Small Businesses and the New FLSA Overtime Rule

There are changes coming in the new year.

By Alexandra Walsh

The U.S. Department of Labor issued on April 23, 2024, its final rule increasing the salary level for certain professional employees to be properly classified as exempt from federal overtime requirements under the Fair Labor Standards Act (FLSA).

The final rule set the standard salary level for executive, administrative, and professional exempt employees under the FLSA at $844 per week. This weekly salary standard will automatically increase to $1,128 on January 1, 2025.

Under this same rule, the annual compensation threshold for the highly compensated employee exemption increased to $132,964 on July 1, 2024, and will again automatically increase to $151,164 on January 1, 2025.

Minimum Wage and Overtime

The FLSA is the federal labor law that provides basic workplace protections to most workers in the United States and guarantees them at least the federal minimum wage for every hour they work. The FLSA overtime protections guarantee no less than 1.5 times an employee’s regular pay rate for any hours over 40 they worked during a workweek.

The FLSA does not provide an exemption from these requirements specifically for small businesses. Generally, the FLSA applies to employees of enterprises that have an annual gross volume of sales made or business conducted totaling $500,000 or more. It also applies to employees individually covered by the law because they are engaged in interstate commerce or in the production of goods for commerce.

If a state or city establishes a more protective standard than the provisions of the FLSA, the higher standard applies in that state or city.

Exempt Employees

While the FLSA applies to the majority of employees in the United States, it does allow employers to claim exemptions from its wage and hour requirements for certain employees whose jobs meet specific criteria.

The FLSA provides an exemption from both minimum wage and overtime requirements for employees working as bona fide executive, administrative, professional, or outside sales employees.

To meet one of these exemptions, employees generally must satisfy certain tests regarding their job duties and be paid at least a certain minimum salary, according to the Department of Labor. Job titles do not determine exemption status, and neither does a particular salary. For an exemption to apply, an employee’s specific job duties and earnings must meet all of the applicable requirements.

It is important to note that simply paying an employee a salary does not relieve an employer of minimum wage and overtime obligations to that employee. Unless they meet all of the criteria for a specific exemption, employees covered by FLSA protections who are paid a salary are still due overtime pay if they work more than 40 hours in a week.

Three Basic Tests

For an employer to claim an exemption for a particular employee, three tests generally need to be satisfied:

1. Payment on a salary basis
2. Payment of a minimum salary level
3. Duties test.

Salary Basis Test

Generally, for an employer to claim exemption from minimum wage and overtime requirements for an employee, that employee must be paid on a salary basis. It means an employee regularly receives a predetermined amount of money, constituting all or part of the employee’s compensation, each pay period. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work.

An exempt employee must receive the salary for any week in which the employee performs any work, regardless of the number of days or hours worked. Exempt employees do not need to be paid for any workweek in which they perform no work.

Administrative, professional, and computer employees may be paid on a “fee basis” rather than on a salary basis. If the employee is paid an agreed sum for a single job, regardless of the time required for its completion, the employee will be considered to be paid on a fee basis.

To determine whether the fee payment meets the minimum salary level requirement, the test is to consider the time worked on the job and determine whether the payment is at a rate that would amount to at least the full standard salary level if the employee worked 40 hours.

Salary Level Test

Generally, an employee must be paid at least a certain minimum amount—the standard salary level—to meet exemptions. Under the 2024 final rule, the standard salary level will change as follows:

• On July 1, 2024, the Department of Labor raised the salary level from $684 per week to $844 per week (equivalent to $43,888 per year).
• On January 1, 2025, the Department of Labor will implement the new salary methodology, resulting in a salary level of $1,128 per week (equivalent to $58,656 per year).
• On July 1, 2027, and every three years thereafter, the standard salary level will update by applying up-to-date earnings data to the salary methodology.
• The salary level test also does not apply to business owners who own at least a bona fide 20% equity interest in their enterprise and are actively engaged in its management.

The regulations contain a special test for exemption for certain highly compensated employees (HCE), which applies a more relaxed duties test. The HCE test’s primary purpose is to serve as a streamlined alternative for very highly compensated employees because a very high level of compensation is a strong indicator of an employee’s exempt status, thus eliminating the need for a detailed duties analysis.

Employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard or special salary levels.

Duties Test

To meet any of the employee exemptions, employees must meet certain tests regarding their job duties. The regulations establish separate duties requirements for executive, administrative, professional, outside sales, and computer employees, respectively.

Most employees who are exempt are subject to the standard duties test. Under the standard duties test, an employee’s primary duty must be that of an exempt executive, administrative, or professional employee. “Primary duty” means the principal, main, major, or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.

Certain highly paid employees can meet the exemption under the special HCE test. Under the HCE duties test, the employee’s primary duty must still consist of office or non-manual work, but the employee need only “customarily and regularly” perform one or more of the exempt duties of an executive, administrative, or professional employee as described in the regulations.

Click here for more information on the duties requirements for each exemption and other information about the new FLSA regulation.

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With a new year around the corner, it is important to make sure your company is ready to go regarding compensation, benefits, and more.

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Alexandra Walsh is the vice president of Association Vision, a Washington, D.C.–area communications company. She has extensive experience in management positions with a range of organizations.