DOL Exempt Salary Change
EMPLOYERS MUST TAKE ACTION NOW: REVIEW AND UPDATE EXEMPT EMPLOYEE SALARIES BEFORE JULY 1, 2024 TO AVOID VIOLATIONS OF FEDERAL WAGE AND HOUR LAW
If you are an employer in the U.S. with salary employees exempt from overtime wages, this article is for you. You MUST take immediate and urgent action to ensure that all exempt employee salaries meet or exceed the new minimum salary threshold by July 1, 2024. Employees whose salaries do not meet or exceed the new salary threshold as of this date will no longer qualify for an exemption and must be paid overtime wages moving forward. Failure to comply with wage and hour laws can result in substantial damages, fines, and penalties and risks exposure to agency audits of and investigations into payroll, timekeeping, and record retention practices.
Continue reading to learn how to remain in compliance with overtime pay requirements under the Fair Labor Standards Act (“FLSA”) following the July 1, 2024 effective date of the Department of Labor’s (“DOL”) new rule increasing the minimum salary threshold for overtime exemptions.
What is the FLSA? What are the Exemptions?
The FLSA is a federal statute that, in part, requires that all employees be paid at least the minimum wage for all hours worked and an overtime wage rate for all hours worked over 40 during any given workweek.
It’s important to note that the purpose of the FLSA is to protect workers’ rights to be paid a minimum wage and prevent overly onerous working hours by requiring a premium wage rate be paid for overtime hours. The FLSA is one of many “employee protection” statutes designed to improve the working conditions of everyday Americans. Prior to the enactment of such employee protective statutes, many workers were subjected to long hours in unsafe work environments for little to no wages without recourse to improve their work conditions.
Under the FLSA, certain “white collar” employees are exempt from one or both of these requirements if they meet the eligibility requirements for one of the available exemptions. We often refer to these employees as “salary exempt” employees. For employees employed in a bona fide executive, administrative, or professional capacity, as defined in the DOL regulations, to be exempt from the Act’s minimum wage and overtime requirements, they must meet all of the following requirements:
The “Salary Basis” test: They must be paid a salary, meaning that they are paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed, including number of hours worked;
The “Salary Level” test: They must be paid at least a specified weekly salary level;
The “Job Duties” test: They must primarily perform executive, administrative, or professional duties as set forth in the DOL’s regulations for the applicable exemption.
Note: There are other exemptions with different requirements that do not require the “Salary Level” test be met that are not discussed in this article. There is also a separate test for Highly Compensated Employees (“HCE”) who are paid a salary, earn at least a higher total annual compensation level, and satisfy a minimal duties test. For purposes of this article, we’re only going to touch on the minimal compensation level for HCEs moving forward as of July 1, 2024.
What’s Changing?
As of July 1, 2024, the minimum salary level required to be eligible for an overtime exemption is increasing for executive, administrative, professional exemptions as well as for HCEs.
It has been over 4 years since the DOL last increased the minimum salary levels for exempt employees when it increased to $684 per week ($35,568 annually) in 2019.. These increases have failed to keep up with inflation or economic growth, so this new Final Rule accounts for both current increases and future increases to attempt to remedy this problem moving forward. The minimum salary levels will be increased on July 1, 2024, and again on January 1, 2025. Beginning on July 1, 2027, salary levels will be evaluated and updated in accordance with then-current wage data and compensation methodologies.
SALARY LEVELs FOR EXECUTIVE, ADMINISTRATIVE, AND PROFESSIONAL EXEMPTIONS
The salary level for the executive, administrative, and professional exemptions, starting July 1, 2024, is equivalent to the 20th percentile of salaried earnings in the lowest-wage Census Region and/or in the retail industry nationwide. For the January 1, 2025 increase, salary levels are set at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South).
For HCEs, the July 1, 2024 salary level is equivalent to the annualized weekly earnings of the 80th percentile of full-time salaried workers nationally, while the January 1, 2025 salary levels are at the 85th percentile of the same.
SALARY LEVEL FOR HIGHLY COMPENSATED EMPLOYEE EXEMPTION
The job duties requirements for these exemptions have not changed.
What Do Employers Need to Do Before July 1, 2024?
All employers will need to review the salaries of employees currently treated as “salary exempt” under the executive, administrative, professional, or HCE exemptions and identify all employees whose current salaries fall below the minimum salary level as of July 1, 2024.
From there, employers have a range of options for responding to the updated levels established by this rule. For each employee affected by the increased earnings threshold, an employer may:
Increase the salary of the employee to at least the new salary level to retain their exempt status;
Keep the salary of the employee as-is and begin to pay an overtime premium of one- and one-half times the employee’s regular rate of pay for all hours worked over 40;
Convert the employee’s pay structure from salary to hourly and begin to pay the overtime premium as per above;
Reduce or eliminate overtime hours;
Reduce the employee’s base salary to offset new overtime pay; or
Use some combination of the above.
Obviously, some of these options will be more palatable to the employee than others. Reducing an employee’s regular rate of pay to offset overtime pay is permissible but unlikely to be received well by the affected employee(s) and could negatively impact morale.
Some employers may find that many salaried exempt positions do not work a significant amount of overtime on a regular basis, in which case, the salary increase required for the exemption could have more of an impact on payroll than leaving the employees’ salaries at their current levels and paying the premium rate for overtime when applicable.
Other employers may find that many salaried exempt positions work extensive overtime on a consistent basis. In this case, the employer may find it more financially prudent to increase compensation to the new salary level, or the employer may determine that it’s more cost-effective to hire another employee to assume some of the workload and reduce or eliminate overtime hours to keep salaries at their current levels.
Timekeeping Requirements
Don’t forget that employers have record-keeping (accounting for such employees’ hours and wages) obligations under the FLSA for all salary and hourly non-exempt employees and those entitled to overtime compensation. Employers must keep an accurate record of the number of hours worked each day and each workweek by the employee as well as their corresponding payroll records. There is no particular form of time-keeping records required, only that they accurately account for all hours worked to ensure employees get paid what they earn and are owed, including overtime wages at the appropriate rate of pay.
Misc. Reminders re: Overtime Compensation
Hours Worked. Employers are obligated to pay non-exempt employees the overtime rate for all work exceeding 40 hours in a workweek, regardless of whether overtime was approved. It is the hours worked, not the hours scheduled/approved that are entitled to compensation. Employers are permitted to issue appropriate corrective action in accordance with company policy to employees who repeatedly or consistently fail to monitor their hours to prevent unapproved overtime, but all overtime worked must be paid.
Regular Rate of Pay. Overtime wages are paid at one-and-one-half times the employee’s “regular” rate of pay. For employees who make one hourly rate for each hour worked, the calculation is simply one-and-one-half times the hourly rate. For employees who are paid different or multiple hourly rates due to shift differentials or for the performance of different jobs for the same employer, the employee’s regular rate of pay is the average hourly rate, calculated by dividing the total pay for employment in any one workweek by the total number of hours actually worked, and the overtime rate is one-and-one-half times this number. Employers will need to complete the regular rate of pay calculation each week the employee works overtime to determine the appropriate overtime rate for that week.
Regular Rate of Pay: Nondiscretionary Bonuses. Certain bonuses are considered non discretionary under the FLSA and must be included in the regular rate of pay calculation, regardless of whether the employee has one or multiple hourly rates, in order to calculate the overtime rate of pay. Nondiscretionary bonuses typically include, but are not limited to, bonuses based on a predetermined formula, such as individual or group production bonuses, bonuses announced to employees to induce more efficiency or better quality results, attendance bonuses, and safety bonuses. These bonuses are non discretionary as employees typically know about the bonus and understand what they must do to earn the bonus, so the bonus is expected. The fact that the employer has the option not to pay the bonus does not make it non discretionary.
Some nondiscretionary bonuses, if earned over a single workweek, must be included in full in the calculation of the regular rate of pay and overtime rate for that workweek. Some nondiscretionary bonuses earned over a series of workweeks, on the other hand, must be prorated and included in the regular rate of pay in all overtime weeks covered by the bonus period. If the amount of the bonus cannot be determined until the end of the bonus period, once the bonus can be ascertained, it must be apportioned back over the workweeks in the bonus period. Additionally, the employer must pay the overtime premium pay due on the bonus, which is based on the new regular rate of pay calculations for weeks in which overtime was previously paid without the bonus compensation included in that calculation.
State Laws. Some states have different requirements for when employees must be paid an overtime premium rate. For example, some states require that all hours worked on the employee’s 7th consecutive workday in one workweek must be paid at the overtime rate, regardless of whether the employee’s overall hours exceed 40 during the same week. Some states have different methodologies for how employers are required to calculate overtime when employees receive certain flat rate nondiscretionary bonuses. Employers with employees outside of the State of Ohio are encouraged to consult with a trusted attorney to become familiar with the employment laws and wage obligations in the state(s) where its employees are located and perform work for pay. The employment laws of the state where the employee is performing work govern that employment relationship, and the employer may need to modify its policies or practices for such an employee to ensure compliance with state law.
As always, we’re here to help. Please reach out to your trusted Anthony Law attorney with questions or assistance in implementing any of the guidance herein.