WRITTEN BY SCOTT WINTERS
PREPARING FOR COMPLIANCE
with FLSA Overtime Exemption Standards
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n April, the US Department of Labor raised the minimum salary required before a job can be considered exempt from overtime pay. The change will be implemented in two phases. Effective July 1, 2024, the annual salary threshold increased to $43,888; on Jan. 1, 2025, it will rise again to $58,656. Further adjustments are expected every three years, starting in 2027. This change will benefit many employees and will surely frustrate many employers. The ruling will, undoubtedly, be challenged, as was a proposed change in 2016. But no matter what ultimately happens, it spotlights a critically important issue for employers: the risk when an employee's exempt status is questioned. Employees in the US are either exempt or non-exempt from overtime pay. The default is non-exempt, meaning an employee is entitled to overtime pay, at 1.5 times their regular rate, for all hours worked exceeding 40 in a week. The link between hours worked and compensation is tenuous for some job positions. Mainly when a particular skill or training is required or the role directly influences the management and operation of a business, the Department of Labor recognizes specific job types as potentially exempt, but only if they meet strict criteria. Determining a job position’s exempt status can be tricky. Under the Fair Labor Standards Act (FLSA), a handful of job categories are identified as potentially exempt from overtime compensation. An exempt determination can only be justified if three category-specific conditions are met: salary level, salary basis, and job duties. For each job category, minimum criteria must be met in these three conditions — the three “tests”
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for exempt eligibility. If any “test” fails, the job position cannot be considered exempt, and the employee is entitled to overtime compensation. This also means the employer is required to maintain a record of hours worked. Simply because an employer and employee might agree that the position is exempt does not make it so. Countless lawsuits are filed yearly by disgruntled former and current employees, claiming they were improperly classified and are entitled to overtime pay. The employer has the burden of proving that a thoughtful determination was made and that the employee’s position meets all three test criteria for that exemption category. The costs associated with improper classification can be high, exposing the employer to legal action.
Exempt Job Types and Qualification Criteria The three condition tests required for all exempt job categories are salary level, salary basis, and job duties. Each is described below, followed by the FLSA job categories that could be exempt if their specific test conditions are met.
Salary Level: A minimum salary level is required before an overtime exemption can be considered. This can either be an annual or a per-week salary determination. Compensation includes commission and non-discretionary bonuses but excludes benefits (e.g., fringe, medical, reimbursements, retirement plan contributions). Discretionary bonuses don’t count toward annual compensation.
The standard salary level was $35,568. This changed to $43,888 on July 1, 2024, and will be $58,656 on Jan. 1, 2025. The weekly pay rate is the annual salary level divided by 52.
Salary Basis: The standard basis is that an employee must be paid a predetermined salary each pay period. A weekly pay period cannot be less than one week, or seven continuous days. Compensation must be fixed and cannot vary based on the quality or quantity of work performed or the employer’s discretion of operations (e.g., not paying employees due to weather closures). Administrative and professional employees can also be paid on a “fee basis,” meaning a predetermined amount for a specific, single task regardless of the time required for completion. The fee basis is only available for single, exceptional projects and does not apply to standard or repetitive duties or deliverables.
Job Duties: Each exempt job category has specific duty requirements, but some general considerations exist. First, the role must be non-manual labor. Second, most of the employee’s time and effort must be spent performing these duties. The Department of Labor is concerned with an employee's “customary and regular” duties, not what they do occasionally. Third, the employee has to be able to exercise discretion in decision-making and the execution of their duties. Fourth, all employees with the same job description must have the same exempt classification.
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