Understanding the FLSA’s New Salary Test

The Fair Labor Standards Act (FLSA) sets minimum wage and overtime requirements for employees. The overtime requirement requires employers to pay at least one-and-one-half times the hourly rate of the employee for each hour the employee works over 40 hours in a regular work week.

However, certain employees may be exempt from the overtime requirements if they qualify as meeting three tests:

1. Job Duties Test;
2. Salary Level Threshold Test, and
3. Salary Basis Test.

The FLSA does not define those tests. Instead, the U.S. Department of Labor (DOL) is directed to define the exemptions and modify criteria from time to time with regulations.

The Job Duties Test specifies certain duties that the employee must perform if the employee is to be classified as an executive, administrative, professional, outside salesperson, or a computer-related occupation. Additionally, highly compensated employees are also eligible if they fit within a specific job duty test. These employees must all meet the Salary Level Threshold Test and be paid a predetermined and fixed salary that is not subject to reduction (Salary Basis Test).

On April 23, 2024, the DOL announced a final rule that greatly changed one of the tests. It increased the salary level test as of July 1, 2024, and January 1, 2025, for the white-collar exemptions and the highly compensated exemptions. Further, the final rule contains a formula for updating the Salary Level Threshold Test to reflect then current earnings commencing on July 1, 2027, and every three years thereafter.

Currently, the salary level test is $684 a week or $35,568 per year for white collar exemptions.

• On July 1, 2024, the salary level weekly test will be increased to $844 or $43,888 per year.
• Again, on January 1, 2025, the salary level weekly test will increase to $1,128 per week, or $58,656 per year.

This change will not affect California given its salary level test is higher.

The HCE salary level test also increases to  $132,964 on July 1, 2024, and $151,164 on January 1, 2025.

The last time that the DOL attempted to raise the salary level in 2016, federal courts blocked the rule eight days before it was to go into effect. However, it is hard to determine how long challenges could take effect or if they will be successful. During that time, the final rule will remain in effect. Therefore, employers should familiarize themselves with the final rule and consider how to address the changes.

Businesses could consider several options:

1. Raise the salary of exempt employees so they remain exempt;
2. Convert current exempt employees to hourly employees (use salaried non-exempt title) and make necessary staffing adjustments to avoid employees working overtime; and/or
3. Craft new job classifications.

For those exempt employees converted to hourly, employers will have to examine its policies and procedures regarding tracking hours worked, updating timekeeping polices and training on following timekeeping policies.

Consult with your counsel or contact a Danna McKitrick employment law attorney to familiarize yourself with the final rule and to determine the best option(s) regarding overtime for your employees.

Authored by Attorney Ruth Binger. Binger serves both emerging and mature businesses concentrating in corporate law, intellectual property and technology law, cybersecurity, digital media law, and labor and employment law. Her commitment to the success of small to medium-sized businesses, and her understanding of multi-faceted issues inherent in operations, are what distinguish Binger’s practice.

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