Deciphering Final Rule Salary Threshold Requirements: Complete Guide

The Department of Labor has published its Final Rule updating the salary threshold requirements for its Executive, Administrative and Professional Exemptions, under the Fair Labor Standards Act, as well as the threshold regarding Highly Compensated Employees (HCE).

FLSA Exemptions

Here’s a brief overview of the three FLSA exemptions, which we cover in-depth during our trainings. Understanding the distinctions between these exemptions is crucial for both employers and employees to ensure compliance with the law.

1. Executive Exemption:

   • The executive exemption under the FLSA applies to employees whose primary duties involve managing the enterprise or a customarily recognized department or subdivision of the enterprise. To qualify for this exemption, an employee must meet all of the following criteria:

   • The employee must be compensated on a salary basis at a rate not less than the prescribed minimum amount.

   • The employee's primary duty must be managing the enterprise or a customarily recognized department or subdivision of the enterprise.

   • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent.

   • The employee must have the authority to hire or fire other employees, or the employee's suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.

     Essentially, the executive exemption is designed to apply to employees in genuine managerial or supervisory roles within an organization.

2. Administrative Exemption:

   The administrative exemption applies to employees whose primary duties involve office or non-manual work directly related to the management or general business operations of the employer or the employer's customers. To qualify for this exemption, an employee must meet all of the following criteria:

   • The employee must be compensated on a salary or fee basis at a rate not less than the prescribed minimum amount.

   • The employee's primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers.

   • The employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

     In essence, the administrative exemption is intended to cover employees who perform work related to the administrative or operational aspects of the business, and who do so while exercising a certain level of discretion and independent judgment.

3. Professional Exemption:

   The professional exemption applies to employees whose primary duties involve work that requires advanced knowledge in a field of science or learning that is customarily acquired by a prolonged course of specialized intellectual instruction. To qualify for this exemption, an employee must meet all of the following criteria:

• • The employee must be compensated on a salary or fee basis at a rate not less than the prescribed minimum amount.

  • The employee's primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment.

  • The advanced knowledge must be in a field of science or learning.

  • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

  • The professional exemption typically encompasses employees such as doctors, lawyers, engineers, scientists, and other similarly educated and skilled workers.

In summary, while all three exemptions—executive, administrative, and professional—provide exceptions to certain provisions of the FLSA, they each have distinct criteria that must be met for an employee to qualify. Employers must carefully evaluate the job duties and responsibilities of their employees to ensure proper classification, as misclassification can lead to significant legal and financial consequences. Similarly, employees should be aware of their rights under the FLSA and ensure that they are fairly compensated in accordance with the law.

Highly Compensated Employee (HCE) Criteria

Meanwhile, a Highly Compensated Employee (HCE) is a classification that pertains to certain employees who receive compensation at a higher level than the standard salary threshold for exemption from overtime pay requirements. The concept of Highly Compensated Employees was introduced by the DOL to streamline and simplify the exemption criteria for certain white-collar employees who may not meet the standard duties test for exemption but receive high compensation. A Highly Compensated Employee, as defined by the FLSA, is an employee who meets specific criteria related to compensation and duties. The primary criterion for classification as an HCE is the total annual compensation received by the employee. As of the most recent update to FLSA regulations, to qualify as an HCE, an employee must:

• Receive total annual compensation of at least the designated threshold amount set by the Department of Labor, part of which must paid on a salary basis at not less than the prescribed minimum amount for the executive, administrative and professional exemptions.
• Perform office or non-manual work.
• Customarily and regularly perform one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee as defined by the standard duties test.

The compensation threshold for HCEs is significantly higher than the standard salary level required for exemption under the FLSA. This threshold is set at a level intended to encompass employees who, due to their high compensation, are less likely to be subject to the potential abuses associated with misclassification and are more likely to perform executive, administrative, or professional duties. In addition to meeting the compensation threshold, HCEs must also perform office or non-manual work and regularly perform one or more of the exempt duties associated with executive, administrative, or professional roles. While the duties test for HCEs is less stringent than that for other exempt employees, it still requires that the employee's duties involve a level of responsibility and discretion consistent with the exempt status under the FLSA. The classification of Highly Compensated Employees serves several purposes within the framework of the FLSA. Firstly, it provides a simplified exemption pathway for certain employees whose high level of compensation indicates that they are less likely to be vulnerable to the potential exploitation that the FLSA seeks to prevent. Secondly, it acknowledges that employees who earn significantly higher salaries may inherently perform duties that align with those of exempt executive, administrative, or professional employees, even if they do not meet the strict duties test criteria.

New DOL Final Rule: Salary Threshold Requirements

The salary thresholds for workers fitting these designations will be increased in phases, beginning July 1st, 2024, with a second increase coming six months later on January 1st, 2025. The Department has also introduced a mechanism to regularly update the salary threshold starting July 1st, 2027, and every three years after that.
The salary thresholds are as follows:

Contractors will be notified at least 150 days before the date of a scheduled update to the salary levels. The Department will publish a notice in the Federal Register with the new earnings levels described above.

As a result of these changes, contractors will have some decisions to make regarding their current employees’ classification. If employers want to continue to classify employees as exempt, they need to increase the salary level in order to remain in compliance and for the exemption to continue to apply. Otherwise, contractors should get ready to switch employees’ compensation to an hourly basis, which includes the responsibility to keep accurate records of hours worked, as well as the requirement to pay “time and a half” for any hours employees work over 40 in a week. Changes in the salary requirements for these positions reflect acknowledgement by the DOL that the labor force at large is facing increased financial strain, as living costs and inflation continue to affect workers.

As a reminder, overtime (or “time and a half”) refers to any hours worked by covered non-exempt employees in excess of 40 hours in a workweek. While the standard workweek comprises 40 hours, any additional hours worked beyond this threshold qualify as overtime and are subject to special compensation rates as mandated by the FLSA. If you decide to reclassify a previously exempt employee as non-exempt, you may need to brush up on overtime calculations:

• To compute overtime pay under the FLSA, employers typically follow a straightforward formula. First, the regular rate of pay for the employee is determined. This is typically the employee's hourly wage for non-salaried employees or their equivalent hourly rate for salaried employees. Next, the overtime premium, equal to one and a half times the regular rate of pay, is calculated. Finally, this premium is paid for each overtime hour worked to determine the total compensation owed to the employee for their overtime work.
• Ensuring compliance with the FLSA's overtime pay requirements is essential for employers to avoid legal repercussions and maintain positive employer-employee relations. The Department of Labor (DOL) is tasked with enforcing the FLSA and has the authority to investigate complaints, conduct audits, and impose penalties for violations of overtime pay provisions. Employers are thus encouraged to maintain accurate records of hours worked, establish clear policies regarding overtime compensation, and remain vigilant in adhering to FLSA guidelines to mitigate potential liabilities.

How Onsi Group Can Help:

Navigating the nuances of the new final rule and its exemptions can be complex. Onsi Group offers tailored consulting services to ensure contractors understand their obligations under new regulations. From conducting comprehensive audits to providing training courses, Onsi Group offers a suite of solutions to support compliance and mitigate risks. Our in-person trainings are one of our most popular offerings, providing employers, HR staff, and workers the opportunity to dive deep and master concepts in FLSA, SCA, and DBA compliance. We also offer these courses online! Our services are uniquely tailored to your business’ ever-changing needs. If you are impacted by this updated final rule, either by increasing salaries for exempt employees or switching employees’ status to non-exempt, we would love to help you ensure compliance and achieve peace of mind.

- Hailey Soupiset, Marketing Intern & Aaron Ramos, Senior Labor Compliance Officer