New Final Rule on Exempt vs Nonexempt Employees - Action Required by July 1st
Business owners ask me questions all the time about the rules regarding Exempt vs Nonexempt employees (mostly as it relates to overtime pay). If you are a company with 1 employee or 5,000 employees, you need to pay attention to any changes to the FLSA, and we just received a new rule that requires a big change starting in July.
First off, let's help you understand this part of the Fair Labor Standards Act (FLSA). All employees governed by the FLSA (which are most in our country) are required to be paid minimum wage and payment for working overtime. The FLSA has an “exemption” for certain employees to not be subject to this regulation. This means they are “exempt” as a classification. As small business owners, this usually matters to us because we don’t have to pay exempt employees overtime pay. On the flip side, if the employees do not qualify for an exemption, they are classified as “non-exempt”, and you must pay them overtime when they work over 40 hours in a work week.
What makes an employee exempt?
The popular misconception by my clients is that they get to choose. However, it is not up to you. The business can’t make that determination. The classification is defined by the job duties, pay level, and pay type. You can classify an employee as exempt only if they pass the job duties test, the salary threshold test, and the pay type test. And they need to meet all of them, and not just one or two.
1. Job Duties Test - They are given little supervision and have the authority to make recommendations. Their titles can look like the following: lawyers, accountants, marketing professionals, business executives, managers, etc.
2. Salary Threshold Test - The employee gets paid over a certain amount (we will talk about that in a minute).
3. Pay Type Test -Their pay doesn’t change week to week (salaried not hourly). Do not fall into the trap of thinking everyone that is salaried is automatically exempt because their pay type is NOT the sole determination. You cannot take an employee who should receive overtime pay, pay them as salaried instead and then call them exempt. It just does not work like that, and you can get in some trouble with the DOL if you try.
There is a also a Specific Job Test that bypasses the above tests that you can look up on the DOL website for specific jobs (for small businesses, this would be like outside salespeople and some computer/IT based employees) that would make them exempt.
Other than these exemptions, everyone is non-exempt. For my small businesses, that means these types of jobs - administrative assistants, bookkeepers, customer service people, and any clerical level employees are non-exempt. Basically, anyone that has more routine tasks and takes direction - these people have no exemption from the rule.
There are also certain industries that have special exemptions such as automobile dealers. So, it is always best to check the regulations!
Now what changed with this new “Final Rule”?
One of the parameters in the list above (#2) states that one “test” of whether a position can be exempt is the salary threshold test. To be exempt, you can make no less than $35,568. If you make less, you are automatically non-exempt no matter what your job description says.
Well, that salary number is changing in a big way. In this final rule, the salary threshold will increase from the present (since 2019) annual salary threshold of $35,568 to the annual salary of $43,888 and increases to $58,656 on Jan. 1, 2025. This will go into effect on July 1, 2024.
So, what do you do because of this change?
For this current change upcoming, you need to query your list of employees that make under $58,656 and they will need to be reclassified as non-exempt by July 1.
What will this do to your business if you have someone that is currently classified as exempt but makes under this new threshold?
If the person doesn’t work overtime at all, this will have no impact on your business.
If the person doesn’t log in and out, they will need to starting on July 1st because at any time you will need proof of when they worked.
If the person does work overtime, you will need to pay them for it.
What are options you can do to mitigate any issues?
Just agree to start paying overtime and be done with it
Find other people to do the additional work so that the person never can work overtime - and tell them they aren’t allowed to work overtime unless it is approved in advance. You could hire a part time person (we can also help with this)
or see if someone else is underworked that can pick up the duties
Raise their pay over $58,656 and they will not be affected.
As a Side Note:
You might want to re-examine the classification you have for all your employees and make sure the way you have classified them is legal. Even if someone makes over $58,656 - they still need job duties that are considered appropriate to be exempt. The misclassification of employees can carry with it a high fine from the DOL and back pay for years. So please don’t make this mistake.
Homework for You
If I were you, I would print out a list of all employees that are currently classified as exempt and make sure they really pass the “tests” above. Can’t hurt to be sure.
We did record a podcast on this a couple months ago, where we talked about getting prepared for this new final rule and the implications. It is 10 minutes and definitely worth your time:
How Innovative Outsourcing and tHRiving: HR for Small Business Can Help:
One of the best services we perform for our clients is our HR Audit. An HR tool built for small businesses to identify the strengths and weaknesses of their HR. As part of the HR Audit, we look at your classifications and 13 other areas of HR to see where you are at. Pricing for this HR Audit starts at $2,500.