This article was first published on HR Daily Advisor on November 25, 2024.
Understanding overtime exemptions under the Fair Labor Standards Act (FLSA) can be one of the more challenging responsibilities HR professionals face. The complexity of exempt classifications—particularly for executive, administrative, and professional employees—requires diligence, especially as roles and salary thresholds evolve. On September 11, the Fifth Circuit Court of Appeals’ ruling in Mayfield v. U.S. Department of Labor serves as a strong reminder that misclassification is a costly mistake that employers can’t afford to overlook.
The Fifth Circuit’s decision in Mayfield didn’t create new laws or delay the implementation of others; rather, it reaffirmed the Department of Labor’s (DOL) authority to enforce the two-part test, a salary and duties test, for determining whether employees are exempt from overtime. This ruling underscores the need for employers to stay vigilant and regularly assess their compliance with both federal and state laws governing overtime exemptions.
Understanding the Two-Part Test: Salary and Duties
When determining if an employee is exempt from overtime requirements under the FLSA—meaning they aren’t eligible for overtime pay for work exceeding 40 hours in a week—employers must evaluate two key factors: the salary threshold and the duties performed.
- Salary threshold: Employees must meet a minimum earnings standard to be considered exempt. As of July 1, the federal minimum salary is set at $844 per week ($43,888 annually). However, starting January 1, 2025, this will increase to $1,128 per week ($58,656 annually).
- Duties assessment: The employee’s actual responsibilities must fall under one of the established exempt categories, like executive, administrative, or professional roles, regardless of their job title.
Employers must satisfy both tests for an employee to be classified as exempt. If either the salary or duties criteria aren’t met, the employee is entitled to overtime pay. There is no partial compliance or partial credit; this is an all-or-nothing test, and strict compliance is required.
It must be noted that while compliance with the FLSA’s requirements may be sufficient, employers who have employees in states that require a higher salary threshold or different duties requirements must pay closer attention. For example, in states such as California and New York, the requirements are even more stringent. California’s minimum annual salary for exempt employees in 2024 is $66,560, and New York’s minimum annual salary varies from $58,458 to $62,400, depending on the region, with additional increases scheduled through 2026. Employers operating in multiple states must manage compliance with varying thresholds, making the classification process even more complex.
The Mayfield Ruling: Reinforcing the Two-Part Test
The Mayfield decision reaffirmed the DOL’s authority to enforce both the salary and duties tests when determining an employee’s exempt status. The plaintiffs in the case challenged the DOL’s power to impose a salary requirement, arguing that exemptions should rely solely on job duties. However, the Fifth Circuit ruled in favor of the DOL, confirming that both salary and duties tests are necessary for exempt classification.
While the court didn’t address the specific amount of the salary threshold, thus leaving room for future challenges, the decision emphasized the importance of maintaining a two-part evaluation. This serves as a crucial reminder for employers to stay proactive in reviewing their employee classifications and updating their practices in line with federal and state requirements.
The Financial Risks of Misclassification
The risks of misclassifying employees as exempt are substantial, both financially and legally. Employers who incorrectly classify workers may face steep penalties, including:
- Back wages: Employees who were incorrectly classified can claim unpaid overtime wages. The FLSA allows recovery of up to three years’ worth of wages, but certain states extend the timeframe for claims up to six years.
- Double damages: The FLSA, along with various state laws, mandates liquidated damages, often equal to the amount of unpaid overtime, thereby doubling the employer’s financial exposure.
- Attorney’s fees and penalties: Employers who violate classification rules may be liable not only for their own legal costs but also for the employee’s legal fees, in addition to facing penalties under state wage statutes.
The financial consequences of misclassification extend beyond just unpaid wages. Lawsuits, attorney’s fees, and potential reputational damage can have a long-lasting impact on a company. Proactively addressing these issues through proper classification practices is essential for protecting your organization.
Best Practices for HR: Navigating Overtime Exemption Compliance
To ensure compliance with overtime exemption laws, HR professionals should adopt a proactive, multistep strategy. Here are some best practices to help HR teams navigate the complexities of exempt classifications.
- Frequent job evaluations: As roles evolve, so do responsibilities. To prevent misclassification, HR teams should routinely reassess job functions and salaries to ensure exempt employees remain compliant with both the duties and salary tests.
- Classification audits: Performing periodic reviews of employee classifications is critical for maintaining compliance. Audits should focus on verifying that exempt employees’ job functions and salaries align with current and future threshold requirements.
- Training and communication: Managers and HR staff should be trained to recognize when changes in job duties or work hours might impact an employee’s exempt status. Open communication with employees, particularly those who perform borderline duties, can help identify potential classification risks early on.
- Utilize digital tools: HR can employ tools like time-tracking software to monitor work hours for employees whose earnings are near the salary threshold, helping identify potential compliance risks early.
Preparing for Future Challenges: Adapting to Legal Changes
While the Mayfield decision confirms that the two-part test for overtime exemptions still applies, it also leaves room for future legal challenges to the specific amount of the salary threshold. Employers must stay informed about changes in federal and state laws that could impact exempt classifications.
To stay ahead of potential changes, HR teams should closely monitor legal developments that could affect exemption standards. By regularly reviewing job roles, conducting internal audits, and training management to recognize evolving duties, HR teams can help protect their organizations from the costly financial consequences of misclassification and ensure ongoing compliance with both federal and state regulations.
Lee Jacobs is a partner in Barclay Damon’s New York office. He devotes a significant part of his practice to counseling a variety of clients on day-to-day employment practices to help them remain compliant with ever-changing labor laws and regulations.