Author: Erik Henry Smetana
Now is a great time to put your "HR house" in order when it comes to accurate exempt/non-exempt classifications and earning thresholds. This spring, the U.S. Department of Labor (DOL) is expected to announce recommended changes related to employee salary for overtime rules as part of the Fair Labor Standards Act (FLSA). A vast majority of organizations across numerous industries face potential compliance and monetary impacts if the legislation passes.
The DOL review and anticipated announcement represent a quick turnaround, given the previous update to overtime rules implemented in 2019 delivered the first substantive changes enacted since 2004. Those changes, however, were less significant than the 2016 efforts to modify FLSA provisions, which were halted later due to a preliminary injunction. The upcoming proposal is likely to mirror or even exceed the changes anticipated in 2016.
Criteria for overtime exemption
As an FLSA refresher, to meet the criteria for exemption from overtime, an employee typically must pass the standard of two "tests":
The duties test
The first test centers on the employee's responsibilities in the organization. While this aspect of the exemption rules is not anticipated to change with the 2022 proposed rule changes, the duties test is important to remember when considering the classification of a particular role.
The following roles are exempt from overtime:
- Executive — Roles focused both on people management and managing the enterprise, with the authority or ability to influence decisions related hiring, firing and changes in employee status
- Administrative — Office-based roles using judgment and discretion focused on management, business operations and interacting with customers
- Professional — Roles that require either advanced knowledge (often associated with having a degree), typically considered intellectual in nature, or which require invention, imagination or talent in a recognized field of artistic or creative endeavor
The salary test
The salary test is where we expect to see changes.
In 2016, a proposed change would have moved the salary threshold from $455 per week ($23,660 annualized) to $913 per week ($47,476). The courts blocked this proposal shortly before it was scheduled for implementation. DOL addressed the topic again in 2019 and enacted changes on January 1, 2020. These changes moved the threshold to $684 per week ($35,568 annualized) and allowed for up to 10% of non-discretionary bonuses to satisfy threshold requirements.
While details of the 2022 proposed changes are forthcoming, organizations should prepare now to address pending challenges and associated opportunities.
Consider the following:
- Some analysts anticipate salary thresholds as high as $90,000, with an initial proposed change in the $75,000 to $85,000 range, prior to any changes emerging from the comment period following publication of the proposal.
- Now is a good time to conduct a preliminary review of exemption and classifications, estimated cost to threshold, or even compensation/classification structure redesign. Such a review can inform responses to changes to exemption status and help determine pay decisions for roles that employers may wish to continue as exempt.
- A well-constructed compensation and classification framework can address anticipated FLSA changes and inform total rewards, learning and development plans, talent acquisition strategies, and more.
- A comprehensive and connected HR strategy based on a review of compensation and classification — as impacted by changes to regulations — positions the HR team to influence and help lead the organization.
Gallagher supports organizations with comprehensive solutions to include exemption review, compensation and classification structures, enhanced management of ongoing joint-employer challenges and implementation strategies. We help organizations develop a comprehensive understanding of state laws and regulations to inform investment across people strategies and operations.
Contact us at ajg.com/us/total-rewards.