Are Your Employees Exempt? Understanding the New Minimum Salary Rule for Local Businesses

Earlier this year, the U.S. Department of Labor issued a final rule regarding minimum salary standards for exempt status employees. They raised the minimum salary to $844 per week (equivalent to $43,888 per year) effective July 1, 2024. Starting on January 1, 2025, the minimum salary is $1,128 per week or $58,656 per year.

All highly compensated employees who earn more than $132,964in 2024 or will earn more than $151,164 in 2025 are automatically classified as exempt.

That also means that all employees who make less than the above highly compensated thresholds can be classified as nonexempt employees. This is important because, despite some positions being eligible for exempt statute, it is not required to be classified that way. It depends on many factors, including workload, budget, and future needs.

In this article, I’ll break down the difference between exempt and nonexempt employees, and what this final rule means for you and your business.

Who, Exactly, Are Exempt Employees?

There are basically two types of employees: nonexempt and exempt employees. Independent contractors are not employees and are not covered by these rules. With that, independent contractors are rather rare in the typical business and should not be used in replacement of employees.

Nonexempt

At minimum, nonexempt employees must be paid at least their state’s minimum wage and must be paid overtime when they work more than 40 hours in a company’s defined workweek.

Some companies want to be generous and let nonexempt employees “bank” hours that are over 40 hours to count as vacation time later. Itis still required by the employer to pay at least time-and-a-half their regular wage for the hours worked over 40 hours.

Exempt

Before companies pay their employees on a purely salary basis, companies must verify that the job duties qualify as being exempt. To do this, it is imperative to have an accurate and current job description. Using the job description for each position, companies must compare their jobs to that of the U.S. Department of Labor’s Fact Sheets. If the job title and duties meet the Department of Labor’s requirements, then their employees in those specific positions can be classified as exempt. If they do not or somewhat meet the requirements, the best action is to keep the employees as nonexempt. Should overtime be a problem, this is a matter of management and the design of the positions.

Fact Sheets for specifying exempt status:

• Fact Sheet #17B: Executive
• Fact Sheet #17C: Administrative
• Fact Sheet #17D: Professional
• Fact Sheet #17E: Computer
• Fact Sheet #17F: Outside Sales

Exempt employees, however, are paid on a salary basis (paid the same amount each week) and they are exempt from overtime pay. That is, exempt employees are paid a higher wage and may be required to work more than40 hours yet receive the same pay. Conversely, exempt employees who might only work a few hours in a day yet are entitled to the entire day’s pay.

You might be asking: employees who work one hour—or less--are entitled to an entire day’s pay? Yes. But companies may require the employee to use some type of vacation, sick, or personal time off (PTO) to supplement the missed work that day.

Should exempt employees regularly work a few hours a day and this is deemed as a problem by companies (maybe an issue of productivity or effort), then this becomes a different matter. It might be an issue of job design, not enough work, or performance issues. With that, avoid classifying a single employee as nonexempt when other employees with the same title and duties are classified as exempt. The reason is that those other employees are then misclassified and may be entitled to overtime rules.

Nonexempt and Exempt: What does it all mean?

For business owners, proper employee classification(exempt/nonexempt) is crucial. It requires careful job design, adherence to overtime rules, and accurate employment practices, including wage structures for your employees.

• ‍Avoid Misclassification Issues: The rules for classifying employees as exempt require forethought to ensure all the rules are followed. Taking the time to properly classify employees (exempt vs nonexempt) based on duties and pay ensures you comply with overtime laws. ‍
• Employee Clarity: Document and have employees sign their job descriptions. Detail all the pay and benefits for each employee, including their nonexempt/exempt status, to make it clear for the employee what they will receive each paycheck.‍
• State Law Nuances: While a federal minimum salary applies for exempt status, some states (like Minnesota and Wisconsin) might have additional rules. Understanding these nuances ensures total compliance.

Classifying employees correctly is essential for business owners. It helps avoid legal issues, keeps everyone on the same page about pay and benefits, and ensures compliance with state and federal laws.

The Value of EFund

With the many nuances in human resources and organizational development, the Entrepreneur Fund can provide you with value in working directly on these issues. We also have an extensive network of experts who can provide ongoing assistance related to this and other HR issues.

We provide guidance on many things related to human resources and organizational development and management:

• We can help with job analysis to create an accurate job description for each position. Further, we can help define the KPIs that you can measure for each position.
• We can help navigate the nonexempt and exempt process for your business to ensure that state and federal laws are being followed.
• When employees are not as productive as you think they should be, we help with determining the issues at hand and offering solutions.
• We help with budgeting, financial analysis, forecasting, and other key financial details so you can be efficient and effective with your company’s resources.

EFund is your partner in creating a thriving organization. Reach out to your primary EFund advisor or get started today for assistance in navigating these crucial aspects of your business.

About the Author

Josh Denton, SHRM Senior Certified Professional, is a business advisor at the Entrepreneur Fund, primarily working with businesses in the Duluth, Minnesota and Superior, Wisconsin areas. Josh has extensive experience in human resources, training and development, and management.  His experience ranges from owning businesses to leading HR functions with nonprofit and private companies in multiple states.

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