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By:  Edmund O’Meally, Chair, PK Law Labor, Employment and Education Group

On April 23, 2024, the U.S. Department of Labor announced a final rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, which took effect on July 1, 2024. The final rule updated and revised the Fair Labor Standards Act (FLSA) regulations, implementing the overtime exemptions for executive, administrative, and professional employees.  Revisions include increases to the standard salary level and the highly compensated employee total annual compensation threshold for most employees who have been exempt from overtime, and a mechanism that provides for the timely and efficient updating of these earnings thresholds to reflect current earnings data.  Effective July 1, 2024, the exempt salary level jumped from $684 per week ($35,568 per year) to $844 per week ($43,888 per year) – i.e., an increase of approx. 23%.  Effective January 1, 2025, the exempt salary level jumps again to $1,128 per week ($58,656 per year) – i.e., an approx. increase of an additional 33%. The final rule also provides for future updates of these levels every three years beginning July 1, 2027, to reflect current earnings data.

If your business has FLSA exempt executive, administrative, or professional employees who were eligible for an overtime exemption but who now, or after January 1 will, earn less than the new salary threshold levels, you will need to make some decisions.

  • Option 1 – Treat these employees as non-exempt and pay overtime if they work more than 40 hours in the workweek.
  • Option 2 –Provide a salary increase (or negotiate such an increase if there is a unionized workforce) in order to maintain the FLSA exempt status. For option 2, non-discretionary bonuses (i.e., stipends) may only account for 10% of the salary needed to maintain the exemption.

The Salary Basis Test and Duties Test Still Apply

The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. In order to be exempt from overtime eligibility, the employee must meet the requirements for bona fide executive, administrative, professional and outside sales employees, and employees in certain computer-related occupations. Keep in mind that in order to be eligible for an overtime exemption, the employee must not only meet the new salary level thresholds but must meet both the salary basis test and the duties test, which remain unchanged.

The “salary basis test” essentially requires that the employee is paid a predetermined amount of compensation each pay period on a weekly, or less frequent, basis, and the predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work.  For additional requirements, exceptions, and permissible deductions allowed by employers click HERE.

The “duties test” requires that the employee’s “primary duty” is the performance of exempt duties – i.e., executive (who must, among other things,  have the authority to hire and fire), administrative (who must, among other things, have the significant authority to use discretion and independent judgment), professional (who must, among other things, have advanced knowledge that is predominantly intellectual, inventive, or artistic and which includes the consistent exercise of discretion and judgment), computer professional (whose duties primarily concern systems analysis or programming), or outside sales (whose duties are primarily outside of the employer’s place of business and are primarily engaged in making sales or obtaining orders or contracts).  Thus, for example, under the “salary basis test” a secretary or other clerical employee would not qualify for overtime exemption even if paid a salary at the new salary levels.

Of note, bona fide teachers (who are employed by an education establishment and have the primary duty of teaching, tutoring, instructing or lecturing in the activity of imparting knowledge) and bona fide practitioners of law or medicine (who are so employed and who hold a valid license for the practice of law or medicine) are exempt from the new salary level thresholds.  Here, it is essential to meet the specific requirements of the exemption.  For example, a bona fide teacher, attorney, or physician would meet this exemption even if paid less than the salary threshold, but an instructional assistant, paralegal, or nurse would not.

For additional information about each job classification exemption requirements, click on the links for explanatory Fact Sheets issued by the Wage and Hour Division of the U.S. Department of Labor.

Executive

Administrative

Professional

Outside Sales Employees

Computer-Related Occupations

Highly Compensated Employees

A “highly compensated employee” who performs office or non-manual work and who “regularly performs” at least one of the exempt duties of an exempt executive, administrative or professional employee even if the employee does not otherwise meet the duties test requirements.  Prior to July 1, 2024, an employee needed to earn at least $107,432 per year with at least $684 per week paid on a salary basis in order to qualify for the highly compensated employee exemption.  As of July 1, 2024, that earnings threshold increased to $132,964 with at least $844 per week paid on a salary basis.  Effective January 1, 2025, that threshold will increase again to $151,164 with at least $1,128 per week paid on a salary basis.

PK Law’s Labor and Employment Attorneys can walk you through the new salary level thresholds as well as help your business navigate other FLSA issues impacting the proper wage and hour treatment for your exempt and non-exempt employees.

Edmund O’Meally is Chair of PK Law’s Labor, Employment and Education Department.  He has worked closely with superintendents, boards of education, private schools, and private sector employers for over 36 years on a wide-variety of matters including collective bargaining, employment litigation, Title IX, civil rights litigation, construction and procurement issues, and Open Meetings Act compliance. Mr. O’Meally can be reached at eomeally@pklaw.com and 410-339-6757.

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