ALERT – The Fair Labor Standards Act (FLSA) Salary Duties Test/Salary Threshold Reverts Back to 2019 Regulations

Over the last several months, employers have been preparing for and/or already prepared for the new salary duties test/salary thresholds under the Fair Labor Standards Act (FLSA), effective on 7/1/24, and 1/1/25, respectively.  However, on Friday, 11/15/24, Judge Sean D. Jordan in the U.S. District Court for the Eastern District of Texas, and appointed by Donald J. Trump in his first term as President, ruled that the U.S. Department of Labor went beyond its authority when implementing the new regulations.  According to the U.S. Department of Labor, the new rule had the potential to make about four million more salaried workers eligible for overtime pay.  Part of the rule increased the salary duties test/salary threshold level to $844 per week or $43,888 annually on 7/1/24, and the second part increased the salary duties test/salary threshold to $1,128 per week or $58,656 annually on 1/1/25, with further increases to follow automatically every three-years.  Now, with Judge Jordan’s ruling, the salary duties test/salary threshold must revert back to $684 per week or $35,500 annually.

Implication for Employers

Employers do not need to comply with the previous Department of Labor ruling with the increase in salary duties test/salary threshold that took place on 7/1/24, nor with the upcoming increase on 1/1/25. However, employers need to recognize that the salary duties test/salary threshold is only one of the contributing factors to determine if an employee is exempt or nonexempt from overtime laws under the Fair Labor Standards Act (FLSA).   

Exempt

An employee who is exempt from overtime is one that primarily performs work that is not subject to the overtime provisions of the Fair Labor Standards Act (FLSA). In other words, an exempt employee is “paid to get the job done” and is paid the same amount each pay period, regardless of how many hours they work per week.

Nonexempt

Nonexempt employees, on the other hand, are paid for every hour that they work and are subject to the Fair Labor Standards Acts (FLSA’s) overtime regulations. Therefore, an employee that is classified as nonexempt must be paid at least $7.25 per hour (the federal minimum wage rate) and overtime equal to one and one-half times their regular rate of pay for all hours worked over 40-hours in a workweek in accordance with the FLSA. The FLSA does not require that overtime be paid to nonexempt employees for hours worked in excess of eight-hours per day, or on weekends, or holidays. However, some states do require this, so employers need to make sure that they research and review the requirements of those states where their employees work and reside.

FLSA Requirements – Salary Basis Test/Salary Threshold and Duties Test

As previously stated above, when an employee is properly classified as exempt under the Fair Labor Standards Act (FLSA), they are exempt from the FLSA’s minimum wage and overtime pay regulations. But how does an employer determine whether an employee qualifies to be classified as exempt in the first place? The employee must “pass” two tests; the salary basis test/salary threshold, and a duties test. If an employee does not pass both tests then they must be classified as nonexempt in accordance with the FLSA.

Salary Basis Test/Salary Threshold

The salary basis test/salary threshold may be determined in accordance with the following:

Some exceptions to the above include the following:

• Computer professionals, which will be defined later in this article, and who earn at least $27.63 per hour, are exempt if they customarily and regularly perform all of the duties under the computer exemption, and earn at least $684 per week ($35,568 annually) paid on a salary or fee basis.
• Alaska, California, Colorado, Maine, New York, Washington, and Wisconsin have differing salary thresholds.
• Elected officials of a government entity are completely exempt from the Fair Labor Standards Act (FLSA).

Duties Test

The duties test is where things tend to get tricky for employers who are working to correctly classify their employees under the Fair Labor Standards Act (FLSA). Under the duties test, the FLSA outlines specific exemptions under which a position may be classified as exempt. The exemptions and each requirement include the following:

• Executive Exemption:
  • The employee’s primary duty must be managing the enterprise or managing a customarily recognized department or subdivision of the enterprise; and
  • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
  • 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.
• Administrative Exemption:
  • The employee’s primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the organization or the organization’s customers; and
  • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to “matters of significance” for most of their job.
    • With regards to “matters of significance” under the administrative exemption,factors to consider in determining whether something is a “matter of significance” include the following:
      • Whether the employee has authority to formulate, affect, interpret, or implement management policies, or operating practices.
      • Whether the employee carries out major assignments in conducting the operations of the business.
      • Whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business.
      • Whether the employee has the authority to commit the employer in matters that have significant financial impact.
      • Whether the employee has authority to waive or deviate from established policies and procedures without prior approval.
      • Whether the employee has authority to negotiate and bind the organization on significant matters.
      • Whether the employee provides consultation or expert advice to management.
      • Whether the employee is involved in planning long-term or short-term business objectives.
      • Whether the employee investigates and resolves matters of significance on behalf of management.
      • Whether the employee represents the organization in handling complaints, arbitrating disputes, or resolving grievances.
• Learned Professional Exemption: 
  • The employee’s primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. Examples may include: doctors, teachers, attorneys, etc.
• Creative Professional Exemption:
  • The employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, or physical work. Examples may include: musicians, artists, sculptors, etc.
• Computer Exemption:
  • The employee’s primary duty must consist of the application of systems analysis techniques and procedures, including consulting with users to determine hardware, software, or system functional applications; or design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or a combination of duties described above to which the performance of the duties requires the same level of skills; and
  • The employee must be a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field.
• Outside Sales Exemption:
  • The employee’s primary duty must consist of making sales, or obtaining orders or contracts for services, or for the use of facilities for which a consideration will be paid by the client or customer; and
  • The employee must also be customarily and regularly engaged away from the organization’s place, or places of business.
• Highly Compensated Employees (HCEs):
  • Highly compensated employees (HCEs) are exempt if they customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, learned, or creative professional employee and have the primary duty of performing office or nonmanual work. Note: California and New York do not allow employers to classify employees as HCEs.

If an employer determines that an employee earns at least the minimum of the salary duties test/salary threshold as stated table above and is able, in good faith, to state that the employee meets the requirements of one of the exemptions as stated above, then the employee may be classified as exempt from overtime under the Fair Labor Standards Act (FLSA). If there is any doubt that an employee’s duties fall under one of the exemptions, it is best practice to either consult an employment law attorney or HR consultant who specializes in the FLSA to seek their expert opinion, or err on the side of caution and classify the employee as nonexempt. Remember, the employee must pass both the salary basis test/salary threshold and the duties test to be classified as exempt under the Fair Labor Standards Act (FLSA).

Salaried Nonexempt

Some employers classify employees as salaried nonexempt. While there is a small provision in the Fair Labor Standards Act (FLSA) deeming this as permissible, employers need to be extremely careful when using this classification. The definition of salaried nonexempt is an employee who receives a fixed salary each pay period, but is also entitled to overtime pay and minimum wage. Thus, the employee is considered nonexempt in accordance with the regulations of the FLSA. The fixed weekly salary must equate to at least minimum wage, which varies from state to state, for all hours worked. The Department of Labor (DOL) Wage and Hour Division explains that this is an extremely rare situation and emphasizes that employers are required to the same recordkeeping requirements under the FLSA for nonexempt employees and must track and record all actual time worked by the salaried nonexempt employee. The DOL cautions that paying an employee the same fixed amount of money each week poses some administrative issues, and if hours worked are not tracked appropriately that could create a legal issue as technically employees need to be paid for all hours worked even if the fixed weekly amount is or is not met. Classifying an employee as nonexempt, thus having an hourly wage, and not as salary nonexempt, is a much cleaner way for employers to make sure that they are paying for all hours worked and for paying overtime for all hours worked over 40 in a workweek, or in accordance with federal and state laws.

Misclassifications

It is a common mistake for organizations to misclassify employees under the FLSA. Unfortunately, all it takes is one upset employee to file a complaint with the Department of Labor (DOL) Wage and Hour Division to raise the red flag. This may ultimately result in mandated back pay not only to the employee who filed the complaint and those who are currently working for the organization, but also to other employees who were misclassified and are no longer working for the organization. Employers should take the time to audit their current employee classifications by utilizing the previously described methods under the FLSA. Doing so may help the employer to avoid costly fines, negative exposure, and time-consuming lawsuits in the long run.

Individual State Laws

As with many employment laws, many states have passed laws that go above what the federal Fair Labor Standards Act (FLSA) requires. So, employers are encouraged to research and review each individual state’s laws as they relate to the Fair Labor Standards Act (FLSA).

Appeals

The Department of Labor (DOL) may appeal the federal Judge’s ruling. They may try and get the ruling reinstated, but the new Trump administration may opt not to do so. As of the updating of this article the incoming administration has not nominated a new person to lead the DOL.

For additional information on classifying employees correctly under the FLSA, please contact us at www.NewFocusHR.com

Written By:    Kristen Deutsch, M.B.A., CCP

                        President

                        Originally written on 07/04/2024

                        Updated on 11/16/2024