Employees Exempt from Overtime Pay? - To Be, or Not to Be
By: Sean Hansen, SHRM-CP | HR Compliance Coordinator
Effective July 1st, 2024, the Department of Labor (DOL) will increase the federal exempt salary threshold from $35,568 per year ($684 per week), to $43,888 per year ($844 per week); the threshold is scheduled to increase again at the beginning of 2025. In addition, they are increasing the highly compensated employee (HCE) total annual compensation threshold, from $107,432 per year to $132,964. This number is also set to increase again in 2025.
This is a big change, but it begs the question: what exactly is the exempt salary/total annual compensation threshold, and how does it apply to us?
Here’s How
The Fair Labor Standards Act (FLSA) established the standard for overtime pay: an employee who works more than 40 hours in a week* must be compensated at 1.5x their regular rate. Any employer that is covered by the FLSA (which is the majority of them) has to follow these rules. It’s meant to protect employees; both to discourage employers from overworking them, and compensating them at a fair rate when their employer needs them to work extra hours. The labor costs of overtime are expensive, and many businesses don’t want to pay it out. That’s not to say the FLSA doesn’t protect employers either. If needed, an employer is allowed to require overtime work from its employees.
However, the FLSA provides exemptions to the overtime rule. Employees that meet certain requirements are not entitled to overtime compensation, which can save employers the extra labor costs from overtime.
It’s important to note there is not a ‘one size fits all’ exemption. The FLSA provides exemptions for multiple categories of employees, and each one has different requirements to qualify. These are referred to as the ‘duties tests’.
Listed below are the different types of employees who may qualify for exemption, should they pass the duties tests:
Executive Employees
Administrative Employees
Professional Employees
Computer Employees
Outside Sale Employees
Highly Compensated Employees
There are also some types of employees who the exemptions do not apply to, and should always be compensated for overtime:
Blue-Collar Workers (Electricians, Carpenters, etc.)
Police Officers, Detectives, and other law enforcement
Fire Fighters
Paramedics, Emergency Medical Technicians, and other emergency medical personnel
Other first responders
While the duties tests vary by category, there is one test that applies to most of them. The salary test, also known as the exempt salary threshold, should take place before the duties test. Executive, Administrative, Professional, Computer, and Highly Compensated Employees** all have to pass some form of the salary test, which is where the new DOL numbers come into play.
*State laws may vary on the overtime threshold and may include daily overtime requirements.
**Some state laws that are more stringent may require employees to pass the salary test that normally do not have to pass it under the FLSA.
Acing the Salary Test
An Important Note
Let’s start with some important terminology: Salary Basis and Fee Basis.
Salary Basis | To be paid on a salary basis means an employee received a predetermined of compensation for each pay period. Employees receive their compensation in full for any week they performed work, regardless of how many hours or days they worked. |
Fee Basis | To be paid on a fee basis means the employee is given an agreed sum for a single job, regardless of the time required for its completion. |
Salary Basis
To be paid on a salary basis means an employee received a predetermined of compensation for each pay period. This can be on a weekly basis, or less frequently (such as bi-weekly or monthly), but the employer cannot pay on a daily or hourly basis. Employees receive their compensation in full for any week they performed work, regardless of how many hours or days they worked. An employee does not need to be paid for a workweek during which they did not work, or if they miss a full day due to personal reasons other than sickness. For the most part, making any other deduction from an employee’s predetermined salary would mean the employee is not paid on a salary basis.
Fee Basis
To be paid on a fee basis means the employee is given an agreed sum for a single job, regardless of the time required for its completion. To determine if someone paid on a fee basis meets the exempt salary threshold, this test has to consider the time spent working on the job. For example, if the employee was paid $350 for a job, and took 20 hours to complete the job, that would meet the current exempt threshold of $684 a week. This is because if they worked another 20 hours, to reach the standard 40 hours per week, they would theoretically have earned another $350, which would total to $700 for that week.
This is important because most categories that need to pass a salary test require the employee to be compensated on a salary basis. If the employee is not paid on a salary basis, and the salary test does not provide an alternative fee basis requirement, the employee cannot be exempted from overtime.
With that out of the way, we can move to discussing the various salary tests.
Executives, Administrators, and Professionals
Three types of exemptions are often grouped together, due to their similarities. Executive, Administrative, and Professional employees have similar requirements, including passing almost the same exact salary test.
Per the FLSA, these employees must be compensated on a salary basis (for executive employees), a salary or fee basis (for administrative and professional), at a rate not less than $684 per week, which translates to $35,568 per year.
These categories follow the standard federal exempt salary threshold, which means as of July 1st, 2024, this requirement would change to $844 per week, or $43,888 per year.
As of January 1st, 2025, it would change to $1,128 per week, or $58,656 per year.
Computer Employees
This type of exemption does have to pass a salary test of sorts; however it also has an alternative hourly basis. This hourly rate, assuming 40 hours per week, does end up at a higher compensation than if paid by salary or fee.
Per the FLSA, these employees must be compensated on a salary or fee basis, at a rate not less than $684 per week, which translates to $35,568 per year. However, these employees can be compensated on an hourly basis, but at a rate not less than $27.63 an hour.
This category follows the standard federal exempt salary threshold, which means as of July 1st, 2024, this requirement would change to $844 per week, or $43,888 per year. The hourly rate will not change.
As of January 1st, 2025, it would change to $1,128 per week, or $58,656 per year.
Highly Compensated Employees
This salary test is a little different. Instead of a simple salary or fee basis, it measures total annual compensation. This includes commissions, non-discretionary bonuses, and other non-discretionary compensation earned during the year.
Per the FLSA, these employees must earn a total annual compensation of $107,432 or more. However, part of that compensation may be paid on a salary or fee basis, at not less than $684 per week. This means that at least $35,568 of the total annual compensation must be paid on a salary or fee basis.
These categories follow the federal annual compensation threshold, which means as of July 1st, 2024, this requirement would change to $132,964 per year, with at least $844 per week paid on a salary basis.
As of January 1st, 2025, it would change to $151,164 per year, with at least $1,128 per week paid on a salary basis.
The State of Exempt Salary Thresholds
All this information has been pulled from the FLSA as well as official rulings from the DOL. However, exempt salary thresholds are not just federal law; they are also state law. Employers are required to follow the highest threshold. For example, California has an exempt salary threshold of $66,560 per year ($1,280 per week). Even with the increases coming to the federal threshold, California’s remains the higher number. Therefore, in order to meet the salary test as an executive, administrative, professional, or a computer employee in the state of California, they must be paid according to California requirements.
Most states don’t have a higher exempt threshold than the current federal value, and many of the ones that do won’t be higher than the new numbers that are going into effect. For more information, you can see the current state salary exempt thresholds using this link: EXEMPT SALARY THRESHOLD
But Why Is It Going Up?
With this new ruling, the federal government has not only implemented two planned increases for both the exempt salary threshold and the total annual compensation threshold, but also put into place a plan to increase it again in the future. As of July 1st, 2027, and every three years after, the DOL plans to update this number based on available salary data.
Why now? The DOL lists many reasons in the 132 page final ruling, which the brave souls can read here. When simplified, it boils down to this: there are many low paid, white collar workers, who do a significant amount of non-exempt work, but are not being paid overtime due to the current rules. The DOL feels that this will be rectified by raising the threshold to match the 35th percentile of weekly earning of full-time, salaried workers ($1,128 per week, or $58,656 annually).
Next Steps
For Employees
Be prepared to transition to non-exempt status | Follow non-exempt rules, which means recording time worked in order to be compensated accurately. | Be Aware of paycheck deductions for not working 40 hours a week, as well as receiving overtime for excess hours worked. |
For exempt employees that will fall below this threshold, be prepared to transition to non-exempt status. There’s always the possibility your employer will raise your compensation in order to keep you exempt, but most likely many employees will be allowed to become non-exempt workers. This means you will be following non-exempt rules, which means recording time worked in order to be compensated accurately. It also means you may receive paycheck deductions for not working 40 hours a week, as well as receiving overtime for excess hours worked.
For Employers
Review employee compensation to determine any affected workers | Decide to either raise compensation, or to change those employees’ status to non-exempt | Start recording these new non-exempt employees’ time worked |
This change will affect employers far more. They will need to review employee compensation to determine any affected workers. From there, employers will need to decide to either raise compensation, or to change those employees’ status to non-exempt. The latter means getting everything in place that you need to start recording these new non-exempt employees’ time worked.
Review Your Overtime Policies | Determine potential costs and what limits on overtime work |
Employers should also review their overtime policies. Since more employees will be eligible for overtime, it’s important to determine potential costs and what limits on overtime work, if any, your company has.
Be Aware of Fines | Misclassification of employment status can result in serious fines, so it’s best to make sure your employees meet all the requirements for exemption |
Misclassification of employment status can result in serious fines, so it’s best to make sure your employees meet all the requirements for exemption. As a general rule, it’s always safer to assume non-exempt rather than exempt.
Not the Only Test
The salary test isn’t the only requirement for exemption. Each category we listed has additional duties tests, beyond the salary test. Stay tuned for Part Two, where we will be doing a deep dive into the various requirements of each exemption.
If you are a Vida HR client and need immediate assistance with employment classifications, please reach out to your HR Business Partner for assistance.
Employees Exempt from Overtime? - To Be, or Not to Be
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