To help employers prepare for the implementation of the Rule, we have prepared the following Q&A guidance.

Q: What does it mean to be exempt from overtime?

Before getting into the specifics of the Rule, it is important to review the basics of the FLSA briefly.  The FLSA was enacted in 1938, during the Great Depression.  Among other things, it created the concept of overtime, under which employees would receive one and a half times their regular rate of pay for hours worked beyond 40 in a given workweek.  Its purpose was to encourage employers (who seemingly would desire to avoid the premium overtime rates) to employ more workers.  President Franklin Roosevelt called it the most important piece of New Deal legislation since the Social Security Act of 1935.

The FLSA assumes that all workers are eligible to receive overtime, unless the employee qualifies for specific exemptions described in the FLSA and its regulations.  For many employers, the so‑called “white collar exemptions” are the most familiar.  As discussed in greater detail below, these exemptions from overtime only apply to an employee who: 1) is paid at least a minimum weekly amount of compensation on a salary basis and 2) performs certain, specified duties on behalf of the employer.

Q: What employees are “exempt” from overtime pay requirements?

A: Employees are considered “exempt” under the FLSA if they are (1) paid on a salary basis, (2) their salary meets a specified weekly salary level, and (3) the employee performs certain duties specified by law.  The most commonly used exemptions are the so‑called “white collar exemptions,” specifically the executive, administrative, or professional (“EAP”) duties described in the FLSA and its regulations.

The FLSA provides that the following primary duties are associated with these exemption classifications:

Executive Exemption

1. Managing the enterprise (or a customarily recognized department / subdivision);
2. Customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and,
3. Has authority to hire or fire subordinate employees (or their recommendations on this issue must be given particular weight).

Professional Exemption

1. Performs work requiring advanced knowledge (i.e. predominantly intellectual in character) and which includes work requiring the consistent exercise of discretion and judgment;
2. Advanced knowledge must be in a field of science or learning; and
3. Advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Administrative Exemption

1. Performs office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
2. Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

As explained above, in addition to the duty requirement, the DOL establishes the threshold salary for exempt employees. However, certain employees, such as doctors, lawyers, and teachers, are not subject to the salary tests and fall within the EAP exemption based on occupation alone.

Certain highly compensated employees (“HCEs”) who are paid a salary, earn at least a higher total annual compensation level, and satisfy a minimal duties test are also classified as exempt.

Up to 10% of the minimum salary for employees under the EAP exemptions (but not highly compensated employees) may be fulfilled with non-discretionary incentive pay, which includes payments promised in advance to the employee and paid at least quarterly, such as commissions, bonuses paid on a fixed formula, catch‑up payments, and incentive pay for set goals.  The catch-up payment may be made within one pay period after the end of the applicable year to ensure that the 10% threshold has been met.

Q: What is the Salary Basis Test and how does it apply to the new Rule?

A: An employee is paid on a “salary basis” if he or she regularly receives a predetermined amount of compensation from the employer each pay period on a weekly basis. This salary cannot be reduced due to the quality or quantity of the employee’s work in any particular workweek.  If the employee is available to work (even if he or she does not), that employee must be paid the applicable salary regardless in order to qualify under this test.  There are limited exceptions, including if: 1) the employee performs no work in a given workweek; 2) the employee is absent from work for a full day for personal reasons; 3) the employee is absent for a full day due to sickness or disability (if the employer has a bona fide sick leave plan); 4) the employee receives jury fees, witness fees, or military pay (but only to offset the actual amount received); 5) assessed in good faith against the employee for violating the employer’s major safety rules; 6) imposed on an employee in good faith to implement an unpaid suspension for violation of a written workplace conduct policy; 7) the employee takes unpaid leave under the Family Medical Leave Act; or 8) the employee works a partial workweek on his or her first or final weeks of employment.  In order to qualify as exempt under the new Rule, the employee’s salary must meet the new salary threshold described below and be paid in the manner described in this paragraph.

Q: Can outside sales employees be exempt from overtime?

Yes, under limited circumstances.  These employees do not need to be paid a minimum salary.  Instead, such employees must meet two criteria: 1) their primary duty must be making sales or obtaining orders or contracts; and 2) they must be customarily and regularly engaged away from the employer’s place or places of business.  In a post-pandemic world in which sales are rarely made at the customer’s place of business, the second criteria may be difficult for employers to establish.

Q: What changes will be implemented under the new Rule?

A: Currently, the salary threshold for white collar workers is $684 per week ($35,568 per year), and the threshold for highly compensated employees is $2,066 per week ($107,432 per year). These salary thresholds have been in effect since the DOL issued its most recent overtime regulation in 2019.

Under the DOL’s new Rule, the salary threshold required for most exemptions (including the EAP exemptions discussed above) will increase as follows:

• $844 per week ($43,888 per year) on July 1, 2024; and
• $1,128 per week ($58,656 per year) on January 1, 2025.

The Rule also increases the minimum total annual compensation level for the highly compensated employee exemption (i.e., one who customarily and regularly performs any one or more of the exempt duties or responsibilities of an EAP employee):

• Effective July 1, 2024, the threshold increases to $132,964, and
• Effective January 1, 2025, the threshold increases to $151,164.

The January 2025 salary threshold for executive, administrative, and professional exemptions is set at the 35th percentile of earnings for full-time workers in the lowest wage Census Region (currently the South), while the HCE threshold for the same year is tied to the 85th percentile of earnings for full-time salaried workers nationally. Additional increases based on then-current wage earnings data are set to automatically occur every three years, beginning July 1, 2027.

Q: When does the new Rule go into effect?

A: The new Rule goes into effect on July 1, 2024.  Keep in mind, however, that on January 1, 2025, the higher salary thresholds described above begin to apply.

Q: What steps should employers take to comply?

A: Employers should begin taking action to ensure they are in compliance when the Rule goes into effect on July 1, 2024. In particular, employers should take the following actions:

1. Audit the current compensation levels of exempt employees to determine which ones will be impacted by the new thresholds (i.e., employees currently treated as exempt who are paid salaries between $35,568 and $58,656 annually);
2. Audit the current compensation levels of employees subject to the highly compensated employee exemption who will be affected by the new thresholds (i.e., employees utilizing the exemption who are paid salaries between $107,432 and $151,164 annually);
3. Verify that exempt employees’ actual job duties meet one of the exemption tests and that they are correctly paid on a salary basis;
4. For those exempt employees who are earning less than the increased salary thresholds, decide whether to increase their annual compensation or reclassify them as non-exempt/eligible for overtime;
5. Ensure employees reclassified to overtime eligible are familiar with the applicable time‑keeping policies for non-exempt employees;
6. To the extent non-exempt employees receive commissions, bonuses, or other incentive pay, plan for the effect those payments will have on employees’ regular rates of pay for overtime calculations.

Employers should additionally consider revising their personnel policies to require preauthorization of overtime or limit the amount of overtime an employee may take without authorization.  Employers doing so, however, should know that any employees working unauthorized overtime must still be paid for it (although these employees may receive discipline for their policy violation).  Employers should also consider whether they need to hire additional workers to reduce the need for non-exempt employees to work overtime.

Q: Why did the DOL adopt a new overtime Rule?

A: According to the DOL, it revised the prior rule on overtime exemptions in order to keep the earnings threshold apace with the growth of the U.S. economy. The DOL last revised its regulations on this issue in 2019.

Q: What about existing state law?

A: Federal overtime requirements establish the floor, not the ceiling, regarding employee overtime protections. States may enact laws that provide higher salary thresholds for exemption (and some states, including California, already have such laws in effect), so employers should take care to stay abreast of applicable state laws.  Some states also place additional requirements on the duty necessary to meet their versions of the overtime exemptions.

Q: What consequences could employers failing to comply experience?

A: Employers who do not comply with the new Rule risk being sued and found liable for back wages for up to three years, liquidated damages (essentially double the amount of back wages owed), and the employee’s attorneys’ fees.

Q: Can individual managers be found liable for violations of the FLSA?

Yes.  The FLSA can impose personal liability on corporate officers and directors for unpaid overtime and other violations. When assessing this issue, courts analyze whether the officer or director in question (1) had the power to hire and fire employees; (2) supervised and controlled employee work schedules or conditions of employment; (3) determined the rate and method of compensation; and/or (4) maintained employment records.  Some states also impose personal liability for wage and hour violations.

Q: Will the Rule be challenged in court?

A: The Rule will likely be challenged in court. Given the recent, high-profile challenges to the scope of the rule-making authority of other prominent administrative agencies, including the FDA and FTC, it is reasonable to expect similar legal challenges to be made with respect to the DOL’s authority. In particular, challenges to the DOL’s authority to update the salary threshold automatically every three years, without a separate notice of proposed rulemaking, are likely.

Regardless, unless and until the Rule is overruled or put on hold through an injunction, employers should still make efforts to comply with the Rule and thus avoid legal consequences.

Q. Where can I find additional information about the FLSA and the new overtime rules?

A: A summary of the proposed rule, additional Q & A, fact sheets, the language of the rule itself and   much more are available at https://www.dol.gov/agencies/whd/overtime/rulemaking.  We also recommend that employers consult trusted legal counsel with experience in wage and hour law.