The article below provides guidance on the FLSA exemption status rules but should not be taken as legal advice. FLSA audits are a legal analysis that should be conducted in conjunction with your employment counsel or General Counsel.
If you’ve been feeling a bit lost and confused about the latest updates to the Fair Labor Standards Act (FLSA) salary exemption rules, you’re not alone.
In case you missed it, the U.S. Department of Labor (DOL) has decided to update the salary thresholds at which employees can be considered exempt from overtime pay.
TL;DR: More people are about to qualify for overtime pay.
How did we get here?
As you may already know, the FLSA sets standards of minimum wage and overtime pay as well as many other things. A key component of its pay standards is the classification of employees as either exempt or non-exempt.
Exempt employees are your traditional “salaried” employees, who are not entitled to overtime pay regardless of how many hours they work. However, it is becoming more difficult to qualify employees as exempt from receiving overtime. To qualify for exempt status, employees must meet specific criteria:
- Salary basis test: They must be paid on a salary basis, receiving a fixed salary regardless of how many hours a week they work.
- Salary level test: This will be discussed in more detail below.
- Duties test: This portion of the analysis should be conducted in partnership with your attorney, as this is very fact-specific. Job titles alone will not determine whether a role is exempt or non-exempt; rather, it is the duties of the role that matter. Employers have to show that exempt employees primarily perform all duties specific to one of the exemptions below:
Or
Employers can classify an employee under the Highly Compensated Employee (HCE) Exemption. In this case, employers must only show that the HCE performs at least one duty of an exempt executive or administrative or professional employee. This is a much more relaxed duties test. The major difference here is the salary thresholds, which we’ll outline below.
On the other hand, non-exempt employees are entitled to overtime pay at one and a half times their regular rate of pay for any time worked over 40 hours in a week. NOTE: Some states require overtime to be paid for any time worked over eight hours in a day.
Proper classification is crucial, especially under this DOL administration. Misclassification can lead to significant legal and financial penalties for employers.
What are the new rules?
The last time the DOL increased the salary exemption threshold was in 2019. Since then, Executive, Administrative, and Professional (EAP) exemptions have been $684/week ($35,568/year), and the HCE exemption has been $107,432/year. The 2019 increase did not include automatic increases for the future, so for the past five years, there have not been any.
Under the new rules introduced this year, the minimum salary an employee must make to be considered exempt from overtime has significantly increased, and the DOL has built in automatic salary increases for the future as well.
If you are classifying an exempt employee under the Executive, Administrative, or Professional exemption, their minimum salary has to be:
| Effective date | Weekly amount | Yearly amount |
|---|---|---|
| July 1, 2024 | $844/week | $43,888/year |
| January 1, 2025 | $1,128/week | $58,656/year |
If you are classifying an exempt employee as a Highly Compensated Employee, it may be easier to satisfy the “duties” portion of the test, but the salary thresholds are much higher now:
| Effective date | Yearly amount |
|---|---|
| July 1, 2024 | $132,964/year |
| January 1, 2025 | $151,164/year |
For both the EAP and HCE, the DOL implemented automatic increases every three years beginning July 1, 2027. The DOL will announce these increases at least 150 days in advance. As of this writing, there will be no changes to the duties test.
Are there any exceptions?
The DOL carved out exception for doctors, lawyers, and teachers. There is also an exception for certain computer employees who are paid at least $27.63/hour. Employers can still pay administrative and professional employees on a fee basis.
Are there state-specific considerations?
Of course, you knew the answer was YES.
Some states don’t recognize the Highly Compensated Exemption as a shortcut to get to exemption status, so make sure to check with your attorney.
Additionally, the states below have different salary minimums for the EAP exemption only. This means that if your employees are in any of the states below, they must meet the state-specific minimum salary threshold to ensure that they are properly classified as an exemption.
| State | Weekly rate | Yearly rate | Notes |
|---|---|---|---|
| Alaska | $938.40/week | $48,796.80/year | |
| California | $1,280/week | $66,650/year | Twice the state’s minimum wage rate |
| Colorado | $1,057.69/week | $55,000/year | Dependent on state’s minimum wage rate |
| Maine | $816.35/week | Updated annually | |
| New York (New York City and Nassau, Suffolk, and Westchester counties) | $1,200/week | $62,400/year | January 1, 2025: $1,237.50/wk ($64,350/yr) January 1, 2026: $1,275/wk ($66,300/yr) |
| New York (rest of state) | $1,224.20/week | $58,458.40/year | January 1, 2025: $1,161.65/wk ($60,405.80/yr) January 1, 2026: $1,199.10/wk ($62,353.20/yr) |
| Washington state | $1,302.40/week | $67,724.80/year | Twice the state’s minimum wage rate |
The states below have implemented salary thresholds for the Computer Exemption:
- California: $55.58/hour or $115,763.35/year
- Colorado: $31.41/hour or $65,333.00/year
- Washington: $56.98/hour or $118,518/year
How should you prepare?
- Audit your salaries and job roles.
- Ask your organization:
- Are we going to raise salaries to maintain exempt status?
- Are we going to reclassify these folks as non-exempt and entitled to overtime instead of raising their salaries?
- Will there be budget implications if these folks are now entitled to overtime?
- Communicate any changes to your employees. Transparency goes a long way in maintaining trust and morale.
- Review and update your overtime policies.
Wrapping it up
The new FLSA salary exemption rules are a big deal, but they don’t have to be a headache. By staying informed and being proactive, both employers and employees can navigate these changes smoothly.
As a reminder, FLSA audits are a legal analysis that should be conducted in conjunction with your employment counsel or General Counsel.
