Exempt Employees Must Pass Both Salary and Duties Tests

[Editor's note: A district court vacated the 2024 overtime rule on Nov. 15, 2024. As a result, the overtime salary threshold for white-collar exemptions reverts to $35,568 annually. The salary threshold for the highly compensated employee exemption has returned to $107,432 annually.]

Misunderstandings abound regarding the interaction of the salary test and the duties test, as well as the exemption for highly paid employees, under the U.S. Department of Labor's (DOL's) Fair Labor Standards Act (FLSA) overtime regulations.

Under the overtime regulations effective July 1, 2024, the annual salary threshold for exempt positions is $43,880 (or $844 per week). Effective Jan. 1, 2025, the annual salary threshold for exempt positions is $58,656 (or $1,128 a week). In addition, a duties test is used to determine whether employees earning at least the salary threshold must be classified as nonexempt from overtime, including the tests for meeting the executive, administrative and professional exemptions. Starting July 1, 2027, the DOL will automatically increase the overtime threshold every three years.

Highly compensated employees (HCEs) who receive total annual compensation of at least $132,964 effective July 1, 2024, and at least $151,164 effective Jan. 1, 2025, are exempt from the FLSA's overtime requirements if they meet a separate HCE duties test that has a lower bar than the test required for employees paid the standard salary level.

Unless exempt, employees covered by the FLSA must receive at least time and one-half their regular pay rate for all hours worked over 40 in a workweek.

The following Q&As address some frequent misperceptions.

If an employee earns at least $43,888 effective July 1, 2024, and at least $58,656 effective Jan. 1, 2025, are they automatically exempt?

No, although this is a common misconception about the overtime regulations. Meeting the salary threshold doesn't automatically make an employee exempt from overtime pay; employees must earn at least the standard salary threshold of $43,888 effective July 1, 2024, and at least $58,656 effective Jan. 1, 2025, and fulfill one of the exemptions in the standard duties test.

Earning a certain salary is only one of three requirements that must be met for an employee to be exempt from overtime under the white collar exemptions. These three requirements are the two prongs of the salary test plus the duties test:

• Salary basis test. The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
  
  
• Salary level test. The amount of salary paid must meet a minimum specified amount of $43,888 effective July 1, 2024, and at least $58,656 effective Jan. 1, 2025, unless and until that figure is revised upward.
  
  
• Duties test. The employee's job duties must primarily involve executive, administrative or professional duties as defined by the regulations.
  

An employee could meet requirements of the salary basis and salary level tests and still fail to qualify as an exempt employee under the FLSA because the employee might not meet the requirements of the duties test.

So, if they just meet the duties test, can they be classified as exempt?

No; once again, exempt employees must earn at least the threshold of $43,888 effective July 1, 2024, and at least $58,656 effective Jan. 1, 2025, and meet one of the exemptions in the standard duties test.

Generally, what duties satisfy each of the white-collar exemptions?

• For the executive exemption, employees must have a primary duty of managing the enterprise or a department or subdivision of the enterprise; must customarily and regularly direct the work of at least two employees; and must have the authority to hire or fire, or their suggestions and recommendations as to the hiring, firing or changing the status of other employees must be given particular weight. 
  
  
• For the administrative exemption, employees must have a primary duty of performing office or nonmanual work directly related to the management or general business operations of the employer or the employer's customers, and their primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.
  
  
• For a professional exemption, employees must have a primary duty of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by prolonged, specialized, intellectual instruction and study, or must specialize in a few other similarly, highly specialized fields, such as teaching, computer analytics and engineering.

In California, an exempt employee must spend more than one-half of his or her time engaged in exempt work.

[SHRM members-only HR Q&A: What is the difference between California overtime exemption requirements and federal overtime exemption requirements?]

But I heard if you earn enough, you don't have to satisfy the duties test under the FLSA?

Not quite. Highly compensated employees who receive total annual compensation of at least $132,964 effective July 1, 2024, and at least $151,164 effective Jan. 1, 2025, are exempt from the FLSA's overtime requirements if they meet a more "relaxed" HCE duties test than is required for employees paid the standard salary level. Under the HCE duties test:

• The employee's primary duty must be office or nonmanual work.
  
  
• The employee must “customarily and regularly” perform at least one of the bona fide exempt duties of an executive, administrative or professional employee, as described in the regulations. An HCE who performs exempt duties on an isolated or occasional basis will not satisfy this minimal duties requirement.
  

“If an HCE employee no longer meets the new salary threshold, the employee may still qualify for exemption” from overtime requirements, said Dena Sokolow, an attorney with Baker Donelson in Tallahassee, Fla. Because the HCE has a streamlined job duty requirement, “employers should evaluate whether the position satisfies all the job duty requirements of one of the EAP exemptions for the employee to remain exempt.”

[SHRM members-only toolkit: Calculating Overtime Pay in the United States]

What if an employee earns between the standard salary threshold and the HCE salary threshold?

If employees earns at least the standard salary threshold ($43,888 a year effective July 1, 2024, and $58,656 a year effective Jan. 1, 2025) but less than the HCE salary threshold ($132,964 a year effective July 1, 2024, and $151,164 a year effective Jan. 1, 2025), and if they do not meet the criteria of the standard duties test, then even if they pass the relaxed duties test for HCEs, you would need to raise their compensation to the HCE threshold to retain their exempt status. Alternatively, you could reclassify the employee as nonexempt, which means that they would be entitled to receive overtime pay for all work hours beyond 40 in a workweek.