What You Need to Know About White-Collar Overtime Exemptions Under the FLSA

Editor's Note: On Sept. 8, 2023, the Department of Labor (DOL) issued a proposed rule increasing the Fair Labor Standards Act's (FLSA's) annual salary-level threshold to $55,068 from $35,568 for white-collar exemptions to overtime requirements. The department also is proposing automatic increases every three years to the overtime threshold and an increase to the minimum salary for highly compensated employees to $143,988. A public comment period will be open until Nov. 7, 2023.

White-Collar Overtime Exemptions Under the FLSA

PURPOSE

While the Fair Labor Standards Act (FLSA) requires that most employees be paid overtime, it also exempts several categories of positions from that requirement. Employees who are eligible for overtime are classified as "nonexempt," and those who are not eligible are "exempt." The most common types of exemptions from overtime are often referred to as the “white-collar exemptions,” and they include executive, administrative, professional, outside sales and certain computer-related occupations.

EXEMPTION CRITERIA

There are three main criteria that must be met for a position to qualify for a white-collar  exemption:

• Payment on a salary basis, with some exceptions;
• Payment of a minimum salary, currently $684 per week ($35,568 annually), also with some exceptions; and
• A primary duty test specific to each type of exemption listed above.

Additionally, a highly compensated employee making $107,432 or more annually who performs at least one of the duties of an exempt position described above may be classified as exempt from overtime. Some states also have their own criteria for exemptions that must be complied with.

CLASSIFICATION

The default classification for all positions is nonexempt. Even if a position qualifies for exemption, there is no requirement to make any position exempt. To release itself from the requirement to pay overtime for a particular position, an employer must actively classify a position as exempt.

HOURS WORKED

Employees in exempt positions may be scheduled to work any number of hours in a workweek without incurring overtime. Some state laws may require certain breaks or days of rest for exempt workers, though many do not.

SALARY DEDUCTIONS

Being paid on a salary basis allows for very limited deductions from pay, even when an employee works less than a full workweek.

RECORDKEEPING

While the FLSA requires employers to keep wage and hour records for nonexempt employees, it does not extend this requirement to exempt employees. Some states, however, may have their own record-keeping requirements for exempt employees.

COMMON ISSUES

MISCLASSIFICATION

Misclassifying a nonexempt position as exempt can lead to lawsuits over back pay due to overtime owed, plus penalties. While some classifications are straightforward, many are not, and understanding how to make these determinations is critical to compliance.

PAY DEDUCTIONS

Improper deductions from pay can jeopardize the exempt status not only for the affected employee, but for all employees in a similar position. In that case, overtime and penalties may be due.

Additionally, while exempt employees may be required to work a specific schedule and track their hours, deducting their pay for hours not worked is generally not allowed unless it meets the limited deductions criteria. These employees may, however, be disciplined for absences, tardiness or not adhering to their assigned schedules.

PAID TIME OFF 

While the PTO banks of exempt employees may be docked in any increment, the actual pay on their paycheck may never be docked in less than full-day increments (with the exception of when they are also on FMLA leave). This may cause an employer to offer advanced PTO to exempt employees, but should the employee terminate employment before repaying that time, it may be difficult to recover.

BUSINESS CLOSINGS

Exempt employees may not be docked pay for business closures (due to weather, holidays, etc.) of less than a full workweek. If the business is closed for a full workweek, they may be docked pay only if they perform no work from home (e.g., sending e-mails, doing online work, etc.).

ADDITIONAL WORK

Exempt employees may wish to work a second, nonexempt job for the same employer without incurring overtime. Employers may also want to pay exempt employees extra for additional work and not jeopardize the employee's exempt status.

RECORDKEEPING

It is a good idea to retain salary history and exemption justification records for exempt positions to prove compliance. Employers must also determine whether retaining time records for exempt employees may be in their best interests. Misclassification lawsuits are common, and determining liability for owed overtime pay in the absence of accurate records could be costly. Conversely, having those records may lead to an even larger payout of back pay because it will prove exactly how much overtime was worked.

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