Updated: 6/25/2024
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 employee must be paid at least a specified weekly salary level that meets or exceeds the minimum requirements for exemption;
- 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 at least a total annual compensation of a specified amount 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.
2024 Final Rule
Effective July 1, 2024, the minimum salary required for the executive, administrative and professional (EAP) employee exemptions from overtime will increase from $684 per week to $844 per week (equivalent to $43,888 per year).
Employers continue to be permitted to use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the minimum salary requirement ($84.40 per week in the second half of 2024) for the administrative, professional and executive exemptions, as long as these forms of compensation are paid at least annually.
Effective July 1, 2024, the minimum total compensation requirement for the highly compensated employees (HCE) exemption will increase to $132,964 per year, including at least $844 per week that must be paid on a salary or fee basis.
Effective January 1, 2025, the minimum salary required for the executive, administrative and professional (EAP) employee exemptions from overtime under federal law will increase from $844 per week to $1,128 per week (equivalent to $58,656 per year).
Employers will continue to be permitted to use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the minimum salary requirement ($112.80 per week) for the administrative, professional and executive exemptions, as long as these forms of compensation are paid at least annually.
Effective January 1, 2025, the minimum total compensation requirement for the highly compensated employees (HCE) exemption will increase to $151,164 per year, including at least $1,128 per week that must paid on a salary or fee basis.
The final rule includes a mechanism to automatically update the salary and total compensation thresholds every three years. The next update will take place on July 1, 2027.
The outside sales employee exemption has no salary requirement so it won't be affected by the final 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 final rule will require it meet or exceed the amounts listed above. If you pay the employee on an hourly basis, it must be at least $27.63 per hour, which won't change under the final rule.
No, the DOL didn't make any changes to the duties tests.
Summaries of the respective duties tests can be found through the links below:
The changes apply to all employers covered by the FLSA and to all employees covered by the FLSA.
With limited exceptions, the FLSA covers an employer if it has at least two employees and an annual dollar volume of sales or business done of at least $500,000. The FLSA also covers hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies. This is known as enterprise coverage.
Even when there is no enterprise coverage, employees are protected by the FLSA if their work regularly involves them in interstate commerce, which is defined broadly. This is known as individual employee coverage.
Examples of employees who are involved in interstate commerce include those who: produce goods (such as a worker assembling components in a factory) that will be sent out of state, regularly make telephone calls to persons located in other states, handle records of interstate transactions, travel to other states on their jobs, and do janitorial work in buildings where goods are produced for shipment outside the state.
As such, virtually all employers will be impacted by the final rule, either through enterprise coverage or individual employee coverage.
As mentioned above, the changes apply to all employers covered by the FLSA and to all employees covered by the FLSA.
Non-profit organizations aren’t covered by the FLSA as an “enterprise” unless they engage in ordinary commercial activities that result in sales made or business done of at least $500,000 annually, such as operating a gift shop or providing veterinary services for a fee.
For a non-profit organization, enterprise coverage applies only to the activities performed for a business purpose; it doesn’t extend to the organization’s charitable activities. However, employees of non-profits are typically protected by the FLSA, through individual employee coverage.
As mentioned above, employees of employers that aren’t covered by the FLSA on an enterprise basis may still be entitled to its protections if they are individually engaged in interstate commerce (defined broadly) or in the production of goods for interstate commerce, or in any closely-related process or occupation directly essential to such production.
Examples of activities that may result in individual employee coverage for non-profits include but aren’t limited to making/receiving interstate telephone calls, shipping materials to another state, and processing credit cards.
As a result, with limited exceptions, employees of non-profits are covered by 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 new federal minimum for one or more of the exemptions. Therefore, employers in most states will be impacted when 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 final rule, employers will 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 won't change under the final 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.
No, there are no minimum salary requirements for the FLSA’s overtime exemption for teachers. A teacher is exempt from overtime simply if their primary duty is teaching, tutoring, instructing, or lecturing to impart knowledge, and if they are performing that duty as an employee of an educational establishment. Educational establishments include elementary school systems, secondary school systems, institutions of higher education, and other educational institutions.
Not unless you have reclassified employees from exempt to non-exempt. If you have reclassified an employee, there may be state and local notice requirements that you must provide to the impacted employee.
Under the FLSA, there is another exemption from overtime for highly compensated employees (HCEs).
Under the HCE exemption, employees performing office or non-manual work and paid total annual compensation of a specified amount are exempt from the FLSA’s overtime requirements if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.
Effective July 1, 2024, the minimum total compensation requirement for the HCE exemption will increase to $132,964 per year, including at least $844 per week that must be paid on a salary or fee basis.
Effective January 1, 2025, the minimum total compensation requirement for the HCE exemption will increase to $151,164 per year, including at least $1,128 per week that must paid on a salary or fee basis.
Employers continue to be permitted to use commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period to satisfy the total compensation requirement. Unlike with the other exemptions, there is no 10 percent cap.
An employee who isn’t employed for a full year — either due to being hired after the beginning of the year or terminating employment prior to the end of the year — may still qualify as "highly compensated" if they earn the prorated portion of the annual compensation amount required based on the number of weeks that the employee has been or will be employed.
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.
Under the FLSA, employers continue to be permitted to use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the minimum salary requirement ($84.40 per week in the second half of 2024) for the executive, administrative, and professional exemptions, as long as these forms of compensation are paid at least annually.
Note: Some states have their own rules on exemption from overtime. 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.
Employers may make one final catch-up payment no later than the next pay period after the end of the year, if the bonus, incentive payment or commission ended up being less than anticipated. 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. Then, if at the end of year, the employee's paid-out salary plus the nondiscretionary bonuses and incentive payments (including commissions) doesn't equal at least the minimum required, the employer would have one pay period to make up for the shortfall.
Options to Consider
If 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. We’ve included some examples and options below.
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 will generally be able to choose one option for some employees and another option 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.
Many states and local jurisdictions require employers to provide advance notice about pay changes. Several of these laws specify the amount of notice required. For example, Missouri generally requires at least 30 days' notice before a reduction in pay. Some states require advance notice but don’t specify how much time is required. Check your state and local law to ensure compliance. In the absence of a specific notice requirement, consider providing notice at least seven days before the change becomes effective.
Some states require employers to provide a notice at the time of hire to employees that contains information about their employer, pay, and, in some cases, whether they are classified as exempt or non-exempt from overtime. This is often called a “wage theft” notice. Typically, an updated wage theft notice must be provided when any of its information changes. Check your state and local law to ensure compliance.
No.
If you want to keep the federal exemption from overtime, you must make sure their weekly salary is at least $844 beginning July 1, 2024 (and their primary duties continue to qualify for exemption). If you don’t pay them at least $844 per week in salary, you will have to reclassify them as non-exempt.
No. For the overtime exemption, the employer will be required to pay at least $844 per week in salary (from July 1, 2024 through December 31, 2024) even if the employee is part-time.
No.
No, supervising employees is only one factor to consider. In this case, the employee must be classified as non-exempt because they won’t meet the minimum salary level tests. Remember, to be classified as exempt, employees must typically satisfy the salary-basis, salary-level and duties tests.
If the employee is paid by the hour, the employee doesn’t satisfy the salary-basis and isn’t eligible for the exemptions from overtime for executive, administrative and professional employees (the hourly wage is also too low to qualify for the professional computer employee exemption). Therefore, this employee must be classified as non-exempt and is entitled to overtime whenever they work more than 40 hours in a workweek. In such a case, you wouldn’t have to increase their hourly wage unless it is less than the applicable minimum wage.
No. This practice is commonly known as "comp time" and it is prohibited in the private sector. Non-exempt employees who work more than 40 hours in a workweek must receive overtime pay. Employees cannot waive their right to overtime, even if the employee would prefer comp time instead.
If a non-exempt employee works more than 40 hours in any workweek, they are entitled to overtime pay under the FLSA. Employers are prohibited from averaging hours worked over two or more workweeks to determine whether overtime is due.
Yes, any employee may be classified as non-exempt from overtime, even if they meet the tests to be classified as exempt from overtime.