Updated: 9/2023
FAQs:
Background
The Fair Labor Standards Act (FLSA), also considered the federal Wage and Hour Law, regulates minimum wage, overtime, equal pay, recordkeeping, and child labor. Under the FLSA, employees are classified as either exempt or non-exempt from minimum wage and overtime. Note: Some states and local jurisdictions have their own wage and hour laws, which may provide greater protection for employees than what is provided under the FLSA. Where federal, state, and local laws conflict, the law that is most beneficial to the employee prevails.
The FLSA applies to virtually all employers, including:
- Employers with employees engaged in interstate commerce (defined broadly, such as assembling products that are sent out of state or regularly making phone calls to another state);
- Enterprises (including non-profits) with gross sales or business of $500,000 or more per year;
- Hospitals; enterprises engaged in the care of the sick, the aged, or the mentally ill who reside on the premises; a school for mentally or physically disabled or gifted children; a preschool, an elementary or secondary school, or an institution of higher education (whether operated for profit or not for profit); and
- Public agencies.
Under the federal FLSA, a non-exempt employee is one who is entitled to at least the minimum wage for each hour worked and overtime whenever they work more than 40 hours in a workweek. Any employee may be classified as non-exempt. By contrast, an exempt employee isn't entitled to minimum wage or overtime, but the employee must satisfy certain tests to be classified as exempt.
Under federal law, the overtime rate is 1.5 times the employee's regular rate of pay. An employee's "regular rate of pay" includes their hourly rate plus the value of nondiscretionary bonuses, shift differentials, and certain other forms of compensation. However, there are certain types of compensation that are excluded from the regular rate of pay.
Note: Depending on the circumstances, some states have different overtime rates. For instance, California also requires employers to pay non-exempt employees double their regular rate of pay for all hours worked over 12 in a workday, and over eight on the seventh consecutive workday in a workweek.
Not necessarily. To be classified as exempt, executive, administrative, and professional employees must generally satisfy all of the following tests:
- The employee must be paid on a salary basis;
- The salary must meet or exceed the minimum requirements for exemption (currently, $684 per week, $35,568 annually, based on the 2019 Final Rule that became effective on January 1, 2020.);
- The employee must receive their full salary in any workweek in which they perform work; and
- The employee must perform specific job duties. Each type of exemption has its own set of primary duties that an employee must perform in order to qualify for the exemption.
There is also a special exemption for "highly-compensated employees" who are paid a total annual compensation of at least $107,432 per year (currently at least $684 must be paid on a weekly salary basis) (this amount is based on the 2019 Final Rule that became effective on January 1, 2020) and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.
Being paid on a "salary basis" means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. This predetermined amount cannot be reduced because of variations in the quality or quantity of work.
2023 Proposed Rule
This rule, if finalized, would increase the minimum salary amount required to be paid to executive, administrative and professional (EAP) employees and the required annual compensation to be paid to highly compensated employees (HCEs) in order for these employees to be considered exempt from the Fair Labor Standards Act (FLSA) overtime pay requirements. The DOL is also proposing automatic updates to these amounts every three years.
|
Current overtime rule |
Proposed overtime rule |
|
The minimum salary required to be paid to an EAP employee for that employee to be exempt from the FLSA overtime requirements is $684 per week ($35,568 annually). |
The minimum salary required to be paid to an EAP employee for that employee to be exempt from the FLSA overtime requirements would be $1,059 per week ($55,068 annually). |
|
The required annual compensation level for HCEs is $107,432 (which must include at least $684 per week paid on a salary or fee basis). |
The annual compensation level for HCEs would be $143,988 (which must include at least $1,059 per week paid on a salary or fee basis). |
|
There are no automatic updates to the required EAP salary levels or HCE total annual compensation level. |
The EAP salary level and HCE total annual compensation level would be automatically updated every three years. Read this FAQ for more information. |
Note: The amounts proposed by the DOL are based on current earnings data. Final rule amounts might be higher.
Other significant changes under the proposed rule include the following:
- In the rules that became effective on January 1, 2020, Puerto Rico, Virgin Islands, Guam and Commonwealth of the Northern Mariana Islands were not included in the salary level increase. Therefore, the salary levels in place prior to 2020 ($455 per week, $23,660 annually) remain in place. The current proposed rules would implement the increased amounts ($1,059 per week, $55,068 annually) for all of these jurisdictions.
- In American Samoa, the DOL proposes to set a special salary level of $890 per week ($46,280 annually). However, because American Samoa is scheduled to increase its minimum wage rates until they equal the federal minimum wage, it is further proposed that 90 days after the highest industry minimum wage for American Samoa equals the federal minimum wage, the full standard salary level in the proposed rule would apply for all employees in all industries in American Samoa.
- The current regulations permit employers to exempt employees in the motion picture industry who are paid a specified base rate per week (or a proportionate amount based on the number of days worked), so long as they meet the duties test for the EAP exemption. Consistent with its practice in recent rulemakings, the DOL proposes to increase the required base rate in proportion to the proposed increase in the standard salary level test, resulting in a proposed base rate of $1,617 per week (or a proportionate amount based on the number of days worked).
The outside sales employee exemption has no salary requirement so it wouldn't be affected by the proposed rule. Exempt computer professional employees may be paid a salary or an hourly wage. If you pay an exempt computer professional employee a salary, the proposed rule would require it to be at least $1,059 per week. If you pay the employee on an hourly basis, it must be at least $27.63 per hour, which wouldn't change under the proposed rule.
No, the DOL didn't propose making any changes to the duties tests.
Virtually all employers are covered by the FLSA and therefore any subsequent changes to the FLSA.
Generally, if state law is more protective (i.e., requires a higher salary amount or has duties tests that are more difficult to satisfy), then state law must be followed. Currently, only a few states have minimum salary requirements for exemption that exceed the proposed federal minimum for one or more of the exemptions. Therefore, employers in most states would be impacted if the federal minimum salary requirement increases.
Keep in mind that state rules may prohibit employers from using bonuses to satisfy part of the salary requirement. Therefore, to maintain the state exemption in these locations, employers must satisfy the state's requirement with a salary alone. Check your state law to ensure compliance.
Under the proposed rule, employers would continue to be 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.
For the highly compensated employee exemption, employers are also 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 wouldn't change under the proposed rule.
Note: State rules may prohibit employers from using bonuses to satisfy part of the salary requirement. Therefore, to maintain the state exemption in these locations, employers must satisfy the state's requirement with a salary alone. Check your state law to ensure compliance.
Nondiscretionary Pay
Nondiscretionary bonuses are generally defined as those announced or promised in advance. For example, if you announce at the beginning of the year that employees will be entitled to a bonus for meeting certain production goals, this would be considered a nondiscretionary bonus. By contrast, discretionary bonuses aren't announced or promised in advance. For example, if you decide at the end of the year to surprise employees with a bonus, this would generally be considered a discretionary bonus. Discretionary bonuses may not be counted toward meeting the minimum salary requirement.
Options to Consider
No action is required at this time, but if the proposed rule were to become final and your exempt employees' salaries fell below the new minimum, you generally either have to:
- Raise their salaries to the new requirement (if you elect this option, review their job duties to ensure they continue to qualify for the applicable exemption); or
- Reclassify the affected employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek.
It depends on which option you choose and how many hours your exempt employees typically work per week.
If you raise employees' salaries to meet the new requirement, your compensation costs will increase.
40 hours per week schedule:
If the potentially impacted employees rarely work more than 40 hours in a week and you don't want to increase your compensation costs, you could reclassify these employees as non-exempt and convert their salary to an hourly wage (divide their weekly salary by 40 hours). These employees would be entitled to overtime if they work more than 40 hours in a workweek.
40+ hour per week schedule:
If the potentially impacted employees regularly work more than 40 hours per week and you want to keep your compensation costs the same, then you would need to account for the overtime premium.
Example of Cost-Neutral Option:
An exempt employee's current salary is $770 per week, the employee regularly works 50 hours per week, and you want to reclassify this employee as a non-exempt employee but keep your costs the same. You would calculate the cost-neutral hourly wage as follows:
| $770 weekly salary
[40 hours + (10 overtime hours x 1.5)] |
= $14 hourly rate |
This employee would be paid $14 per hour for the first 40 hours and $21 per hour ($14 x 1.5) for each hour of overtime. Remember, whatever hourly rate you decide to pay reclassified employees, it must meet or exceed the highest applicable minimum wage (federal, state, or local). If the result above is less than the applicable minimum, you would need to raise the rate of pay to meet the requirement.
Click here for more information on these options, or use our calculator to help you estimate the costs of each of these options for your business.
If you decide to reclassify employees to non-exempt to comply, you would generally be able to choose one option for some employees and another for other employees. Remember, when reclassifying employees as non-exempt, all such employees must receive at least the minimum wage for each hour worked and overtime pay whenever they work more than 40 hours in a workweek. Some states require overtime in additional circumstances.
Because job title is not used to determine exemption status, the FLSA generally doesn't prevent an employer from classifying one employee as exempt and another employee as non-exempt even though they have the same job titles. However, the employee classified as exempt must meet all the applicable tests for exemption. Additionally, there are other factors to consider, such as internal equity (meaning employees in similar roles and with similar experience are paid comparably) and employee morale. If two employees have the same job title and there are substantial differences in pay (because one employee is receiving overtime pay), employees may have questions about why they are paid less.
Yes, you may adopt such a policy, but remember that even if employees violate the policy, you will still have to pay them overtime if they work more than 40 hours in a workweek. While you may subject them to discipline for violating your policy, you may never withhold overtime pay.
If you reclassify employees as non-exempt, you can still pay them a salary as long as they receive at least the minimum wage for each hour worked and overtime pay whenever they work more than 40 hours in a workweek. Remember, you will need to track their hours closely to ensure you pay overtime in accordance with the law.
Transferring duties of a non-exempt employee to another employee continues to be one of the options employers have for reducing overtime costs.