New Overtime Exemption Rule: Answers to Your FAQs

In April 2024, the United States Department of Labor (DOL) released a final rule that will increase the minimum salary amount required to be paid to certain employees in order for these employees to be considered exempt from the Fair Labor Standards Act (FLSA) overtime pay requirements. As a result of the final rule, the minimum salary required for certain employees to be classified as exempt from overtime under federal law increased on July 1, 2024, and will again on January 1, 2025.

Important update:

July 1, 2024 DOL Overtime Rule Temporarily Blocked for State of Texas Government Employees

ADP recently hosted a webinar on the changes to the overtime exemption rule, Federal Overtime: Navigating the final rule (watch the on-demand version). During the webinar, attendees submitted hundreds of questions. Below are the answers to those that were most frequently asked.

Key information about the final rule

The final rule covers FLSA exemptions from overtime for executive, administrative and professional employees. The final rule also applies to employees covered under the highly compensated employee exemption (see the section below on highly compensated employee (HCE) exemption). To qualify for the exemptions from overtime for executive, administrative and professional employees, an employee generally must:

Be paid a salary, meaning that they are paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed (the "salary basis test");
Be paid at least a specified weekly salary level; and
Primarily perform executive, administrative or professional duties, as provided in the DOL's regulations (the "duties test").

Effective July 1, 2024, the final rule increases the minimum salary required for the FLSA's executive, administrative and professional exemptions to $844 per week. Effective January 1, 2025, the final rule increases the minimum salary required for these exemptions to $1,128 per week. The salary threshold for the highly compensated employee exemption will also be impacted (see the section below on highly compensated employee (HCE) exemption).

If your exempt employees' salaries fall below the new threshold, you will generally either have to:

Raise their salaries to the new requirement; or
Reclassify the affected employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek.

Covered employers and employees

Q: What employers are impacted by the changes made by the final rule?

A: The changes will generally impact any employer for whom both of the following apply:

The employer classifies one or more employees as exempt from overtime under the executive, administrative or professional employee exemptions from overtime under the FLSA; and
The employee's salary is below the new threshold set by the final rule.

Q: What employees are impacted by the changes made by the final rule?

A: The changes will generally impact any employee that is:

Classified as exempt from overtime under the executive, administrative or professional employee exemptions from overtime under the FLSA; and
Paid a salary that is below the new threshold set by the final rule.

Q: Do the changes made by the final rule apply to small employers?

A: 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.

Q: Do the changes apply to non-profit organizations?

A: 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.

Q: Are individuals who meet the FLSA's exemption for teachers impacted by the final rule?

A: 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.

Q: Are computer professional employees impacted by the final rule?

A: Computer professional employees who satisfy the applicable duties test may be paid a salary or an hourly wage to qualify for exemption from overtime under the FLSA. If you pay an exempt computer professional employee a salary, the final rule will require that 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.

Q: Does the final rule impact the overtime exemption for outside salespeople?

A: The FLSA's outside sales employee exemption from overtime has no salary requirement, so it won't be affected by the final rule.

Complying with new minimum salary requirements

Q: With some business groups now challenging the final rule, what should employers do now?

A: Updated July 1, 2024: The final rule has begun to face legal challenges, but it still went into effect on July 1, 2024. Late on June 28, 2024, a federal judge temporarily blocked the final rule but only for government employees working for the state of Texas. For all other employers, the final rule took effect as scheduled on July 1, 2024. As such, all other employers with employees classified as exempt from overtime should continue to make sure they comply with the final rule. It is important to note that other cases challenging the final rule are pending. We are monitoring the status of the rule closely and updating our FLSA and Overtime Exemption Rule Guide as developments unfold.

Q: If we reclassify an employee or increase an employee's salary to comply with the final rule, what documents are needed?

A: 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.

Q: If there are no changes/impact to anyone as a result of these new salary requirements, is providing notification required?

A: No.

Q: If I have multiple employees doing the same job functions but some meet the new salary requirements and some don't, can they be classified differently than each other?

A: 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 functions. However, the employee classified as exempt must meet all the applicable tests, including the duties 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 functions and there are substantial differences in pay, employees may have questions about why they are paid less.

Q: If an employee is classified as exempt from overtime but does NOT regularly work more than 40 hours, do I still raise their salary to $844.00/week?

A: 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.

Q: If I have an exempt employee who works only 20 hours per week, would the minimum salary requirement for exemption be $422 per week?

A: 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.

Q: Can bonuses and/or commissions be used to satisfy part of the salary requirement?

A: 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.

Q: What happens if the employee's bonus or commission ends up being less than anticipated?

A: 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.

Q: For the overtime exemption tests, can you count how much the employer pays toward health insurance benefits as part of the salary?

A: No.

Q: If our manager makes less than $844 on July 1, 2024, can they stay classified as exempt from overtime under the executive exemption if they supervise two or more employees?

A: 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.

Q: If one of my employees is paid $19 per hour, which is $760 per week, will I have to increase their hourly wage to $21.10 to get their pay to $844 per week?

A: 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.

Duties tests

Q: Did the final rule make changes to the duties tests?

A: No, the final rule didn't make any changes to the duties tests.

Q: Where can we find the "primary duties" for exempt employees?

A: Summaries of the respective duties tests can be found through the links below:

Non-exempt employees

Q: Is any action required for non-exempt employees surrounding this new overtime exemption rule?

A: 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.

Q: Can we pay overtime hours worked in paid time off instead overtime pay?

A: 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 they would prefer comp time instead.

Q: If an employee works less than 40 hours one workweek and wants to work more next week to make up for the lost hours, is there a way to avoid paying overtime?

A: 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.

Q: Is it true that anyone can be classified as non-exempt from overtime? Even those employees who could technically be classified as exempt?

A: Yes, any employee may be classified as non-exempt from overtime, even if they meet the tests to be classified as exempt from overtime.

Highly compensated employee (HCE) exemption

Q: Who is considered a highly compensated employee? What is changing for these employees under the final rule?

A: 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.

Q: What happens if an employee classified as exempt under the HCE exemption leaves part way through the year?

A: 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.

Conclusion

If you have employees classified as exempt from overtime, make sure you are now compliant with the final rule, which went into effect July 1, 2024.

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