One of the most costly mistakes an employer can make is misclassifying employees, particularly regarding salary exempt status and overtime eligibility. Employers found by enforcement agencies to have misclassified their employees may face significant damages. The Department of Labor has placed a renewed focus on the enforcement of proper classification of workers.

As such, one of the most important tasks an employer must do is to ensure that their employees are classified correctly, including whether a position, based on the duties and responsibilities, would be considered exempt under the Fair Labor and Standards Act (FLSA). Paying an employee a salary alone does not make them exempt.

Under the law an employee must perform specific duties in order to be eligible for an exemption under the FLSA, known as the duties test. The most common exemptions are administrative, executive, or professional. In addition to performing specific duties, an employee must also earn a certain amount in salary every week to be eligible. Currently, the salary threshold is set at $684 per week or $35,568 annually. Of note though, the Department of Labor has recently issued a proposed increase to the salary threshold which would increase the salary requirement to $1,059 per week or $55,068 annually. This increase expected to be implemented by the middle of 2024.

Employers should proactively prepare for this increase, so they are not scrambling when the proposed rule comes into effect. Employers should conduct internal audits of employees who fall within the new and old salary threshold. Once they have compiled a list of these employees, the employer needs to determine whether the duties performed by these individuals meet the exempt employee duties test for one of the white-collar exemptions. If a position meets the duties requirement for the exemption, the employer then needs to make a decision as to whether they want to continue to have the position be exempt and therefore raising the salary of the position to meet the new minimum when it goes into effect or does the employer want to forego increasing the salary and reclassify the position as non-exempt.

Employers should remember that while a position may meet the criteria for exemption, they are not required to classify it as such. They can classify the position as non-exempt and pay overtime accordingly. Factors such as the cost of the increased salary and frequency of overtime work may influence this decision. If an employee works a position that meets the exempt requirements and the position frequently requires over 40 hours of work in a work week, then it may make business sense to keep the position exempt and increase the salary rate to meet the new salary requirements. However, if the position generally works 40 hours a week or less, then it may make sense to reclassify the position as non-exempt and forego increasing the salary to meet the new salary requirement for exemption.

Need help determining whether a position meets the requirements to be salary exempt? NAE members have access to the FLSA Exempt Status Questionnaire through our Member Portal. This handy tool will take you through each of the exemptions so you can determine if any exemption applies. Want to know more about the salary threshold increase? Attend our webinar, Understanding the New Salary Threshold for Exempt Employees, on April 16th.