Department of Labor Overtime Regulations: A Compliance Guide for Small and Medium-Sized Businesses | NAVEX

(author: Jaclyn Jaeger)

The final rule issued by the Department of Labor (DOL) changes the wage requirements for determining minimum wage and overtime exemptions under the Fair Labor Standards Act (FLSA). This article discusses the rule changes and provides practical steps that small and medium-sized businesses (SMBs) can implement to comply with the rule changes.

Under the FLSA, non-exempt employees must be paid at least the federal minimum wage and at least 1.5 times their hourly rate for any overtime hours worked in excess of 40 hours in a week. Section 13(a)(1) of the FLSA provides an exemption from minimum wage and overtime pay for “bona fide executive, administrative, or professional employees” (EAP).

The Department of Labor uses three tests to determine EAP exemption:

• Job Duties Test:The employee must primarily perform managerial, administrative or professional duties
• Salary Base Test:An employee is paid on a salary basis, meaning that the employee receives a set amount of wages each pay period weekly or less frequently.
• Salary level:The salary cannot be lower than the minimum wage threshold

Job Duty Test Explained

The final rule does not change the DOL’s official duties test. To meet the duties test for the executive exemption, the duties test still requires that:

• The employee’s primary duty must be “to manage the business or to manage a customarily recognised department or sub-division of the business”;
• The employee must “customarily and regularly supervise the work of at least two full-time employees”; and
• An employee has the authority to take personnel actions, such as hiring or firing other employees, or to decide whose recommendations regarding “the hiring, firing, promotion, advancement or any other change in the status of other employees shall have special weight.”

To meet the duties criterion for an administrative exemption, the employee’s primary duty must be to perform activities that are “directly related to the management or general business operations of the employer’s clients”; and this includes “the exercise of discretion and independent judgment with respect to matters of significance.”

The professional exemption obligation test covers two categories of professionals:

• Educated professionals:For educated professionals — such as scientists and doctors — the duties test requires that the employee perform work that requires “advanced knowledge” in a field of study or science that is “primarily intellectual in nature and involves work requiring the ongoing exercise of discretion and judgment.”
• Creative professionals:For creative professionals – such as musicians, artists and writers – the duties test requires the employee to perform work that “requires invention, imagination, originality or talent in a recognised field of artistic or creative activity”.

Certain outside sales workers are also exempt. To qualify, the primary duties must involve “making sales” or “obtaining orders or contracts for services or use of facilities for which a customer or consumer will pay for compensation.” In addition, the sales worker must be engaged in work outside the employer’s physical work locations. Employees who do not meet the outside sales exemption may still be exempt under one of the other FLSA exemptions, provided they meet the exemption criteria.

Finally, exceptions also apply to certain computer-related professions – such as computer systems analysts, computer programmers and software engineers – provided they meet the criteria for the duties required for that profession.

Changed salary exemptions

While the job duties test remains unchanged, the final rule changes the salary requirements for the EAP exemption. For an employee to meet the EAP exemption, the minimum weekly salary threshold increased from $684 per week to $844 per week ($43,888 per year), effective July 1. Beginning January 1, 2025, it will increase to $1,128 per week ($58,656 per year).

Highly compensated employee test

In addition, the final rule increases the total annual salary requirement for highly compensated employees (HCEs). Employees who pass the HCE test must have essential duties, including performing clerical or non-manual work; and customarily and regularly perform at least one of the duties of an exempt EAP employee.

As of July 1, HPE is considered exempt if the employee earns at least $107,432 in total per year, including at least $684 per week in salary or honorarium. The previous threshold was $132,964 in annual salary. It will increase to $151,164 on January 1, 2025.

“Non-discretionary bonuses and incentive payments, including commissions, may be counted toward the total annual threshold salary requirement, but the employer must pay at least the full standard weekly wage – not including such bonuses or incentive payments – on a salary or fee basis to meet the HCE test,” the Department of Labor explained in its Small Entity Compliance Guide.

The final regulations also state that the earnings thresholds will be updated every three years, starting July 1, 2027, to “provide employers with an easier time adapting by knowing when wage updates will occur and how they will be calculated,” Jessica Looman, administrator of the Department of Labor’s Wage and Hour Division, explained in a blog post.

Criticism of DOL overtime rules

The notice of proposed rulemaking generated approximately 33,000 comments. The U.S. Small Business Administration and the National Federation of Independent Businesses (NFIB) expressed concerns about the rule, primarily because the DOL underestimated the economic impact of the overtime provision on small businesses.

“Small entities have commented that this rule will have a detrimental impact on their businesses and increase their payroll,” the SBA said in its comment letter. “Small entities cannot afford these additional labor costs as they face a challenging business environment in the wake of the pandemic, including inflation, supply chain disruptions, closures, and tightening labor markets.”

The NFIB raised concerns that the time it takes to read, understand and implement the changes is unnecessarily burdening small businesses. “Compliance with the employee classification, timekeeping and documentation mandated by the FLSA will most often fall to the busy business owner or, in some small businesses, an employee who handles administrative and back office tasks,” the NFIB comment letter said. “These individuals are typically not adept at wade-ing through regulatory text, so the time it takes to read the regulations is longer than it would be for larger businesses.”

Compliance measures for small and medium-sized enterprises

Even if the DOL rule faces legal challenges, companies should prepare by reassessing their employees’ job roles, compensation, and pay policies and procedures now. “Employers have a range of options for responding to the updated thresholds set forth in this rule,” said Bridget Dutton, program specialist in the DOL Wage & Hour Division, during a DOL webinar discussing the rule changes.

For example, for each employee covered by the increased earnings threshold, an employer may:

• Increase the employee’s salary to at least the new salary level to maintain his or her exempt status;
• For each overtime hour worked, the employee must be paid an overtime allowance of 1.5 times his or her hourly rate;
• Reduce or eliminate overtime; or
• Reduce the amount of an employee’s base pay, provided the employee continues to earn at least the applicable minimum wage per hour, to offset the new overtime pay.

Compliance officers should, alongside the company, ensure that managers and payroll departments are informed of the rule change, as well as any compensation or policy changes the company makes in response. For additional information, small and midsize businesses should review the DOL’s “Small Entity Compliance Guide,” which describes in more detail the applicable exemptions and how to comply with the rule.

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See the original article at Risk & Compliance Matters