On July 1, 2024, the United States Department of Labor's final rule, Defining and delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, took effect. This rule updates and revises the regulations issued under section 13(a)(1) of the Fair Labor Standards Act ("FLSA"). It is crucial for employers to review employee classifications and update or reclassify employees to comply with the new regulations. This article will briefly explain the FLSA and review its history, provide a short overview of the current FLSA rules and regulations, and give an overview of the changes to the exemptions.
The Fair Labor Standards Act
The Fair Labor Standards Act ("FLSA") is a federal United States labor law that creates the right to minimum pay and grants employees working overtime "time-and-a-half" pay when working over 40 hours a week. In addition, the FLSA prevents "oppressive child labor" by prohibiting the employment of minors. The Department of Labor ("DOL") is the federal agency tasked with enforcing labor laws, including the FLSA. The FLSA was originally published in 1983 and applies to all employees of enterprises having workers engaged in interstate commerce, producing goods for interstate commerce, or handling, selling, or otherwise working on goods or materials that have been moved in or produced for such commerce by any person. [1] These rules and regulations are the minimum requirements with which states must comply, however, states can provide additional protections to employees through their own state laws. [2]Employers must comply with the FLSA and the other state requirements. Make sure to check with a local attorney to ensure you are complying with state laws/requirements. The FLSA is currently codified at 29 U.S.C. §§ 201-219.
Overview of the Current FLSA Rules and Requirements
Under the current structure of the FLSA, the federal minimum wage is $7.25 per hour (as of July 2009). As stated above, states may have their own minimum wage requirements that guarantee employees a higher minimum wage than the federal minimum. In this instance, the employee is entitled to the higher minimum wage (in effect, no state can dip below the federal minimum; it can only grant a higher minimum wage).
In addition to the minimum wage requirements, there are overtime requirements in the FLSA. Covered nonexempt employees must receive overtime pay for hours worked over 40 per workweek. The FLSA sets the workweek at any fixed and regularly recurring period of 168 hours (i.e., seven consecutive 24-hour periods). The rate of pay for any hours worked over 40 per workweek is one and one-half times the regular rate of pay. There is no limit on the number of hours employees 16 years or older may work in any workweek as long as employees are being paid time and a half for all time worked over 40 hours per workweek. There is currently no federal requirement that employees be paid time and a half on holidays. States may add such a requirement, but the federal rules do not require time and a half on holidays. (Note: as of the writing of this article, August 30, 2024, there are only two states that require time and a half pay for employees on a holiday—Rhode Island and Massachusetts. You should check with a local attorney to ensure state requirements are being met).
As stated above, the FLSA applies to enterprises with workers engaged in interstate commerce, producing goods for interstate commerce, handling, selling, or otherwise working on goods or materials that have moved in interstate commerce. A covered enterprise performs these related activities through unified operation or common control by a person or persons for a typical business purpose and:
Enterprises whose annual gross volume of sales made or business done is not less than $500,000 (exclusive of excise tax that is separately stated) or
Engaged in the operation of a hospital or like institution; a school for the mentally ill; preschool, elementary or secondary school, or an institution of higher education; or
An activity of a public agent.
Certain exemptions apply to the minimum wage and overtime requirements of the FLSA. Some exemptions include minimum wage and overtime pay, exemptions from overtime pay only, and partial exemptions from overtime pay. The focus of this article is not to outline the whole of the list of exempt or partially exempt employees. Instead, the focus is to highlight the changes to one group of exemptions to both minimum wage and overtime pay:
Executive, administrative, professional, outside sales, and certain computer employees (commonly referred to as "white-collar" or executive, administrative, or professional (EAP) exemption).
The regulations implementing this exemption have generally required that each of the following tests be met:
The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variation in the quality or quantity of work performed (the salary basis test).
The salary must meet a minimum specified amount (the salary level test).
The employee's duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the duties test).
The employer bears the duty to prove the applicability of the exemption.
New Overtime Rule and How It Changes the Previous Structure.
On April 23, 2024, the DOL unveiled a new rule that significantly raised the minimum salary threshold for certain overtime exemptions under the FLSA. This rule had a profound impact on employees' entitlement to overtime pay and the employer compensation structure. The rule was enacted on July 1, 2024, with two sections becoming applicable beginning January 1, 2025.
The new DOL rule sets compensation thresholds for the white-collar/EAP exemptions by raising the salary minimum for these exempt employees. For instance, a marketing manager who previously earned $684 per week (or $35,568 annually) and met the specific job duty criteria outlined above to qualify as exempt from FLSA overtime requirements, will now need to earn $844 per week ($43,88 annually) to maintain the exemption. The new DOL rule maintains the exact job duty requirements to exempt employees from overtime pay under the FLSA.
Further, the new DOL rule increases the annual compensation threshold for employees classified as "highly compensated." Under the previous structure, the minimum annual compensation threshold for highly compensated employees was $107,432 annually, including a weekly salary of $684 and other minimum job duty requirements, to be classified as highly compensated and, therefore, exempt from overtime requirements. The new DOL rule increases the annual salary to $132,964, with a weekly salary minimum of $844 while maintaining the same job duty criteria.
The new DOL rule will also increase the minimum requirements on January 1, 2025, as follows:
- $1,128 per week ($58,656 annually) for white-collar employees; and
- $151,164 annual salary with a weekly salary of $1,128 for highly compensated employees.
After this initial period and starting on July 1, 2027, the new overtime rule will raise the standard salary thresholds for the FLSA overtime exemptions using the updated methodology, tied to the 35th percentile of weekly earnings in the lowest U.S. wage region based on current wage data. This increase will occur every three years after that.
Why Is This Important For Employers And What Should They Do?
You may be wondering why this is important for employers. The consequences of misclassifying employees and failing to pay them overtime are great. Under the FLSA, employers that have misclassified employees as exempt may be liable for all unpaid overtime owed to the employee up to three years before the employee's claim. Additionally, courts may impose liquidated damages equivalent to the unpaid overtime (in effect, doubling the amount owed to the nonexempt employee). Employers found to willfully or repeatedly misclassify employees may have a civil penalty imposed up to $1,000 per violation and may be subject to criminal prosecution, depending on the severity of the violation. For this reason, it is vital that the employer carefully review employee classifications and update or reclassify employees who now do not meet the minimum threshold requirements discussed above. Employers should communicate any change in the employee's classification and ensure that there are systems in place to periodically review employee classifications as well as ensure other compliance strategies are in place. If any employer or employee has questions regarding these changes, would like to review their current employees' classification, or would like to create and implement compliance plans/strategies, the attorneys at Erickson Sederstrom have extensive experience in this field and
[1] https://www.dol.gov/agencies/whd/compliance-assistance/handy-reference-guide-flsa#:~:text=Back%20to%20Top-,Who%20is%20Covered%3F,are%20covered%20by%20the%20FLSA.