Fair Labor Standard Act (FLSA) Issues Final Rule to Increase Salary Thresholds for Highly Compensated Employees (HCE)

Under the new rule, total annual compensation requirement for HCEs will increase from $107,432 per year to $132,964 per year on July 1, 2024 and will rise to $151,164 per year on January 1, 2025.  Earning thresholds will be updated every three years starting on July 1, 2027.

This increase is expected to affect nearly 300,000 currently highly compensated dependent on the relaxed job duties test.  

Criteria for Classification as an HCE

An employee must meet several criteria before being classified as an HCE.

First, the employee must be paid a total annual compensation of at least $132,964 as of July 1, which includes at least $844 per week on a salary basis. Effective Jan. 1, 2025, the total compensation threshold will increase to $151,164, which includes at least $1,128 per week paid on a salary basis.

The weekly salary amount of $844, or $1,128 as of Jan. 1, 2025, must be paid in its entirety. Employers may not use nondiscretionary bonuses and incentive payments—including commissions—to satisfy any portion of the weekly standard salary level for HCEs.

The required total annual compensation may consist of commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during a 52-week period. However, the total compensation does not include credit for board or lodging, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits.

There are special rules for prorating the annual compensation if employees work only part of the year. These allow payment of a single lump-sum, make-up amount to satisfy the required annual amount at the end of the year as well as similar make-up payments to employees whose employment terminates before the year ends.

Second, the employee’s primary duty must include performing office work and/or nonmanual work. In other words, the work must be of the “white-collar” variety as opposed to “blue-collar” manual labor.

Finally, the employee must “customarily and regularly” perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee. For example, they must regularly direct the work of two or more employees, have the authority to hire or fire, perform office work directly related to the management operations of the employer, perform work requiring the exercise of discretion and independent judgment regarding matters of significance, perform work requiring advanced knowledge that is predominantly intellectual in character, or perform work requiring originality or talent in an artistic or creative field. The new rule made no changes to the duties tests for HCEs.

The exempt duty doesn’t need to be the HCE’s primary duty, but it must be done regularly, not just occasionally. The exempt duty must be “normally and recurrently performed every workweek, but does not include isolated or one-time tasks,” a DOL fact sheet specifies.

Source(s): Society of Human Resource Management, received May 24, 2024; DOL, accessed on May 28, 2024.