Salary level test

What Is Salary Level Test?

The salary level test is a key component under the Fair Labor Standards Act (FLSA) used to determine whether certain employees are exempt from federal minimum wage and overtime pay requirements. It sets a specific minimum weekly or annual salary that an employee must earn to qualify for certain exemptions, primarily the "white-collar" exemptions. This test falls under the broader category of labor economics and regulatory compliance, ensuring that only genuinely higher-paid professional, administrative, and executive employees are excluded from overtime protections. If an employee's salary falls below this threshold, they generally must receive overtime pay for all hours worked over 40 in a workweek, regardless of their job duties. The salary level test works in conjunction with other criteria, such as the salary basis test and the duties test, to classify an employee as an exempt employee or non-exempt employee.

History and Origin

The concept of a salary level test originated with the enactment of the Fair Labor Standards Act (FLSA) in 1938. This landmark legislation, signed by President Franklin D. Roosevelt, established a federal minimum wage and required overtime pay for hours worked beyond a standard workweek. From its inception, the FLSA included exemptions for "bona fide" executive, administrative, and professional employees, often referred to as "white-collar exemptions." To distinguish these roles, the Department of Labor (DOL) established regulatory tests, including a minimum salary threshold.

Initially, in 1938, an earnings threshold of $30 per week was set for executive or administrative roles, with professionals later included under a $50 per week threshold in 1940. Over the decades, these salary levels were periodically adjusted to reflect changes in wages and economic conditions. For instance, adjustments occurred in 1958, 1963, 1970, and 1975. A significant change in regulatory approach occurred in 2004 under the Bush Administration, which replaced the previous "long" and "short" tests with a single standard, setting the salary threshold at $23,660 annually. This level remained in place for over a decade. The U.S. Government Accountability Office (GAO) noted in a 1999 report that statutory and regulatory changes to these white-collar exemptions since 1954 have primarily involved adjustments to the salary-test levels and modifications to coverage for specific types of workers.¹⁹ More recently, the DOL has continued to update these thresholds. In 2019, the salary level was set at $684 per week ($35,568 annually).¹⁶, ¹⁷, ¹⁸

Key Takeaways

• The salary level test dictates a minimum weekly or annual salary an employee must earn to be considered for certain FLSA exemptions.
• It is one of several criteria, including the salary basis test and the duties test, that must be met for an employee to be classified as exempt.
• Employees earning below the established salary level must generally receive overtime pay for hours exceeding 40 in a workweek.
• The salary thresholds are periodically updated by the U.S. Department of Labor to reflect current economic conditions.
• Recent legal challenges have impacted the implementation of new salary thresholds, reverting to prior established levels.

Interpreting the Salary Level Test

Interpreting the salary level test involves understanding the current thresholds set by the Department of Labor and how they apply to an employee's total compensation. For an employee to qualify for a white-collar exemption (such as the executive exemption, administrative exemption, or professional exemption), their salary must meet or exceed the specified minimum. As of late 2024, due to a court decision vacating a proposed 2024 rule, the applicable standard salary level for most of these exemptions remains $684 per week, which equates to $35,568 annually.¹³, ¹⁴, ¹⁵ For highly compensated employees (HCE), a higher total annual compensation threshold applies, which was set at $107,432 under the 2019 rule, with a requirement that at least $684 per week is paid on a salary or fee basis.¹²

It is crucial to note that merely meeting the salary level test does not automatically confer exempt status. An employee must also satisfy the salary basis test (meaning they receive a predetermined salary not subject to impermissible deductions) and the specific job duties test for their respective exemption category. If an employee's salary falls below the current threshold, they are generally entitled to overtime pay, regardless of their job duties.

Hypothetical Example

Consider Sarah, who works as a marketing coordinator for a small tech startup. Her primary responsibilities include managing social media campaigns, drafting marketing materials, and scheduling meetings. She earns a fixed annual salary of $32,000. Her employer believes she is an exempt administrative employee.

To determine if Sarah is exempt from overtime under the FLSA, her employer must consider the salary level test, along with the salary basis test and the administrative duties test. Given the current standard salary level of $35,568 per year ($684 per week), Sarah's annual salary of $32,000 falls below this threshold. Therefore, even if her job duties might appear to be administrative in nature, she does not meet the salary level test. As a result, Sarah must be classified as a non-exempt employee and is entitled to receive overtime pay at one and a half times her regular rate for any hours worked beyond 40 in a workweek. Her employer would need to accurately track her hours to ensure proper payment.

Practical Applications

The salary level test has direct and significant practical applications for employers across various industries, impacting regulatory compliance, payroll management, and overall labor costs. Employers must regularly review employee classifications to ensure adherence to FLSA requirements. If an employee's salary does not meet the threshold, they must be treated as non-exempt, entitling them to minimum wage and overtime pay.

The U.S. Department of Labor frequently updates these thresholds, necessitating ongoing vigilance from businesses. For instance, in April 2024, the DOL issued a final rule to increase the minimum salary threshold for white-collar exemptions. While parts of this rule faced legal challenges and were vacated, the intent to adjust these thresholds reflects the dynamic nature of wage and hour regulations.⁹, ¹⁰, ¹¹ Such changes require companies to reassess their compensation structures. Employers must decide whether to raise an employee's salary to maintain exempt status or reclassify them as non-exempt and budget for potential overtime expenses. This involves a careful analysis of each employee's salary against the current standard salary level and, for highly compensated employees, against the higher annual compensation threshold.

Limitations and Criticisms

While designed to protect workers and clarify overtime eligibility, the salary level test faces several limitations and criticisms. One significant critique is that a single national salary threshold may not adequately account for variations in the cost of living and prevailing wages across different regions of the United States. A salary that qualifies an employee as exempt in a low-cost-of-living area might be considered low-to-mid income in a major metropolitan area, potentially leading to disproportionate impacts.

Another limitation arises from the interplay between the salary level test and the job duties test. Critics argue that simply increasing the salary threshold, without sufficiently rigorous duties tests, could inadvertently reclassify workers who genuinely perform high-level executive, administrative, or professional functions, but whose salaries fall just below new, higher thresholds. This can lead to increased regulatory compliance burdens and unforeseen labor costs for businesses. Furthermore, frequent changes to the thresholds, or the vacating of new rules by courts, as seen with the 2024 overtime rule, can create uncertainty and compliance challenges for employers. The U.S. District Court for the Eastern District of Texas, for example, vacated the 2024 rule, concluding that the DOL exceeded its authority, reverting thresholds to the 2019 levels.⁷, ⁸

Salary Level Test vs. Salary Basis Test

The salary level test and the salary basis test are two distinct, yet equally critical, components for determining an employee's exempt status under the Fair Labor Standards Act. While both relate to an employee's pay, they address different aspects of it.

The salary level test establishes a minimum monetary threshold an employee must earn to be considered for an exemption. It specifies the weekly or annual amount an employee's salary must meet or exceed. For instance, an employee generally needs to earn at least $684 per week to satisfy this test for most white-collar exemptions.

In contrast, the salary basis test focuses on how that minimum salary is paid. It requires that an exempt employee regularly receives a predetermined amount of compensation each pay period, and this amount cannot be reduced due to variations in the quality or quantity of work performed. It ensures that the employee's pay is fixed and guaranteed, regardless of hours worked or performance fluctuations (subject to specific, limited exceptions for permissible deductions). An employee might meet the salary level test but fail the salary basis test if, for example, their pay is routinely docked for minor absences or poor performance. Both tests must be satisfied for an employee to be truly exempt from overtime and minimum wage protections.

FAQs

What is the current salary level for FLSA exemptions?

As of late 2024, following a court decision vacating a newer rule, the standard salary level for most white-collar exemptions under the FLSA is $684 per week, or approximately $35,568 per year.⁵, ⁶

Does meeting the salary level test automatically make an employee exempt?

No. Meeting the salary level test is a necessary but not sufficient condition for exemption. An employee must also satisfy the salary basis test and the specific job duties test for the executive, administrative, or professional exemption they are being considered for.⁴

What happens if an employee's salary is below the salary level test threshold?

If an employee's salary falls below the established salary level test threshold, they are generally considered a non-exempt employee under the Fair Labor Standards Act (FLSA) and must be paid at least the federal minimum wage for all hours worked and overtime pay (one and a half times their regular rate of pay) for any hours worked over 40 in a workweek.

Are there different salary levels for different types of exemptions?

For most standard executive, administrative, and professional exemptions, the same salary level test applies. However, there is a separate, higher total annual compensation threshold for highly compensated employees (HCE) who perform at least one of the duties of an exempt executive, administrative, or professional employee.³ Specific rules may also apply to certain other categories, such as computer employees or teachers.

How often do salary level test thresholds change?

Historically, the thresholds have been updated periodically by the Department of Labor, though not always on a fixed schedule. Recent regulations have proposed automatic updates every three years, but these proposals have also been subject to legal challenges and changes. Employers must monitor official DOL announcements for the most current requirements.¹, ²