The DOL has issued its final rule on overtime exempt workers, surpassing all expectations and setting a minimum salary threshold sixty-five percent (65%) higher than current thresholds in a two-step process. Last year, we delved into the DOL’s efforts in its proposed rule regarding white-collar overtime exemptions to raise the minimum salary threshold for such exemptions by over fifty percent (50%).
Effective Salary Threshold Increases
Effective July 1, 2024, exempt executive, administrative, and professional employees are required to be paid a minimum salary of $844 per week ($43,888 per year).
Effective January 1, 2025, exempt executive, administrative, and professional employees are required to be paid a minimum salary of $1,128 per week ($58,656 per year).
Similarly, the minimum salary for highly compensated employees shall increase to $132,964 annually as of July 1, 2024 and to $151,164 annually as of January 1, 2025.
Certain professional employees are excepted out of these salary thresholds which will not apply to employees engaged as teachers and employees who hold a valid license to practice law or medicine or are engaged in medical internship or resident programs.
As of January 1, 2027, and every three years thereafter, the thresholds will be adjusted to reflect current earnings data using the methodology in effect under the Final Rule at that time.
Impact and Key Actions for Employers
It is estimated that these changes will eliminate over three million positions that are currently exempt from overtime unless employers respond by increasing salaries by over 65%.
Key Actions for Employers:
- Identify those currently exempt employees that will fall below this required salary threshold and determine whether to increase their salaries or convert them to non-exempt employees.
- Devise a plan to provide notice in advance of the effective date to those impacted as well as their managers.
- Train managers of these impacted employees on record-keeping policies and procedures with which they may not be familiar especially meal breaks, call-ins, donning and doffing rules, and de minimis time activities.
- Determine which policies and procedures, including leave and benefits, which now may or may not be applicable to these impacted employees.
Importantly, be prepared to respond to the potential outcry from the impacted employees who now have to record all of their time. Being overtime exempt for many employees is viewed as a respected achievement they have earned and they may deem the designation as non-exempt to be a demotion. They may not understand that the change is DOL driven and not internal to the company.
Audit Overtime Exempt Employees
Lastly, don’t overlook the gift that a periodic change in the salary threshold may bring. It is a great time to conduct an audit of all of your overtime exempt employees to assure they are properly classified.
Understanding Exemptions
Not only must the employer meet the salary basis requirement and salary thresholds, but white-collar exemptions are tightly tied to certain prescribed duties. Those duty requirements are often misunderstood or not fully explored by the employer such that the employees are misclassified as exempt. When reviewing an employer’s compliance with these exemptions, the DOL will not rely on a position description but on the actual duties performed by the employee.
Definitions of Exempt Categories
Executive employees
Executive employees are those whose primary duty is managing the enterprise or a customarily recognized department or subdivision of the enterprise and who customarily and regularly directs the work of at least two more full-time employees or their equivalent. They also must have the authority to make employment decisions such as whether to hire, promote, or fire other employees or whose recommendations carry particular weight.
Administrative employees
Administrative employees are those whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or its customers in functional areas such as tax, finance, quality control, purchasing, marketing, human resources, and the like. This duty must involve the exercise of discretion and independent judgment with respect to matters of significance which encompasses more than simply applying well-established techniques or specific standards described in manuals or other sources. They generally are able to deviate from established policies when necessary to further the interests of the employer.
Professional employees
Professional employees are those employees whose primary duty is the performance of work requiring advanced knowledge from a prolonged course of specialized learning and generally involves work of an intellectual nature in a field of science or learning requiring the consistent exercise of discretion and judgment in analyzing, interpreting, or making deductions from varying facts and circumstances.
Highly compensated employees
Highly compensated employees are those employees who perform office or non-manual work and customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee.
Risks and Compliance
The exemption most fraught with risk is the administrative exemption. Employers often overlook the requirement that such employees not only must perform certain significant administrative functions and they must do so with independent judgment and discretion. Another common error is a failure to meet the salary basis test. Employers often make improper deductions from salary when an employee fails to appear for work or fails to establish at the commencement of employment the required predetermined weekly salary amount. As we learned from the Helix Energy Solutions Group, Inc. v. Hewitt decision from the U.S. Supreme Court earlier this year, merely paying the same weekly amount as a matter of course or happenstance is not the same as promising to pay a predetermined amount at the time of hire. Only the latter will meet the salary basis test. A properly conducted audit can reveal these errors and assure that an employer is compliant with the requirements of these exemptions. A failure of compliance can result in liquidated damages equal to twice the unpaid overtime compensation for the past two (three years if the error is determined to be willful) and reimbursement of the employee’s attorney fees.
If you have any questions, need assistance in responding to the new requirements or wish to conduct a compliance audit please contact KJK attorney Maribeth Meluch (MM@kjk.com; 614.427.5747) or any of our partners in the Labor & Employment Practice Group.