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On Tuesday, April 23, 2024, the U.S. Department of Labor issued a new rule raising the salary thresholds for employee overtime exemptions.

Under the new final rule, the minimum salary for overtime exemption will increase to $43,888, effective July 1, 2024. Furthermore, the minimum salary will rise to $58,656 on January 1, 2025. The thresholds for highly compensated employees will increase to $132,964 on July 1, 2024, and $151,164 on January 1, 2025.

There will be automatic increases every three years thereafter. These are calculated based on the 35th percentile of the full-time non-hourly workers in the lowest earning Census region. The lowest earning Census region is currently the South. The highly compensated employees thresholds will be calculated based on the 85th percentile of all non-hourly workers nationwide.

The Department of Labor estimates that the new overtime thresholds will benefit 4.3 million workers, including 2.4 million women and 1.0 million people of color. These affected workers would receive an estimated $1.5 billion annually from the increased pay.

See Also: Employee or Independent Contractor? New Rules for 2024

Fair Labor Standards Act and Overtime Exemptions

Under the Fair Labor Standards Act, employers generally have to pay employees time and a half for hours over 40 hours a week. However, some employees are exempt from these overtime rules. The exemptions usually fall into four categories (E-A-P employees + outside sales):

  1. Executive Employees
  2. Administrative Employees
  3. Professional Employees
  4. Outside Sales Employees

These are more generally lumped together as your office “white collar” employees. Under these exemptions, the employee must be paid on a salary basis, the employee’s primary duties must be exempt duties, and the employee must meet a minimum salary threshold (that is what is changing in this rule).

The overtime exemptions are complicated, and it is really easy for employers to get these wrong. In fact, the federal and state Departments of Labor conduct hundreds of employment audits annually.

What’s a Highly Compensated Employee?

Highly compensated employees can also be exempt from overtime rules under the FLSA. Under this exemption, an employee who is office worker or non-manual work and is paid at least $107,432 is exempt from the overtime rules. In addition, the employee must customarily and regularly perform at least one duty of an exempt executive, administrative, or professional employee. This is a relaxed duties test – for employees that fall under the highly compensated employee salary threshold, the duty must be their primary duty, not a regular duty.

Under the final rule issued yesterday, the highly compensated employee’s threshold salary will also go up. On July 1, 2024, the threshold increases to $132,964. On January 1, 2025, the threshold will again increase, this time to $151,164.

What is a Professional Employee?

One of the most commonly misunderstood exemptions, and thus frequently misclassified exemption, is the professional employee.

There are two ways that an employee can qualify as a professional employee: through the learned professional or the creative professional tests.

For a learned professional, the primary duty must be in the performance of work requiring advanced knowledge, predominately intellectual in character and includes consistent exercise of discretion and judgment. Furthermore, the advanced knowledge must be in a field of science or learning and customarily acquired by a prolonged course of specialized intellectual instruction.

The Department of Labor has specifically said that this advanced knowledge cannot be attained at the high school level. Typically, undergraduate or graduate level instruction is required for the prolonged course of specialized intellectual instruction. It would not apply to employees that can or do generally acquire their skill by experience rather than specialized instruction.

I want to highlight the learned professional specifically because so many professional service firms get this one wrong and become subject to the harsh penalties for non-compliance. For example, in law firms, paralegals are not exempt under the learned professional exemption. CPAs would qualify; however, bookkeepers would not qualify for the exemption. In general, you must have college or higher level instruction on that specific job or role; a general education or liberal arts degree is not going to be sufficient in most cases.

See Also: EEOC Issues Final Rules on Pregnant Workers Fairness Act

What about Outside Sales for Brokers?

Because of my experience in the supply chain, I often get questions about the exemption as it relates to customer sales employees. The Outside Sales employee exemption is for those sales employees that are regularly away from the primary place of business (including the employee’s home) to make in-person sales calls (not telephone calls, but actually showing up in person).

This exemption is intended for your “road warrior” that spends most of their time away from the office, traveling to or from the customer’s place of business or home. It does not apply to employees that are sitting in your office, making calls via telephone or internet.

Some (truck) drivers may also qualify in theory. However, these are very limited in practice and only if the driver’s primary responsibility is to make sales. Truckers may also qualify for the exemption under the Motor Carrier Exemption.

Expected Legal Challenges

Like the FTC’s actions yesterday to ban non-competes in most employment contexts, most expect that there will be legal challenges to these updated overtime salary standards.

In 2016, a court found that the Department of Labor did not have the authority to increase the thresholds and that it would require an act of Congress to do so. Once the presidential election switched parties, the new administration did not pursue appeals and let the decision stand. A similar challenge is expected here and the changes may not take effect.

Next Steps for Companies to Comply with Overtime Rules

Regardless of expected legal challenges, employers should prepare for these changes as if they will go into effect. Prior challenges didn’t stop the changes until the last minute, after many companies had already made changes to their classifications and/or salaries. There is no guarantee that if a company waits for a legal challenge to be successful that they won’t be caught flat footed come July 1 if the changes are not stopped.

Companies should audit their payroll to determine who may be affected by these changes. Companies should then make decisions on whether any compensation changes can or should happen. Another alternative is for companies require newly non-exempt employees to comply with time keeping requirements and to ensure that training is conducted to ensure compliance. In addition, payroll processes should be updated to ensure that overtime is properly calculated for these newly non-exempt employees.

Regardless of the threshold, it is important that companies properly classify employees based on their duties. It is a best practice to regularly review the duties that each position has to ensure that they are still properly classified. As companies grow and change, the duties in a role may change and an employee that was exempt, no longer is. Or an employee that was non-exempt becomes exempt.

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