The Fair Labor Standards Act (FLSA) requires virtually all employers to pay most employees at least the federal minimum wage for each hour worked, as well as overtime pay for all hours worked in excess of 40 in a workweek. The FLSA allows for exemptions from these overtime and minimum wage requirements for certain employees who work in administrative, professional, executive, highly compensated, outside sales, and computer professional jobs. These employees are known as "exempt" employees. To be considered "exempt," these employees must generally satisfy three tests:
- Salary-level test. Employers must pay employees a salary of at least $684 per week to qualify for the executive, administrative, and professional employee exemptions.
- Salary-basis test. With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.
- Duties test. The employee's primary duties must meet certain criteria.
There is also a special exemption for "highly-compensated employees" who are paid a total annual compensation of at least $107,432 per year (at least $684 must be paid on a weekly salary basis) and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.
Final rule effective January 1, 2020
New salary requirements:
On September 24, 2019, the Department of Labor released a final rule that increased the minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive exemptions from $455 per week to $684 per week ($35,568 annually). The change became effective January 1, 2020.
Effective January 1, 2020, employers are also permitted to use nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least annually.
The final rule permits employers to make a final "catch-up" payment within one pay period after the end of year to bring an employee's compensation up to the required level. For example, if an employer chooses this option, each pay period, the employer must pay their exempt executive, administrative, or professional employee at least 90 percent of the salary level ($615.60 per week). Then, if at the end of the year, the employee's paid-out salary plus the nondiscretionary bonuses and incentive payments (including commissions) does not equal at least $35,568, the employer would have one pay period to make up for the shortfall.
Highly compensated employees:
The final rule increased the total annual compensation requirement for the "highly compensated employees" exemption to $107,432 per year (at least $684 must be paid on a weekly salary basis).
For the highly compensated employee exemption, employers are already allowed to include commissions, nondiscretionary bonuses, and other nondiscretionary compensation toward meeting the total annual compensation requirement, but there is no 10 percent cap like the other exemptions. This didn't change under the new rule. Thus, as long as the employer pays the employee at least $684 on a weekly salary basis, the employer will be able to count these other forms of compensation toward meeting the minimum total compensation requirement ($107,432 per year).
Some states have their own salary requirements that exceed the new federal rule. Some other states may decide to increase their salary thresholds based on the new federal rule. Review both federal and state law to determine whether an employee may be classified as exempt from overtime. If an employee is covered by both the federal and state law but doesn't meet both sets of tests, consult with counsel to determine how you should classify the employee in that particular situation.