Salary Threshold for Exempt Employees to Increase

By Robert Showers Esq. and Justin R. Coleman, Esq.

On April 23, 2024, the Biden Administration, through the US Dept of Labor (DOL), announced its final rules regarding overtime pay for all United States employees. These rules will significantly impact which employees qualify for exemption from overtime pay as “white collar” and “highly compensated” employees. While these FLSA changes apply to churches and nonprofits, religious entities may have additional options to avoid these categorizations, such as the “ministerial exception.” Such organizations and others should also examine new considerations for employees exempt from overtime pay, such as executive, administrative and professionals who may no longer fall within the elevated salary amounts. See generally for overtime rules: https://www.simmsshowerslaw.com/new-overtime-rules-under-fair-labor-standards-act-take-affect-2020-and-will-impact-churches-nonprofit-and-business/

I. “White Collar” Exempt Employees

Most employees are considered “non-exempt” employees under state and federal wage and hour laws. This means that employers are required to pay them overtime pay for hours worked in excess of 40 hours in a work week. However, certain employees may be considered “exempt” from overtime pay if they meet certain “white collar” employment requirements: 1) their job duties meet the executive, administrative, or professional duties as defined by the Fair Labor Standards Act (FLSA or the Act); 2) they are paid on a fixed salary basis; and 3) their salary meets the minimum threshold amount under the Act.

Beginning on July 1, 2024, in order to continue to qualify for “exempt” employee status, the employee’s annual salary must now be at least $43,888 (or $844/week). This is an $8,320 annual increase from the current threshold of $35,568 ($684/week).
This threshold will then increase to $58,656 annually (or $1,128/week) on January 1, 2025. Based on the current wage data, the new rules will require this threshold to increase again on July 1, 2027, and then every three years thereafter.

II. Highly Compensated Employees

These new rules will also increase the total annual compensation threshold for the “highly compensated” employee exemption under FLSA. Beginning on July 1, 2024, this threshold will
increase from $107,432 annually to $132,964 annually. On January 1, 2025, this amount will increase again to $151,164 annually. It will increase based on the current wage data, beginning on July 1, 2027, and every three years thereafter.

III. Impact on Non-Profit and Religious Employers

These rule changes are going to directly impact all employers, especially non-profit and church employers who often pay lower salaries. If required to increase salaries for its “white collar” employees to maintain their “exempt” status, these employers are going to be looking at significant additional costs, potentially ranging from tens to hundreds of thousands of dollars. This is in conjunction with a continuing downward trend in charitable giving post-COVID. Non-profit and church employers should review their current employee job descriptions and salaries in the coming months to determine which employees are going to be impacted. It is crucial to seek knowledgeable legal counsel to understand the implications and explore the options are available to them regarding these employees. Our firm often does HR Legal Audits in which “exempt” determinations employee by employee are made with recommendations on strategic decisions to make.

A. Ministerial Exemption

Churches and religious non-profit employers may have an added option to resolve their concerns about losing exempt employees that secular employers do not. Based upon the Supreme Court’s recent rulings in Hosana-Tabor and Our Lady of Guadalupe, which expanded and clarified the definition of “ministers”, certain employees may qualify for “ministerial exemption” and thus, be considered exempt employees regardless of whether their salary meets or exceeds the FLSA threshold.

In both cases, the Court evaluated the employee’s duties and responsibilities and how close they were to their religious employer’s central mission and purposes. The more closely the employee’s functions and job duties support the employer’s religious purpose, the greater the likelihood that the employee would be considered a “minister.” In Hosana-Tabor, the employee was a Lutheran school teacher who was also an ordained minister. In Our Lady of Guadalupe, the employees were non-ordained teachers working at Catholic schools. In both cases, the Court found that the title of a “minister” was not essential as many religions use similar titles that carry similar authority. Instead, the Court focused on the employees’ education, training, and experience in support of their job duties and responsibilities. Further, the Court highlighted that the work the employees did – teaching students about their faith and living a life consistent with that faith is at the central core of their religious employer’s purpose. The Court in Our Lady of Guadalupe further confirmed that the “ministerial exemption” would likely apply to any employee who serves in a religious leadership position, facilitates religious services or important ceremonies, or educates or delivers the faith message of the employer. Thus, certain administrative positions, worship leaders, missionaries, and teachers could be considered “ministers” under this exemption if their duties and responsibilities adequately reflect the core religious purposes of their employer.

Religious employers should work with knowledgeable legal counsel to review their employee agreement and job descriptions to determine what employees, if any, may qualify under the “ministerial exemption.”

B. Job Duties Test

If the ministerial exemption would not apply to an employee, an employer’s next available option would be to determine whether the exempt employee actually meets at least one of the three types of “white collar” exempt employees based on their job description and the work they actually do for the organization.
To qualify, the employee’s primary duties must fit into one of three categories:

• Executive – employee manages the organization or significant portion of it, regularly directs two or more employees, and has hiring and firing authority or significant input into employment decisions.
• Administrative – employee performs office or other non-manual work directly related to operations and exercises “discretion and independent” judgment on significant matters.
• Professional – employee’s work requires advanced knowledge in a field … customarily acquired by a prolonged course of specialized intellectual education or requires creativity, invention, imagination, originality, or talent in a “recognized field of artistic or created endeavor.”

The duties under each of these categories are key in determining whether the employee would qualify as an “exempt” employee. If an employee does meet the duties qualifications, then the employer will have to determine if it can afford to increase the employee’s compensation and/or certain benefits to meet the new threshold limits.

This analysis of the employee’s duties should be done with knowledgeable legal counsel in order to avoid incorrectly categorizing the employee, which could result in significant penalties and interest as well as the employer having to pay for unpaid overtime.

C. Other Exemptions

In addition to the ministerial exemption, there are a number of other categories of exempt employees that are not subject to the above salary threshold for “white collar” employees.

However, these types of exemptions are specific to certain types of employees – e.g., teachers, certain computer-related fields, seasonal workers.

D. Shifting Work Responsibilities

If none of the above are available to a religious employer to continue qualifying an employee as “exempt,” the employer may have to consider options to shift workload responsibilities for the impacted employee(s). These options may include: 1) rearranging job duties to share responsibilities between two or more employees; 2) hiring independent contractors to cover certain tasks or responsibilities; or 3) changing the employee to an independent contractor. Another option is to raise salaries, if close, to meet the exemption, assuming that the job duties qualify for the exemption, especially if the minister and teach exemptions do not work. Finally, you may want to reconsider whether the worker is better classified as an independent contractor rather than employee thereby avoiding the wage hour exemptions altogether. However, DOL favors employers and correctly distinguishing between employee and independent contractor is complex but one guiding star to employee classification may be whether day to day work activities are overseen by employer. See https://www.simmsshowerslaw.com/employee-or-independent-contractor-making-the-best-decision-from-irs-guidelines/
All of these options require evaluating the organization’s current operational structure, employee duties, and updating current human resources policies. All such decisions and reviews should be done by the employer with consultation and advise by knowledgeable legal counsel.

IV. Conclusions

These upcoming changes will create challenges for all churches and non-profit organizations. However, it also provides these employers with opportunities to review and update its current employment policies and practices for compliance purposes and to take proactive steps in ensuring it is compliant with current employment regulations and case law. Churches and religious employers will want to take steps to update its employment policies ahead of the July 1, 2024, enactment of these new FLSA rules.

Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum. Please contact Justin Coleman at jrc@simmsshowerslaw.com for specific legal advice on this issue for your needs.