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The Department of Labor's 2024 Final Rule and its Impact on Exempt Staff

By John Mavros Attorney at Law, Partner, Fisher & Phillips, LLP | November 2024

This article was co-authored by Jae-Min Hwang Cho , Law Clerk, Fisher Phillips

On April 23, 2024, the U.S. Department of Labor published its final rule which significantly increases the minimum salary threshold for executive, administrative, or professional employees to qualify as exempt under the Fair Labor Standards Act. The 2024 final rule is expected to affect millions of U.S. workers by potentially changing their exempt status and increasing overtime eligibility.

The U.S. Department of Labor is rolling out the salary threshold increase in two stages. The first stage occurred on July 1, 2024, while the second will occur on January 1, 2025. Employers are required to either adjust salaries to maintain exemptions or face new overtime and record-keeping obligations. Legal challenges are anticipated, and employers should prepare for compliance.

Background of Federal Exemptions for Executive, Administrative and Professional Employees

Enforced by the U.S. Department of Labor, the Fair Labor Standards Act is a federal law that applies to most private and public sector employees. The Fair Labor Standards Act establishes minimum wage, overtime pay, recordkeeping, and youth employment standards. It also mandates that most employees receive the federal minimum wage and overtime pay for hours worked over 40 per week.

However, the Fair Labor Standards Act exempts executive, administrative, and professional employees from minimum wage and overtime protections if the employee satisfies (1) the Salary Basis Test and (2) the Duties Test.

Salary Basis Test. An employee must earn the minimum specified salary that is a predetermined and fixed.
Duties Test. An employee’s job duties must primarily involve executive, administrative, or professional tasks as defined by U.S. Department of Labor regulations. This test assesses the nature of the work performed to determine exemption eligibility.

Increased Threshold for Executive, Administrative, and Professional Employees

While the 2024 final rule does not alter the Duties Tests, it significantly increases the threshold for the Salary Basis Test. On July 1, 2024, the standard salary level increased from $684 to $844 per week. It will further be increased to $1,128 per week on January 1, 2025. Additionally, on July 1, 2024, the total annual compensation threshold for highly compensated employees increased from $107,432 to $132,964 and will increase again to $151,164 on January 1, 2025. Based on these increases, employers must take steps to ensure that its managerial employees are classified properly.

Salary Level Requirements Can be Higher in Different States

Many employers in states like California must satisfy stricter exemption criteria. For example, the Salary Basis test in California is currently $1,280 per week, or $66,560 annually. Further, employers cannot apply non-salary bonuses to satisfy this threshold. Another California distinction is that the state does not recognize the federal highly compensated employee exemption.

Potential Impact on Employers

The 2024 final rule will have significant impact on the hotel industry. Employers must plan and budget for salary increases to maintain exemptions. Alternatively, if salaries are not adjusted, employers must reclassify employees earning below the new threshold as non-exempt, further causing new obligations related to overtime, minimum wage, time keeping, and record-keeping.

Employers should also keep in mind that future updates to earnings thresholds are scheduled for July 1, 2027, and every three years thereafter. Employers are advised to consult legal counsel to implement necessary changes.

Re-Visiting the Federal Duties Test

The Duties Test for executive, administrative, and professional employees evaluates whether their responsibilities qualify them as exempt employees under the Fair Labor Standards Act. It focuses on the nature of the work performed rather than job titles or time spent. Each category has specific criteria that must be met for an employee to be considered exempt from overtime pay.

For executive positions, the employee’s primary duty must be managing the enterprise or a recognized department. They must also regularly direct the work of at least two other full-time employees and have authority to hire or fire, or their recommendations must carry significant weight. An example would be a hotel manager that directs staff and has input on hiring or firing decisions.

As for administrative positions, the employee’s primary duty must involve office or non-manual work directly related to management or general business operations. They must also exercise discretion and independent judgment on significant matters. An example would be a hotel employee handling tasks like budgeting, human resources, marketing, or compliance while exercising discretion and judgment.

Finally, in professional positions, the employee’s primary duty must require advanced knowledge in a field of science or learning, typically acquired through prolonged education. This includes work that is predominantly intellectual and requires consistent exercise of discretion and judgment. For example, a hotel accountant with specialized knowledge or hotel chef with culinary expertise could be exempt if their primary duties involve applying this advanced knowledge.

California Duties Test is More Stringent

The Duties Test under California law requires that an employee primarily engage in exempt duties more than half of their work time to qualify for exemption. This is stricter than the federal standard. The exempt employee’s duties must also fall under executive, administrative, or professional categories, as defined under the federal standards. However, California focuses primarily on the actual time spent performing these duties rather than the nature of the work performed.

Best Practice Advice for Hotel Employers

The Duties Test is important because it helps determine whether an employee is exempt from overtime pay under the Fair Labor Standards Act. By assessing the nature of an employee’s job responsibilities, the test ensures that only those performing specific executive, administrative, or professional duties qualify for exemption. This prevents employers from being subjected to misclassification lawsuits that are time consuming and expensive.

To prevent misclassification, employers should conduct regular audits by reviewing and updating job descriptions for managers, administrative staff, and professionals to reflect actual duties performed. This would help ensure they meet exemption tests. Furthermore, employers should take time to observe daily tasks to verify that employees’ actual work aligns with their classified roles.

Employers can further train supervisors and human resources personnel on proper Fair Labor Standards Act requirements, stressing the importance of accurate classification. Other best practice recommendations include staying informed about updates to labor laws, keeping detailed records of job duties as they change over time, communicating with employees clearly, and developing checklists to evaluate whether positions meet exemption criteria.

Occasionally conducting employee surveys could also be a great tool to gather feedback to ensure job duties are accurately represented. By asking employees to outline the amount of time they spend on managerial tasks versus non-managerial tasks, hotel employers can get a real view of how their management level employees are spending their time. This opens the door to conversations that will ultimately open the lines of communication that drive better performance. For more complex cases, advice from employment law specialists familiar with hospitality industry standards is recommended.

There are several common ways a hotel employee might inadvertently mix exempt and non-exempt work. This can occur, for example, when an exempt hotel manager handles front desk duties or housekeeping, which are typically non-exempt tasks. This is a common occurrence when small hotels are understaffed.

Other examples include managers covering shifts for absent staff in roles that don’t meet exemption criteria or spending significant time on clerical or manual work instead of managerial or supervisory duties. A lack of clear role definition caused by ambiguities in job descriptions could also be a major contributing factor to a mix of duties. Regularly reviewing job duties and providing clear guidelines can help prevent any confusion.

Some best practice recommendations for employees include understanding their job description and responsibilities and keeping accurate records of hours worked, especially if duties are mixed. Employees should also be sure to communicate with management about any discrepancies between assigned duties and actual work, stay informed of rights under labor laws and company policies, and ask for guidance if there is any confusion on tasks classifications or responsibilities.

Conclusion

The 2024 final rule on overtime pay exemptions marks a significant shift in employment standards, impacting millions of workers and employers nationwide. By increasing the salary thresholds for exempt status, the rule aims to expand overtime eligibility and ensure fair compensation. The final rule will ultimately force employers to adjust managerial salaries in order to maintain manager exempt status. Alternatively, employers can choose to pay employees on an hourly basis and pay for overtime.

In sum, employers must adjust salaries and compliance practices to meet these new requirements. As legal challenges loom, proactive consultation with legal counsel is essential to smoothly transition and mitigate potential risks.

This article provides an overview of the law and is not intended to be, nor should it be construed as legal advice for any particular fact situation.

Ms. Cho This article was co-authored by Jae-Min Hwang Cho. Ms. Hwang is currently a law clerk in Fisher Phillips' Irvine office while awaiting bar exam results. She is looking forward to representing employers in a variety of employment law matters including discrimination, harassment, retaliation and wage and hour litigation. SheJae-Min recently earned her J.D. in May 2024 from the University of California, Irvine, School of Law. During her time at UC Irvine Law, Ms. Hwang was a Kim/Lee Scholar and served as the Research Editor on the UC Irvine Law Review. As an undergraduate, she majored in Art History at University of California, Irvine, with a minor in Studio Arts. In her graduate studies, she studied East Asian Art History and Humanities at the University of Chicago.

Mr. Mavros

John Mavros, Attorney at Law, is a partner in Fisher Phillips' Irvine office. His practice involves representing employers in all aspects of labor and employment law, including wrongful termination, discrimination, harassment, and retaliation. His practice also involves representing employers against unpaid compensation claims, including unpaid minimum wages, overtime, meal/rest period premiums, vacation pay, and/or business expenses, on both an individual and class action basis. Mr. Mavros defends all types of businesses involved in civil litigation or arbitration. This includes defending claims brought before the Division of Labor Standards Enforcement (DLSE aka the Labor Board) and the California Unemployment Insurance Appeals Board. His practice also includes preventative counseling. He regularly assists employers with employee handbook preparation, wage/hour audits, new hire policies, employee compensation plans, severance agreements, reductions in force, and day-to-day workforce issues. He also conducts sexual harassment prevention training as mandated for all California employers by AB 1825. Extended Biography & Contact Information

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13. PRIVACY POLICY

The following is the Privacy Policy for HotelExecutive

We can be reached via telephone, email, or online at our contact page. When you visit our site we do not log any information regarding your domain or email address. Information Sharing: We do not share user information with any third parties other than via press release distribution as described below.

Hotel Newswire is a newswire service that distributes press releases on behalf of our users. If you decide to submit a press release for distribution through our system we will transmit your entire press release including any personal information therein contained to our media contacts and online distribution points including search engines. This is the only redistribution of your information that we engage in. Your submission of press releases through our system indicates consent with this policy. The information we collect during your registration process is used to notify users about updates to our service and inform users of any special events hosted by Hotel Newswire. This information is not shared with other organizations for commercial or non-commercial purposes.

Cookies: Our system requires the use of cookies to enable the user to log back into our website to access information from the newswire, without having to log in each time using the required username and password.

If you do not want to receive email from us in the future, please let us know by following instructions included in our communication with you. Users who supply us with telephone numbers online may receive telephone contact from us regarding their account, or informing them of new products and services available on the HotelExecutive website. If you do not wish to receive such telephone calls, please edit your account and remove your phone number from your account profile. This can be done from your user account menu.

Ad Servers: We do not partner with or have any relationship with any ad server companies. From time to time, we may use customer information for new uses not previously disclosed in our privacy notice. If our information practices change at any time, we will post the policy changes to our website to notify you of these changes and provide you with the ability to opt out of these new uses. If you are concerned about how your information is used, you should check back at our website periodically.

Upon request we provide site visitors with access to all information (including proprietary information) that we maintain about them. Users can access this information by logging in to their account.

Security: We always use industry-standard encryption technologies while transferring and receiving user data exchanged with our site. We have appropriate security measures in place in our physical facilities to protect against the loss, misuse, or alteration of information that we have collected from you on our site. We do not store credit card information in our systems.

If you feel that this site is not following its stated information policy, you may contact us.