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Exempt Salary Thresholds

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Salary thresholds for employees qualifying for the “white-collar” and the ‘highly compensated” exemption will soon increase, as a result of a finalized rule issued by the U.S. Department of Labor (“DOL”) on April 23, 2024.

For nonprofits employers, new considerations exist for employees exempt from overtime pay, such as executive, administrative, and certain professional employees, who have been covered by the existing salary threshold, but may no longer fall within the escalated amounts. What should responsible nonprofit leaders do in response?

Strategic Decisions

Several key steps may soon come into sharp focus such as the following, and particularly for nonprofits on tight budgets:

1. Check salary amounts for affected employees, and consider whether to give raises (or higher initial salaries) in order to meet applicable salary thresholds;
2. Evaluate whether affected employees truly fit within the white-collar exemption category, or perhaps qualify for another exempt or non-exempt category;
3. Evaluate whether affected workers are better classified as independent contractors, not employees;
4. For employees who will no longer qualify for exemption due to below-threshold salaries, consider reallocating their work responsibilities among additional employees, thereby minimize overtime hours worked and corresponding overtime pay liability;
5. For employees paid close to the minimum salary threshold, consider offering higher pay and/or possibly reducing other employee benefits;
6. Modify record-keeping requirements, especially so that employers can now legally comply with overtime requirements for any employees who will qualify as non-exempt and therefore qualify for overtime pay;
7. Update job descriptions for employees whose classifications shift from exempt status to non-exempt status; and
8. Make any overtime prohibitions clear in employee handbooks and otherwise, along with related expectations (e.g., working overtime is allowed only upon advance approval).

Specific Salary Threshold Changes

The DOL’s new rule modifies regulations issued under section 13(a)(1) of the federal Fair Labor Standards Act (“FLSA”) regarding the distinction between “exempt” and “non-exempt” employees for white-collar employees. More specifically, the minimum salary threshold (not to be confused with minimum hourly wage) will change as follows:

- Effective July 1, 2024, the minimum salary level changes from $684 to $844 per week ($43,888 per year) – a bit higher than $20 per hour;
- Effective January 1, 2025, it changes from $844 to $1,128 per week ($58,656 per year); and
- Effective July 1, 2027, and then every three years after, the minimum salary level increases based on current wage data.

Additionally, the minimum salary level for exemption based on “high compensation” will change as follows:

- Effective July 1, 2024, the “high compensation” minimum salary threshold increases to $132,964;
- Effective January 1, 2025, it increases to $151,164; and
- Effective July 1, 2027, and then every three years after, the “high compensation” minimum salary threshold increases based on current wage data.  

Effective Nonprofit Strategies

Raise Salaries for Exempt Employees?

The first strategy may be sufficient, to raise salaries for certain employees in order to keep them within the exempt classification. But other steps may be appropriate instead, especially if such employees do not (upon further scrutiny) meet the test for the white-collar exemption, if they satisfy a different exemption test, if they should not be classified as “employees,” or if they never work overtime. Read on!

Evaluate Applicability of White-Collar Exemption, Or Perhaps Another Exemption Category?

For the white-collar exemption to apply, all three elements of the following exemption test must be satisfied:

1. Salary basis - 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 carried out;
2. Salary threshold - the amount of salary paid must meet a minimum specified threshold amount; and
3. Duties - the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.[1]

With respect to “duties” prong, the category-specific white-collar exemption requirements are quite important.

· An “executive” employee should be one (a) whose primary duty is managing the organization or a significant part of it, (b) who regularly directs the work of two or more other employees, and (c) who has the authority to hire or fire other employees or whose input on personnel matters is given particular weight. Such employees thus should be primarily engaged in managerial decisions like regularly assigning work, training, budget planning, making major purchases, and handling legal compliance matters.

· An exempt “administrative” employee is one (a) whose primary duty is performing office or other non-manual work directly related to the organization’s operations, and (b) who exercises “discretion and independent judgment” in “significant” matters. The first prong is relatively straightforward. The second prong is much more challenging, with elusive terminology and highly fact-specific determinations.

· The professional employee exemption is far more straightforward. To qualify, the employee’s primary duty must be to perform work either (a) requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or (b) requiring creativity, invention, imagination, originality, or talent in a “recognized field of artistic or creative endeavor.”

Notably, the white-collar exemption and its accompanying salary threshold does not apply to certain types of employees. Rather, such employees are covered by other exemptions. These exemptions include the following categories of employees: employees covered by the ministerial exemption; teachers; employees engaged in certain computer-related occupations; certain seasonal workers; doctors; and attorneys. These exemption categories may likewise be significant for many nonprofits (e.g., churches, summer camp operations), since such employees will remain exempt without regard to their compensation amounts.

State and local laws may – or may not – be analogous to the FLSA, especially with respect to seasonal employees. When in doubt, evaluate (a) each employee’s job description and (b) applicable federal, state, and local law for each employee’s work location.

Reconsider Employee vs. Independent Contractor Status?

Some workers may be better classified as independent contractors than as employees, thereby entirely avoiding the exempt/non-exempt issue. But nonprofits do not get to decide such classification issues as a matter of choice. Instead, they are legal issues that warrant careful evaluation, and typically favor employee status.

Correctly distinguishing between employees and independent contractors can be tricky. For example, if a worker is well integrated into a nonprofit’s operations and carries out many types of activities on a relatively long-term basis, then the person is likely an employee. Note too that in California, a person who works full-time is necessarily an employee, and such simplistic classification could be followed in other states too. Additionally, employee classification under state law depends on the worker’s location, which in turn may raise a host of legal compliance issues for nonprofits with multi-state operations or remote workers. There is also no such thing – legally speaking – as an employee who receives an IRS Form 1099. Such tax form is only for independent contractors; employees receive IRS Form W-2. The Internal Revenue Code also mandates that every corporate officer generally be classified as an employee, regardless of how much time the worker spends on nonprofit business or the nature of the worker’s specifics, as a bright-line approach presumably based on governing boards’ direct control of corporate officer.

These areas reflect a sampling of potential classification aspects – worth considering in terms of correctly evaluating such matters. But this distinction is not necessarily the answer for resolving a salary threshold issue.

Reallocate Work Responsibilities?

This potential strategy is highly focused on operations. To illustrate, consider a nonprofit employer that has one employee who regularly works sixty hours a week for below the salary threshold but otherwise within the white-collar exemption. Would it make sense to divide the employee’s job into two positions, such as forty/twenty or thirty/thirty hours worked between them? Such reallocation could avoid overtime pay liability – at one and half times the employee’s regular hourly rate of pay (as may be calculated from the employee’s salary amount). Is such reallocation worth it for the employer? Perhaps yes, financially, but not otherwise.

Another scenario could be an employee who only occasionally works more than forty hours per week, such as for a conference or other special event. In that case, a nonprofit employer may prefer to pay the employee his or her regular salary (of less than the required salary threshold for the white-collar exemption) and then pay overtime for the occasional extra work, rather than reallocate certain job responsibilities to others. And always relevant for management evaluation: Could certain operational areas be more efficient, therefore warranting fewer hours worked?

Offer Higher Pay, or Reallocate Certain Employee Benefits?

Further considering compensation dynamics, note that cash wages, non-discretionary (i.e., earned) bonuses of up to 10% of the threshold, and commissions (also to a limited extent) may be counted as compensation for purposes of the salary threshold. Employee fringe benefits, such as payment of health insurance premiums, retirement contributions, and provision for lodging and meals, cannot be counted. Consequently, employers with employees below the salary threshold may wish to rethink employee benefits and perhaps offer at least some of them through increased wages (albeit with resulting employment tax consequences).

Modify Record-Keeping Requirements, Especially for Related Compliance.

Consider overtime pay compliance as well for non-exempt employees as part of the employer’s overall legal obligations, whether newly recognized as non-exempt because of the salary threshold increase, or otherwise previously identified as non-exempt. For example, if non-exempt employees occasionally perform duties away from the office or other regular work site, such as to check email or to make phone calls, such work may need to be counted toward the maximum 40-hours per week amount – or the employer will need to pay overtime wages. In addition, the employer may need to pay wages (and possibly overtime) for travel, depending on the times and amount of travel. Employers may also need to revisit time reporting, such as through regular time-keeping methods and clear employer-employee communications about expected work hours.

It may be wise too to require overtime-eligible employees to keep track of their time worked, such as through computer software that allows for recording this information. Imposing this requirement may prove quite useful in the event that an employee later asserts an overtime claim, to refute a claim or otherwise determine whether a claim is legally valid. Ignoring wage laws is not an option. Employees whose rights are violated may generate massive organizational liability, especially if a once positive employment relationship later sours. Penalties are extremely high for violations, including possible personal liability for directors and officers. 

Update Job Descriptions?

Having accurate job descriptions may present some management or other administrative challenges, but they can prove vitally important for a variety of HR-related purposes. Focusing here, they should identify a position’s exempt or non-exempt status and contain correspondingly accurate job responsibilities – consistent with the duties prong of the white-collar exemption test, or otherwise meeting a different exemption category (e.g., for applicability of the ministerial exemption).

Update Employee Handbooks and Other Communications?

Remember that non-exempt employees will need to be paid additional compensation for any overtime actually worked (as well as minimum wage). Depending on the circumstances, it may be appropriate to prohibit overtime work as a discipline-related matter – but such pay must be provided if actually earned.

Note too, employees “volunteering” for overtime is not an option. As a legal matter, extra time that employees spend on the job for the same type of work as they regularly perform cannot be treated as volunteer service; wages must be paid. While nonprofit workforces often have highly dedicated and skilled nonprofit workers who put in long hours, their extra efforts may result in overtime wage obligations.

All such matters are appropriate to address through employee handbooks, to keep employees apprised of related expectations and responsibilities. Additional communications may be appropriate too, such as through periodic HR communications or one-on-one employee guidance.

Concluding Observations

Nonprofit employers may find the changing white-collar salary threshold challenging, especially if certain exempt employees will become non-exempt per this financial requirement. Whether they modify salary amounts in response, reorganize job responsibilities, or take other proactive measures, nonprofit leaders need to be proactive in addressing such important HR matters. Additionally, they and their organizations can greatly benefit from this opportunity to re-evaluate important legal compliance dimensions and to take responsive measures as may be warranted.

[1] For more information about the duties portion of the test, which can involve certain complexities, please see our law firm’s blog article.

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