Under the Fair Labor Standards Act, everybody has to earn at least minimum wage. Employers are required by the Fair Labor Standards Act to track all hours worked by their employees. Employers should pay workers overtime for all hours worked in excess of 40 hours a week. These requirements by the FLSA should apply to everybody except for a few select folks who are exempt from this regulation. Those exemptions are spelled out in the regulations by the Department of Labor.
There are a number of these fact sheets, and it will give you all of the exceptions, but essentially to be considered exempt from the FLSA and not be eligible for overtime, there are three pieces to the puzzle.
It’s a myth that being paid a salary makes you exempted from overtime.
In order or be exempted from overtime, 3 requirements must be met.
- Salary-level test. Effective January 1, 2020, employers must pay employees a salary of at least $684 per week. The FLSA’s minimum salary requirement is set to remain the same in 2022.
- Salary-basis test. With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.
- Duties test. The employee’s primary duties must meet certain
1. Exempt Employees: Minimum Salary Requirements
The first thing is you have to have a minimum income. The second thing is you have to be paid as salary. The third part is that you have to satisfy the duties test. We call it the whitecollar test, but certain essential functions and duties of the job that would qualify you to an elevated status that you would then not be eligible for overtime and you would be paid on a salary basis.
Effective January 1, 2020, employers must pay employees a salary of at least $684 per week.
This minimum threshold income that you have to earn is $648 a week is an annualized salary of $35,568 a year. So, what that means is anybody earning less than this minimum salary is entitled to overtime. Anybody earning less than $35,568 needs to be classified as non-exempt and their time needs to be tracked. They need to be earning at least minimum wage and they need to get overtime for any hours worked in excess of 40 hours a week.
There is something called a highly compensated employee (HCE) exemption and the salary and the total annual compensation requirement is $107,432.
So if you have anybody who you’re treating a salary today is earning less than that. $35,568. You’re going to need to reclassify them as non-exempt employees and they will be eligible for overtime. The other alternative is you can increase their salary up to above that minimum threshold to salary, to satisfy the minimum income in order to be exempt from the FLSA.
Another thing is your income might qualify for being exempt, but you still have to satisfy the salary or duties test. So you could satisfy the minimum income and still being as classified. If the duties of your job don’t really warrant classification as exempt. For example, many companies have their customer service reps or their inside sales reps classified as exempt and or paid salary.
In most instances, instances, those are misclassifications, even though they’re making way more than the $684 a week but the duties of their job do not qualify them for being accepted.
If an employer has employees falling beneath that salary threshold, they need to figure out what they are going to do with them. Either reclassify them or increase their salary. The only exception to this is there are states like California, where there are minimum income threshold to be considered exempt is much higher than the federal level, even the one that’s being proposed.
The federal level is the floor. Some states have a higher minimum salary for exempted employees. See below:
To qualify for the administrative, professional, and executive exemptions in California, employees must meet certain salary and duties tests and must be paid at least twice the state minimum hourly wage based on a 40-hour week. . California employers with 26 or more employees must pay a salary of at least $1,200 per week to qualify for the exemption. Employers with fewer than 26 employees must pay a salary of at least $1,120 to qualify for the exemption.
Computer software employees may be paid on an hourly or a salary basis in order to qualify for exemption from California’s overtime requirements. These employees must earn at least:
- $50 per hour (for all hours worked); or
- A monthly salary of $8,679.16; and
- An annual salary of $104,149.81.
In Colorado, employees must meet certain salary and duties tests to qualify for an exemption. As a result of the Colorado Overtime & Minimum Pay Standards Order, the minimum salary required to qualify for the executive/supervisor, administrative, and professional exemptions under state law increases to $865.38 per week on January 1, 2022.
Under the state’s exemption for highly technical computer employees, the employee may be paid by salary (at least $865.38 per week) or by the hour (under a state proposal, the minimum hourly rate would be $28.92.
Note: In Colorado, an exempt employee’s salary generally must also be sufficient to satisfy the minimum wage for all hours worked in a workweek.
To be classified as exempt from overtime under state law, administrative, professional, and executive employees must satisfy certain salary and duties tests and receive a salary that exceeds 3000 times the state minimum wage. Due to an increase in the state’s minimum wage, the minimum salary required for the administrative, professional, and executive exemptions from overtime under state law will increase to $735.59 per week.
New York (December 31, 2021):
To be classified as exempt from New York’s overtime requirements, executive and administrative employees must meet minimum salary requirements and satisfy certain duties tests. For these two exemptions, the state generally sets the minimum salary requirement at 75 times the state minimum wage, which differs based on the region of the state. On December 31, 2021, the minimum wage is increasing in every region except New York City. As a result, the minimum salary required for the executive and administrative exemptions is as follows:
- Nassau, Suffolk, and Westchester Counties: $1,125 per week
- The remainder of the State (except New York City): $990 per week
Note: There is also a professional exemption under state law. For the professional exemption, employees must satisfy certain duties tests, but there is no minimum salary requirement under state law. Federal law establishes a minimum salary of $684 per week for the professional exemption. Employers seeking to classify employees as exempt from overtime should ensure employees meet both federal and state exemption criteria.
In Washington, employees must satisfy certain salary and duties tests to be classified as exempt from overtime under state law. In 2022, employees in Washington must earn a salary of at least 1.75 times the minimum wage for a 40-hour workweek to qualify for an exemption. The minimum salary required for the executive, administrative, and professional exemptions from overtime under state law is $1,014.30 per week.
Employers in Washington may pay computer professionals by the hour (if at least $50.72 per hour in 2022) or on a salary basis (if at least $1014.30 per week in 2022) for those employees to qualify for an overtime exemption.
2. Exempt Employees: No Improper Salary Deductions
The employer will lose the exemption if it has an “actual practice” of making improper deductions from salary. While 1 or 2 deductions are not going to void the salary, the courts look at the big picture. Factors such as: the number of improper deductions; were the deductions justified; the time period during which the employer made improper deductions; the number and geographic location of both the employees whose salary was improperly reduced and the managers responsible; and whether the employer has a clearly communicated policy permitting or prohibiting improper deductions. Some expampes of deduction from the pay of a salaried employee are: partial or full day deductions for absences from work; penalties for violations of safety rules or policies.
If an “actual practice” is found, the exemption is lost during the time period of the deductions for employees in the same job classification working for the same managers responsible for the improper deductions.
3. Exempt Employees: Must Perform Exempt Duties
Below, are some of the most commonly used exemptions under the FLSA.
Executive employees are exempted from overtime wages if they are compensated at a rate not less than $455 per week on a salary or fee basis and manage the enterprise or manage a customarily recognized department or subdivision of the enterprise and customarily and regularly direct the work of at least two or more other full-time employees or their equivalent. The executive employee must have the authority to hire or fire other employees or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
Administrative exemption applies to an employee who is compensated at a rate not less than $455 per week on a salary or fee basis and who performs office or non-manual work directly related to the management or general business operations of the employer while exercising discretion and independent judgment with respect to significant matters.
Computer Professionals Exemption
Certain computer professionals are exempt from the FLSA if they are compensated at a rate not less than $455 per week on a salary or fee basis or, if compensated on an hourly basis, at a rate not less than $27.63 an hour and are employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties which include the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; he design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or a combination of thereof.
There are two types of professional exemptions under the FLSA. First, an employee can be exempted from the FLSA as a learned professional if that employee is compensated at a rate not less than $455 per week on a salary or fee basis and performs work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment. This knowledge must be in a field of science or learning and must be customarily acquired by a prolonged course of specialized intellectual instruction. In addition to a learned professional, a person who is a creative professional is exempt from the FLSA so long as that employee is compensated at a rate not less than $455 per week on a salary or fee basis and performs work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
Outside Sales Exemption
Outside salespeople are exempt from the FLSA if their primary duty is making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and they are customarily and regularly engaged away from the employer’s place or places of business.
Highly Compensated Employees
Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption