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Brewing Up New Thresholds for Federal Exempt Employee Classifications

Brewing Up New Thresholds for Federal Exempt Employee Classifications


Good afternoon everyone. Thanks for joining us for the November episode of Kelleher and Holland’s monthly Lunch and Learn webinars. Introduce yourself, and today’s topic is regarding the new thresholds for federal exempt employee classifications.

Before we get started: If you have a question at any time during the webinar, please type it in the Q&A question box located in your Zoom control panel and we will address them at the end of today’s presentation.

We have a “perfect blend” of panelists today from our employment law group: Andy Boling and Madeline Kelleher. Before we get started, do either of you have a favorite coffee or tea drink?

Question 1: Let’s start today’s presentation off by defining the Fair Labor Standards Act – Madeline, what is it?

Madeline F. Kelleher:  The Fair Labor Standards Act, or FLSA, is a federal law that was enacted in 1938 and is enforced by the Wage and Hour Division of the United States Department of Labor.  The FLSA establishes minimum wage, overtime pay, recordkeeping requirements, and child labor standards. 

In order for the FLSA to apply, there must be an employment relationship between the employer and the employee.  Almost every employee in the United States is covered by the FLSA, as it affects most private and public workers.

Question 2: Madeline, does the FLSA define all terms and conditions of employment?

Madeline F. Kelleher:  No. While almost every employee in the United States is covered by the FLSA, there is a common misperception about the scope of the FLSA. 

For example, it does not require paid time off, meal or rest periods, pay raises or fringe benefits. But, always check state and local laws for these requirements, as some states require such conditions of employment.

Rather, the FLSA is geared specifically toward minimum wage, overtime pay, recordkeeping requirements, and child labor standards. Let’s go over the current applicable rules.

Currently, federal minimum wage is $7.25 per hour and has been so since July of 2009.

Tipped employees, meaning those engaged in an occupation in which the employee customarily and regularly receives more than $30 per month in tips, must be paid $2.13 per hour and if the employee’s tips combined with this lowered minimum wage does not equal the minimum wage of $7.25 per hour, the employer must make up the difference.

Additionally, covered employees must be paid for all hours worked in a workweek.  Generally, compensable hours worked include all time an employee is on duty or at a prescribed place of work and any time that an employee is “suffered or permitted,” meaning work past normal business hours or during times the employee is supposed to be “off the clock.”  This would generally include work performed at home, travel time, waiting time, training during work time, and probationary periods.  For example, workers must be completely relieved of duty for a meal period not to be compensable work time.

Covered, non-exempt employees must be paid overtime at a rate of 1.5 times the employee’s regular rate of pay for all hours worked over 40 hours in a week.  All time that is hours worked must be counted when determining overtime hours worked.

There are some workers who are classified as “exempt” from the FLSA overtime pay requirements, including executives, administrative workers, professionals, computer workers, highly compensated employees, and those in outside sales.  Commonly exempt professions include CEOs, human resources manager, teachers, accountants, executive chefs, pharmacists, lawyers, computer engineers, and doctors.  Generally, exempt employees must currently make no less than $684 per week, which would come out to approximately $35,600 per year and have duties that fall within the duties tests, which Andy will discuss in detail in a few minutes.

Employers must display an official poster outlining the requirements of the FLSA.  Employers must also keep employee time and pay records for a specific minimum number of years, depending on the type of record.

The FLSA regulates the employment of youth, including the jobs they can do at certain ages and the hours they can work at certain ages.  These provisions are designed to protect the educational opportunities of minors and prohibit their employment in jobs and under conditions detrimental to their health or well-being.

Question 3: Does the FLSA override state laws?

Madeline F. Kelleher: Yes and no. The FLSA sets a floor of minimum protections regarding overtime, minimum wage, recordkeeping, and child labor.  No state can impose reduced rights than those provided under the FLSA.  However, many states and local governments can legally require more generous treatment to employees.  Employers must always follow the law that provides the greatest protections for workers.

Many states, counties and even cities have their own wage and hour laws that they regulate and enforce.  Some are similar to the FLSA, but some differ and are more “employee friendly.”

Key state and local wage laws to monitor are those regarding:

1.      Salary levels for exempt employees

2.      Meal/rest breaks

3.      Timing of final paychecks

4.      Vacation

5.      Paid time off

6.      Bonuses/commissions; and

7.      Wage notices

Question 4: Andy, can you break down for us the specific changes the Department of Labor is proposing?

Andrew J. Boling:

Increase the minimum salary to qualify for “exempt” status for executive, administrative, and professional employees from $684 per week ($35,568 annualized) to at least $1,059 per week ($55,068 annualized)

The increase will be based on the standard salary level at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the Southern region). 

Final amount will be pegged at fourth quarter data for 2023 and it could be as high as $1,158 per week ($60,209 annualized).

Increase to approximately $143,988 the minimum total annual compensation needed to qualify for streamlined Highly Compensated Employee (HCE) exemption.  The current HCE minimum is $107,432.

The current HCE minimum was calculated in 2019 using the 80th percentile of full-time salaried workers nationally. Under the proposed rule, the amount needed to qualify for the HCE test would be based on the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally. Based on 2022 data, the DOL reports that the HCE test would require total annual compensation of $143,988. Again, however, the DOL indicates that it will use the most recent data available at the time the final rule is promulgated, which may lead to a much higher annual threshold.

Automatic increases to salary threshold minimums every three years.

No change to duties tests.In addition to meeting specific compensation requirements, employees generally must meet certain tests regarding their job duties for an exemption to apply. Significantly, the proposed rule would not make any changes to the duties tests for qualifying as an exempt executive, administrative, or professional employee.

Comment period closes today.  Could be finalized by year end and effective by January 1, 2024. Under the Obama Administration, the DOL issued a proposed rule setting the salary level at $913 per week ($47,476 per year), but that rulemaking was blocked by a permanent injunction prior to its effective date and was formally rescinded. The DOL almost certainly will face legal challenges to its latest rulemaking, including questions about the agency’s authority to impose the salary threshold increase, as well as its authority to implement, for the first time, automatic updates to those thresholds. A lawsuit pending in a Texas federal district court challenges the 2019 rulemaking and argues that the federal agency lacks statutory authority to impose any salary level because the statutory text of the FLSA does not include a salary threshold.

Question 5: Andy, you mentioned there will be no change to the duties tests for exempt status under the FLSA. Can you provide a short summary of each exemption?

Andrew J. Boling: The FLSA provides that executives are exempt if:

1.      They make no less than $684 per week; and

2.      Their primary duty consists of the management of the enterprise or a department or subdivision of the enterprise; and

a.       Customarily and regularly direct the work of two or more employees; and

b.      They either have the authority to hire or fire employees or their recommendations as to hiring, firing, advancement, promotion, or change of status are given particular weight.

3.      However, an executive is automatically considered exempt if the executive owns 20% or more equity interest in the company and is actively engaged in management of that enterprise.


Administrative workers are exempt if:

1.      They make no less than $684 per week; and

2.      Their primary duty is the performance of office or non-manual work directly related to management policies or general business operations (e.g., accounting, marketing, human resources); and

3.      They exercise discretion and independent judgment with respect to matters of significance.

a.       Don’t just follow well-established techniques and procedures.


As for exempt professionals, they can be classified as either a learned professional or a creative professional.

1.      To qualify for the learned professional employee exemption, all of the following must be met:

a.       They must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week; and

b.      Their primary duty consists of performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study; and

c.       They consistently exercise discretion and judgement.

2.      To qualify for the creative professional employee exemption, all of the following must be met:

a.       They must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week; and

b.      The employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

Finally, highly compensated employees are exempt if:

1.      Currently paid total annual compensation of at least $107,432,

2.      receive at least $684 per week paid on a salary basis, [Employers may not use nondiscretionary bonuses and incentive payments (including commissions) to satisfy any portion of the weekly standard salary level for HCEs.]

3.      perform office or nonmanual work, and

4.      customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee

Question 6: All of this sounds pretty complicated, Andy.  Are there any traps employers should avoid?

Andrew J. Boling: Misclassified employees:

·         Employee is paid hourly or less than the salary threshold

·         Job title was used to determine exempt status

·         Job description was used to determine exempt status

·         College degree was used to determine exempt status

·         Relying on “high” salary alone to determine exempt status

·         Deductions are made from an exempt employee’s salary

·         Forgetting about state law requirements

·         “I couldn’t do the job…” isn’t enough

Question 7: Any key takeaways or “to-go” cups for our listeners, Madeline?

Madeline F. Kelleher: The key takeaways from today’s presentation are:

1.      Monitor the new regulations

2.      Work with your attorney to conduct a privileged audit of your employee classifications to ensure

3.      Don’t forget about state laws

- e.g., CA and Washington state have much higher thresholds for …—over 64k for large employers in CA and over 65K for large employers in WA.

Q&A: 1. If this proposal becomes final, what should my company do if my exempt employees’ salaries are below the new minimum?

If the rule becomes final and your exempt employees fall below the new salary threshold, you would generally have two options: (1) reclassify the employees as nonexempt and pay them overtime whenever they work more than 40 hours in a workweek; or (2) raise their salary to meet the new requirement.


That wraps it up for today. We hope that was an informative session for all those listening, and we thank you for attending. You can contact our speakers directly if you have additional questions about today’s topic; their contact info is on the screen and we are happy to answer them offline.

Our last Lunch and Learn for 2023 will be on Tuesday, December 5th,  discussing the National Labor Relations Board’s final rule regarding the expansion of the scope of joint employment, and whether or not joint employers can be held accountable for workers they didn’t know were their employees. Fill up your travel mugs and join us for this one!

Registration for this session will be open soon, so check your inbox or our social media pages for more information. Have a great rest of your day!