The Fair Labor Standards Act (FLSA) is the federal law governing employee compensation in American workplaces. Some states also enforce their own more stringent wage and hour laws. The FLSA requires employers to pay employees minimum wage for all hours worked and overtime rate and a half for all hours worked in excess of 40 hours in a work week.
However, the FLSA provides certain exemptions from minimum wage and overtime requirements. So-called “white collar” exemptions to minimum wage and overtime requirements refer to exemptions for executives, administrators, professionals, IT, and outside sales. To benefit from one of these exemptions, employees must be paid a predetermined salary not subject to reduction based on the number of hours worked or the quality of the work and the salary must meet the minimum “threshold” prescribed by the FLSA, currently $684 per week or $35,568 annually. In addition, employees must pass the job tests defined by the FLSA to enroll in one of the exemptions.
To qualify for the executive exemption, which covers most managers and supervisors, an employee’s primary duty must be the management of the business or a recognized subdivision or department thereof. . The basic requirement is that the employee must regularly direct the work of two or more subordinate employees.
- The administrative exemption covers many office managers, financial consultants, sales managers, production planners, inspectors, insurance agents and human resources employees and requires that an employee’s primary duty be clerical or non-manual work directly related to management or general business operations. In particular, the duties should include the exercise of discretion and independent judgment on material matters.
- The professional dispensation can be divided into two categories – erudite professionals and creative professionals. The primary duty of learned professionals must involve advanced knowledge in a specialized area of science or learning, usually acquired through prolonged study – often a university degree. Common examples include engineers, pharmacists, medical technologists, nurses, dental hygienists, physician assistants, and accountants. Creative professionals include editorial writers, journalists, graphic designers, actors, and artistic painters.
- The IT employee exemption generally excludes computer support employees who install and maintain computer workstation software and similar routine functions. The exemption requires theoretical and practical knowledge in computer systems analysis, programming or software engineering and tasks which generally consist of designing, testing and/or implementing software or hardware systems. While the same minimum wage of $684 per week is required if paid on a salary basis, the FLSA also allows payment of an hourly rate of at least $27.63 per hour to qualify under with the exception of IT employees.
- In addition to a test of rights, common to each white-collar exemption, the foreign sales exemption requires a location test. However, unlike the other exemptions, it does not require a minimum wage. As the name suggests, to qualify, an employee’s primary duty must be to conduct sales outside the employer’s place or places of business, which of course excludes inside sales employees. , unless they separately qualify for executive or administrative exemption.
The DOL has raised the salary threshold several times over the years in response to economic conditions. The most recent minimum wage increase took effect January 1, 2020, from $455.00 per week ($23,660 per year) to $684.00 per week ($35,568 per year). In 2016, the Obama administration proposed an increase from $455.00 per week to $913.00 per week ($47,476 per year).
Many trade associations, as well as a number of states immediately challenged this proposal in federal court. The court blocked the implementation of the increase proposed by the Obama administration, and it remained blocked until the Trump administration withdrew it. It is estimated that if Obama’s proposal had gone into effect, four to five million additional workers would have become eligible for overtime.
The Biden administration announced several months ago that it planned to release a salary threshold increase proposal in October 2022. If the proposed increase under the Obama administration is any indication, we could see a near doubling from the current $684.00 per week to around $1,300.00. per week. Many small and even medium-sized employers may struggle to afford such a dramatic increase, with up to 10 million workers eligible for overtime pay if the FLSA wage threshold doubles. Whatever the increase, its implementation will almost certainly be delayed by legal challenges.
Nevertheless, now is the time for employers to carefully consider the specific duties and number of hours worked each week by their employees classified as exempt. A thorough review can confirm whether the employee’s primary duties are sufficient for exempt status. Unfortunately, misclassification is a common problem that can create significant liability.
Reviewing hours worked will also help determine if an exempt position typically requires more than 40 hours, so converting it from salaried to hourly may not result in a significant difference in cost due to the need to pay substantial overtime. This review could also help confirm whether a consolidation of duties and/or exempt positions might be an option.
Beyond the additional costs of overtime, employers should consider the effect on employee morale and productivity if an employee’s position is reclassified from salaried to hourly. A supervisor who worked his way up from hourly jobs to eventually become a salaried supervisor may consider returning to an hourly position a demotion.
Given that a potentially substantial salary threshold increase is virtually certain, even if delayed by legal action, these are the types of questions that proactive employers should seriously consider in anticipation of any threshold increase. salary.
Rick Alaniz, JD, of Alaniz Associates, has been at the forefront of labor and employment law for over forty years. He began his legal career as General Counsel with the U.S. Department of Labor, served on the President’s Cost of Living Council during the Nixon administration, and also held senior positions with the National Labor Relations Board, first in Washington DC and later in Minneapolis where he coordinated the NLRB’s law enforcement actions in the five-state Midwest region. A partner in private practice since 1985, his experience has only deepened Rick’s enthusiasm for labor and employment law and his drive for continued excellence in the field. He is certified in labor and employment law by the Texas Board of Legal Specialization. Rick writes dozens of labor and employment law articles each year for trade journals and delivers numerous seminars each month to client companies and professional associations across the country.