Recently, the Department of Labor (DOL), the Federal agency that enforces the Fair Labor Standards Act (FLSA), has released employment law changes affecting the exemption tests that determine which employees are eligible for overtime (“non-exempt”) and which are not eligible (“exempt”).

The first wave of changes to the salary threshold portion of the exemption tests went into effect on July 1, 2024. The second phase will go into effect on January 1, 2025.

In this blog, key aspects of the exemption tests/salary threshold will be outlined, and we will explain the changes that will take place.

The FLSA contains detail regarding each aspect of what qualifies an employee as “exempt” under certain types of positions, including executive, administrative, and professional (EAP) positions.

Much of this information can be confusing to employers when analyzing how to appropriately categorize each employee. According to the DOL, there are three tests each of those exempt employees must meet:

1. They must be paid a salary,
2. They must be paid at or above a specified amount – known as the “salary threshold,” and,
3. They must perform primarily executive, administrative, or professional duties and functions.

Currently, in order for an employee to be considered exempt under any of the EAP exemption tests, they must be paid a minimum of $648 per week ($35,568 annually).

That threshold increased on July 1, 2024, with the salary threshold now set at $844 per week ($43,888 annually).

During the changing regulation's second phase, effective on January 1, 2025, the salary threshold will increase to $1,128 per week ($58,656 annually).

Additionally, under the new regulations, the threshold will adjust every three years thereafter, based on the methodology in the new rule. (In the past, there had to be action taken on the part of the DOL to change the threshold.)

Prior to July, employers will need to consider how they plan to handle these changes in regard to any employees who are currently considered non-exempt, but who will no longer be paid above the salary threshold (who will become non-exempt) after the above dates. The questions employers need to address include:

• Do we need to increase those employees’ pay to ensure that they remain exempt?
  • Does that employee ever work over forty hours per week and, thus, would we need to pay them overtime when they become non-exempt after the threshold changes?
  • If they have historically worked over forty hours per week, can we afford to pay them time-and-a-half? Will that cost us more, or less, than adjusting their pay to keep them above the new thresholds?
  • Could/should we leave them as non-exempt and prohibit them from working overtime?
• If we are going to increase their pay to keep them exempt, are we going to increase their pay once in July and again in January, or all at once in July?
• If we adjust some employees’ pay, how will those adjustments affect other employees who do the same or similar work and who are already above the threshold, but who will then be paid the same as or more closely to the employees who are being adjusted to keep them above the threshold? Will those pay compression issues need to be addressed with pay increases to other employees who are already above the new thresholds?

Employers might also consider whether it makes sense to hire additional employees into certain roles. Hiring new employees might eliminate the need for existing employees to work over forty hours per week, and thus limit the payment of overtime. However, with additional employees, there is the increased expense of benefits and other costs of employment for more people.

Also, if an employer decides to permit currently exempt employees to become non-exempt after the threshold changes, they should be cognizant that some employees are sensitive to the stigma associated, by certain people, with being defined as “non-exempt” (hourly). Some employees might prefer to remain exempt, rather than have the opportunity to earn overtime compensation, in favor of the prestige of calling themselves an “exempt” (salaried) professional.

The new exemption test/salary threshold rules are a harbinger of overwhelming considerations. Employers would be prudent to partner with an HR expert who is well versed in compensation and who can help to:

• Minimize confusion and mistakes when determining how to apply the new tests to accurately categorize employees to meet the new salary thresholds.
• Address resulting compensation compression issues.
• Find the right approach to seamlessly prepare and thoughtfully deliver sensitive communication to employees who might be impacted by these new threshold rules.

By preparing for these changes ahead of time, you will be able to protect your company from what could be a difficult and costly audit, should the Department of Labor decide to review your compensation practices, while minimizing a potentially challenging compensation transition for your employees.

Paying your employees legally and appropriately is a key component to maintaining the integrity of your business. A byproduct of such transparency is keeping and attracting talent, which, in turn, supports a business owner’s goal to transform your business through your people™.

For more information, please reach out to me at 774-250-5005 or send an email to carolyn@rossinsightsolutions.com.

Legal Disclaimer:

The information provided in this blog is for general informational purposes only and is not intended to be legal advice. While we strive to ensure that the information provided is accurate and up to date, it should not be considered comprehensive or a substitute for professional legal advice. No action should be taken based solely on the information in this newsletter without consulting a qualified professional. We disclaim all liability for any actions taken or not taken based on the contents of this newsletter. If you have specific legal questions, you are encouraged to consult a licensed attorney.

About the Author

Carolyn Ross founded Ross Insight Solutions to provide tailored HR solutions to small to medium sized businesses. She specializes in HR consulting, training, management, and strategies to help companies and their people achieve the next level of success.

We're proud to have Carolyn in our Connected Payroll network to empower small business owners with HR techniques and strategies that help transform their internal processes. To get in touch with her, book a free consultation on her website.