might affect you.
Fair Labor Standards Act (FLSA)
First, let’s provide some background on the Fair Labor Standards Act (FLSA). Enacted by Congress in 1938, this law aimed to address labor conditions which were detrimental to employees’ health, efficiency, and well-being. Today, the FLSA continues to safeguard employee rights and promote positive working conditions.
In April of 2024, the Wage and Hour division of the Department of Labor issued the final rule on an update and revision to the FLSA. This update affects the Executive, Administrative, and Professional exemption as well as the Highly Compensated Employee exemption from minimum wage and overtime protections. The ruling increased both the standard salary level for exemption and the total annual compensation requirement for highly compensated employees.
So how does this affect you? If you employ anyone classified as “salaried-exempt” or “highly compensated,” you will need to audit your payroll records to ensure compliance with the rule changes.
Salaried-Exempt and Highly Compensated Thresholds
At this time, the salary exemption threshold for executive, administrative, and professional employees is $35,568 annually (or $684 per week). This is commonly known as the “white-collar” exemption.
The exemption threshold for employees classified as highly compensated is $107,432 annually.
These salary thresholds exempt employers from paying overtime at time-and-a-half to employees classified as “salaried-exempt” or “highly compensated” who meet the criteria. However, employees who do not meet these requirements become “non-exempt,” and employers must pay them overtime at time-and-a-half for any time worked over 40 hours in a week.
Threshold Increases
Please note: Due to the November 15, 2024, Federal court decision in Texas which struck down this ruling, new changes to the exempt employee salary threshold no longer apply.
The ruling released in April indicates that the salary exemption threshold is set to increase in 2 phases:
1. Starting July 1, 2024,
Executive, Administrative, and Professional exemption will increase to $43,888 annually (or $844 per week)Highly Compensated Employee exemption will increase to $132,964
2. Starting January 1, 2025,
Executive, Administrative, and Professional exemption will increase to $58,656 annually (or $1,128 per week)Highly Compensated Employee exemption will increase to $151,164
Reason for Change
You might wonder why this change was made. The Fair Labor Standards Act grants the US Secretary of Labor the authority to define and delimit the terms of the exemption. Since 2004, there has been a recognized need to regularly update the earnings thresholds to effectively differentiate between exempt and nonexempt employees. The last increase occurred as a result of a September 2019 rule, which took effect on January 1, 2020.
The new threshold for the Executive, Administrative, and Professional exemption is based on the 35th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region. The Highly Compensated Employee exemption sets the threshold at the 85th percentile of annualized salaried workers nationwide. These adjustments are necessary to reflect current market conditions, inflationary pressures, and prevailing wages for hourly workers. One of the Fair Labor Standards Act’s goals is to prevent employers from avoiding paying overtime to employees by just calling them “exempt” in their job title or job description.
Criteria for Compliance
So, what happens if an employer currently classifies an employee as “salary-exempt” under the Executive, Administrative, and Professional exemption, but the employee is only making $40,000 per year?
The employer would have 2 options: 1) Increase the employee’s salary to meet the new threshold, or 2) Reclassify the employee from exempt to non-exempt.
The best option depends on the employee’s roles and responsibilities, and a calculation of the likelihood they will need to work overtime if reclassified. If you choose to reclassify them but want to limit overtime, communicate this to them very clearly. If overtime is necessary, require prior approval for any overtime work.
You may also consider implementing a flextime policy, so that they could put in more hours on one day and fewer hours on another in order to stay within 40 hours for the week. According to a 2018 Mercer Global Talent Trends study, flexibility is one of the top five things that employees look for in a job.
Remember, although the new rule changes the salary level, employers must still meet additional criteria to classify an employee as “salary-exempt” or “highly compensated.” While auditing your payroll records for compliance with the new salary thresholds, you should also work with HR to ensure that the employees’ duties and responsibilities meet ALL of the criteria for these classifications.
Tests for Salary-exempt
Basically, to classify an employee as salary-exempt under the Executive, Administrative, and Professional exemption, they must meet all three criteria:
- Salary basis test – the employee must be paid a predetermined and fixed salary not subject to reduction because of variations in the quality or quantity of work performed.
- Salary level test – the employee must be paid a minimum specified amount. These are the amounts which will change effective July 1, 2024, and January 1, 2025.
- Duties test – the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.
Again, an employee must pass all three tests. The salary level test alone, for example, is not enough to classify them as exempt if they do not meet the duties test. Simply calling someone a “manager” does not make them exempt; the actual work they do must fall within the criteria for exemption. For more details on the duties test, review the Wage & Hour division fact sheet here, or consult your HR professional or labor attorney.
Keep in mind that the employer, not the employee, bears the burden of proving the applicability of the overtime exemption. Job titles and job descriptions alone will not suffice. Misclassifying a nonexempt position as exempt can result in lawsuits for back pay due to overtime owed, plus penalties.
Legal Challenges
Although the rule is set to take effect July 1, 2024, it is currently facing legal challenges. Multiple lawsuits have been filed seeking to invalidate and set aside the Final Rule and to block the increased salary thresholds. The plaintiffs in these cases argue that the Department of Labor lacks the statutory authority to raise the minimum salary level for the exemptions. Although it is unclear at the time of this article how those lawsuits will play out in the legal system, experts encourage employers to prepare for compliance by July 1st as if the rule will take effect as scheduled.
In conclusion, the salary exempt threshold is a crucial component of employment law, significantly impacting the classification and compensation of millions of workers. By understanding these changes and preparing accordingly, both employers and employees can effectively navigate this evolving landscape.