Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 29 CFR Part 541, 89 Fed. Reg. 32842 (Apr. 26, 2024); Frequently Asked Questions—Final Rule: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees
The DOL has finalized regulations that increase the salary thresholds used to determine whether executive, administrative, professional, outside sales, and computer employees must be paid overtime. Generally, employees covered by the federal Fair Labor Standards Act (FLSA) must be paid at a rate not less than one and one-half times their regular rate of pay for hours worked in excess of 40 in a workweek. Salaried employees who primarily perform executive, administrative, or professional duties, however, are exempt, with the employer bearing the burden of establishing the exemption’s applicability. DOL regulations adopted in 2019 (see our article) currently apply that exemption to employees who satisfy a standard duties test and are paid at least $684 per week ($35,568 per year for full-time workers). Those regulations also exempt certain highly compensated employees (HCEs) whose total compensation exceeds $107,432 per year.
The final regulations will increase the minimum weekly salary under the standard salary level test to $844 per week ($43,888 per year for full-time workers) beginning July 1, 2024, and to $1,128 per week ($58,656 per year for full-time workers) beginning January 1, 2025. (Different weekly minimums that apply in the U.S. territories and in the motion picture industry are unchanged but will be addressed in future rulemaking.) The final regulations also will increase the HCE salary threshold, applicable to HCEs whose primary duty includes performing office or non-manual work, to $132,964 per year beginning July 1, 2024, and to $151,164 per year beginning January 1, 2025. On July 1, 2027, and every three years thereafter, the minimum weekly salary and the HCE threshold will be adjusted to reflect current earnings data and published in the Federal Register. The final regulations continue to allow up to 10% of the minimum weekly salary ($112.80 per week as of January 1, 2025) to be satisfied by annual or more frequent nondiscretionary bonuses, incentives, and commissions.
EBIA Comment: The final regulations, which are likely to face legal challenges, do not directly affect retirement plans, but they could dramatically increase the number of overtime-eligible workers, resulting in increased retirement plan contributions under plans that use a definition of compensation that includes overtime pay. Even if a plan excludes overtime pay when calculating compensation for plan contribution purposes, the regulations may alter nondiscrimination testing results—e.g., if the number of employees with overtime pay increases, this may lower the average deferral or contribution percentages of non-HCEs. Either way, employers should consider the effect on their plans and prepare to address the potential costs and consequences. For more information, see EBIA’s 401(k) Plans manual at Sections V (“Core Concepts: Definitions and Uses of Compensation”), XVIII.K (“Identifying Highly Compensated Employees (HCEs)”), and XX (“Nondiscrimination: Code § 401(a)(4) and Top-Heavy Rules”).
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