On April 26, 2024, the U.S. Department of Labor (DOL) issued its Final Rule, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees,” which significantly increased minimum compensation requirement for most exempt employees under the federal Fair Labor Standards Act. The salary basis test is one component in determining whether an employee may be classified as exempt under the FLSA. The other component is whether the position at issue meets the criteria of the duties test for various exemptions.
The Duties Test
Under the duties test, the employee’s job responsibilities must meet various criteria set by the DOL to determine if the position qualifies for one of the seven exemptions: executive, administrative, professional, computer professional, outside sales, highly compensated employees (HCE), or certain retail sales.
- The executive exemption requires an assessment of whether the employee’s primary duty is management, if they customarily and regularly direct the work of two or more other employees, and if they have the authority to either decide or influence the decision to hire or fire employees.
- The administrative exemption applies to employees whose primary duties include office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.
- The professional exemption has three elements;
- (1) the primary duties must involve work requiring advanced knowledge, predominantly intellectual in character, and includes work requiring the consistent exercise of discretion and judgment;
- (2) the advanced knowledge is in a field of science or learning; and
- (3) that advanced knowledge is customarily gained by a prolonged course of specialized intellectual instruction.
- The computer professional exemption applies to employees whose primary duties are systems analysis techniques and procedures, designing, developing, documenting, analyzing, creating, testing, or modifying computer systems or programs, or a combination of these duties.
- The outside sales exemption is for employees whose primary duties involve making sales or obtaining orders or contracts for good, services, or the use of facilities for which a client or customer will pay and accomplish those duties in locations other than the employer’s place(s) of business.
- Finally, highly compensated employees (HCEs) need not satisfy each element of any duties test if they
- (1)receive total annual compensation (salary plus bonus, commission, or other periodic payments) of at least $107,432 (with a salary of at least $684 per week paid on a salary or fee basis) and
- (2) they customarily and regularly (but not primarily) perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee.
- Finally, employees whose primary duties include a combination of exempt duties may qualify for the FLSA’s “combination exemption.”
- Certain inside retail salespersons may also qualify as exempt if they are employed by a retail or service establishment and their regular hourly rate of pay exceeds 1½ times the minimum wage. If more than half of the employee’s compensation for a representative period (not less than one month) represents commission on the sale of goods and services, they will qualify for this exemption. However, the salary basis test does not apply to these retail employees.
The Salary Basis Test
Under the salary basis test, exempt employees must be paid a predetermined and fixed salary that does not vary based on the quality or quantity of work performed. That salary must meet a minimum threshold to qualify as exempt. For the salary basis test, an employee will be considered to be paid on a salary basis if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation. The amount may not be subject to reduction because of variations in the quality or quantity of the work performed.
From 2004 to 2019, inexplicably, the minimum salary required to meet the test was frozen at $455 a week ($23,660 annualized). In 2019, it was raised to $684 ($35,568).
The DOL’s 2024 Final Rule
The DOL’s April 26 Final Rule applies to employees meeting one of the duties tests in the executive, administrative, professional, outside sales, computer employee, and/or combination exemption categories.
Effective July 1, 2024, the minimum annual compensation threshold will be raised to $43,888 ($844 a week). That minimum will then jump to $58,656 ($1,128 a week), effective January 1, 2025. The salary threshold and minimum annual compensation are scheduled to update every three years, with the next adjustment date being July 1, 2027. Note that up to 10% of the annual minimum may be comprised of nondiscretionary bonuses, commissions, and incentive payments that do not have to be included in the weekly amounts.
The highly compensated employee (HCE) exemption will also see substantial increases come summer. The minimum total annual compensation level for HCEs will increase from $107,432 to $132,964, effective July 1, 2024, and $151,164, effective January 1, 2025.
Navigating DOL Updates: Ensure Compliance with Legal Guidance from Avisen
The recent Final Rule issued by the U.S. Department of Labor significantly impacts the classification of exempt employees under the Fair Labor Standards Act (FLSA). Understanding the intricacies of the duties test for various exemptions is crucial for employers navigating these changes.
As these adjustments come into effect, it’s essential for businesses to stay informed and adapt their practices accordingly to maintain compliance and uphold fair labor standards. For guidance and assistance in navigating these complex legal matters, contact Avisen Legal today. Our experienced team is ready to provide tailored solutions to ensure your business meets these requirements while maximizing efficiency and productivity.
