DOL‘s Final Overtime Exemptions Rule: What Employers Must Be Prepared For?

 

On April 23, 2024, the United States Wage and Hour Division of the Department of Labor (DOL), released a final rule titled Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, which becomes effective on July 1, 2024.

The Details

The final rule updates and revises the provisions of the Fair Labor Standards Act (FLSA) exempting executive, administrative, and professional employees from minimum wage and overtime requirements.

For an employee to be exempt from the FLSA minimum wage and overtime requirements, the employee must generally meet the following three tests:
 

1. Salary basis test: Employee is paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed.
2. Salary level test: The salary paid to the employee must meet a minimum specified amount.
3. Duties test: The employee must perform executive, administrative, or professional duties.

The final rule increased the salary level test amounts but did not modify the salary basis test or the duties test provisions. The DOL also increased the amounts the regulations provide as an alternative test to the salary level test for certain highly compensated employees who are paid a salary, earn above a higher total annual compensation level, and satisfy a minimal duties test. Employees meeting the requirements of the alternative test are also exempt from the FLSA overtime and minimum wage requirements.

The chart below provides the current amounts and future amounts that an employee must be paid to meet the salary level test and the alternative test to be exempt from the FLSA overtime and minimum wage requirements:
 

Effective Date	Standard Salary Level Test Amounts	Alternative Test Amounts (Highly Compensate Employee Total Annual Compensation Threshold)
Before July 1, 2024	$684 per week (equivalent to $35,568 per year)	$107,432 per year, including at least $684 per week paid on a salary or fee basis
Beginning July 1, 2024	$844 per week (equivalent to $43,888 per year)	$132,964 per year, including at least $844 per week paid on a salary or fee basis
Beginning January 1, 2025	$1,128 per week (equivalent to $58,656 per year)	$151,164 per year, including at least $1,128 per week paid on a salary or fee basis
Beginning July 1, 2027, and every 3 years thereafter	To be determined by DOL using earnings data published by the U.S. Bureau of Labor Statistics.	To be determined by DOL using earnings data published by the U.S. Bureau of Labor Statistics.

Use of Bonuses and Incentive Payments to Satisfy the Salary Level Test

The final rule continues to allow up to ten percent of the salary amounts noted in the chart to be satisfied through the payment of nondiscretionary bonuses, incentives, and commission payments that are paid annually or more frequently. 

However, if by the end of the year, the amount paid to the employee is less than 52 times the required salary amount, the employer must make one final payment sufficient to meet the required level no later than the next pay period after the end of the year.

Next Steps

• Determine if the compensation employees are receiving is sufficient to meet the upcoming increase to the salary level test or alternative test amounts.

 

• If the amounts are not sufficient, then you will need to determine whether to increase the employee's salary sufficient to meet the required amount or begin to treat the employee as an FLSA non-exempt employee entitled to the FLSA overtime and minimum wage protections.

 

• Several states have their own test for exempt status. These tests are typically harder to satisfy. You should apply both the state and federal tests to determine an employee's status under both federal and state law.

 

• If you reclassify employees as non-exempt, ensure that managers are prepared to manage overtime costs and understand what hours are considered hours worked. For example, under certain circumstances, travel time and time spent performing preliminary or postliminary activities can be deemed compensable work time.

 

• Keep in mind that an employee's "regular rate of pay" for FLSA overtime calculation purposes is the average hourly rate calculated by dividing the total pay for employment (except the statutory exclusions) in any workweek by the total number of hours actually worked. Total pay includes, for example, commissions and non-discretionary bonuses.

 

• If employees are reclassified as non-exempt, then their pay frequency might also need to be changed depending on state law.

 

• Finally, be prepared to communicate any changes to employees promptly and in writing taking into consideration any state or local requirements governing the timing of pay change notifications.

ADP Compliance Resources

ADP maintains a staff of dedicated professionals, who carefully monitor federal and state legislative and regulatory measures affecting employment-related human resource, payroll, tax and benefits administration, and help ensure that ADP systems are updated as relevant laws evolve. 

For the latest on how federal and state tax law changes may impact your business, visit ADP Eye on Washington.

ADP is committed to assisting businesses with increased compliance requirements resulting from rapidly evolving legislation. Our goal is to help minimize your administrative burden across the entire spectrum of employment-related payroll, tax, HR and benefits, so that you can focus on running your business. 

This information is provided as a courtesy to assist in your understanding of the impact of certain regulatory requirements and should not be construed as tax or legal advice. Such information is by nature subject to revision and may not be the most current information available. ADP encourages readers to consult with appropriate legal and/or tax advisors. 

This article was originally published on adp.com/SPARK. 
 

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