Salary-Basis Rules

Defines the salary-payment mechanics that determine whether an employee can be treated as exempt. Improper handling of salary deductions can destroy exempt status for entire employee groups.

Salary-Basis Test

The salary-basis test is the FLSA requirement that an exempt employee receive a predetermined, fixed salary that is not subject to reduction based on the quality or quantity of work performed in any given week.

Also known as: salary basis requirement

Improper deductions from a salaried employee's pay can destroy exempt status for the entire class of similarly situated employees.

Salary-Level Test

The salary-level test is the FLSA requirement that an exempt employee earn at least a specified minimum weekly salary set by DOL regulation. The current federal floor is $684 per week ($35,568 annualized) under the 2019 rule, subject to periodic DOL updates.

Also known as: salary threshold test, minimum salary test

The 2024 DOL rule that raised the floor to $844 per week was vacated by federal courts in November 2024, reverting the threshold to $684 per week.

Highly Compensated Employee (HCE) Threshold

The highly compensated employee (HCE) threshold is the annual total-compensation level above which an employee qualifies for a streamlined FLSA overtime exemption requiring only a minimal showing that the employee customarily performs at least one exempt duty.

Also known as: HCE threshold, highly compensated exemption

The federal HCE threshold is $107,432 annually as of 2025, also subject to the vacated 2024 rule that would have raised it to $132,964.

Improper Deduction

An improper deduction is a reduction to a salaried exempt employee's pay that violates the FLSA salary-basis requirement. An example is docking pay for a partial-day absence not covered by a bona fide leave plan.

Also known as: prohibited salary deduction

Seven categories of permissible deductions exist under 29 CFR § 541.602(b), including full-week absences and safety-rule violations.

Exemption Tests

Names and scopes the three-part classification test structure that governs exempt status. Each exemption category has distinct duties criteria that courts and the DOL evaluate independently.

Duties Test

The duties test is the FLSA requirement that an exempt employee's primary job responsibilities fall within a recognized exemption category, such as executive, administrative, professional, outside sales or computer employee, as defined by DOL regulation.

Also known as: primary duty test, job duties test

"Primary duty" means the principal, main, major or most important duty; courts use a totality-of-circumstances analysis.

Executive Exemption

The executive exemption is an FLSA overtime exemption available to employees whose primary duty is managing the enterprise or a department, who customarily direct two or more employees and who have authority to hire, fire or make recommendations that carry significant weight.

Also known as: executive employee exemption

All three criteria (management primary duty, supervision of two or more and hiring/firing authority) must be met simultaneously.

Administrative Exemption

The administrative exemption is an FLSA overtime exemption available to employees whose primary duty is office or non-manual work directly related to management or general business operations, and who exercise discretion and independent judgment on significant matters.

Also known as: administrative employee exemption

The "discretion and independent judgment" prong is the most frequently litigated element in administrative exemption misclassification cases.

Professional Exemption

The professional exemption is an FLSA overtime exemption covering learned professionals, whose work requires advanced knowledge acquired through prolonged specialized education, and creative professionals, whose work requires invention, imagination or talent.

Also known as: learned professional exemption, creative professional exemption

Learned professional status typically requires a four-year degree or its equivalent in the specific field; teachers and attorneys qualify under separate sub-rules.

DOL Rulemaking

Defines the regulatory artifacts and update mechanisms that change salary thresholds over time. Understanding this rulemaking cycle is critical for payroll leaders who must anticipate and respond to threshold changes.

DOL Final Rule

A DOL Final Rule is a binding federal regulation issued by the U.S. Department of Labor's Wage and Hour Division that sets or updates FLSA overtime-exemption salary thresholds, following a notice-and-comment rulemaking process under the Administrative Procedure Act.

Also known as: Department of Labor final rule, DOL overtime rule

The 2019 Final Rule set the current $684/week floor; the 2024 Final Rule (vacated November 2024) would have raised it to $844/week in July 2024 and $1,128/week in January 2025.

Automatic Update Mechanism

An automatic update mechanism is a provision in a DOL Final Rule that schedules periodic, formula-driven increases to the FLSA salary-level threshold without requiring a new rulemaking cycle, typically indexed to wage-survey percentiles or inflation.

Also known as: automatic escalator, indexing mechanism

The vacated 2024 rule included triennial automatic updates; the 2019 rule did not, making the presence or absence of this mechanism a key compliance-planning variable.

Wage and Hour Division (WHD)

The Wage and Hour Division (WHD) is the DOL agency responsible for administering and enforcing the FLSA, including investigating employer compliance with overtime-exemption salary thresholds and pursuing back-wage recovery on behalf of misclassified employees.

Also known as: WHD, DOL Wage and Hour Division

WHD recovered $274 million in back wages for workers in FY 2023.

Reclassification

Reclassification is the process of changing an employee's FLSA exemption status, typically from exempt to nonexempt, in response to a salary-threshold increase, a duties-test failure or a DOL enforcement finding, requiring payroll, timekeeping and benefits adjustments.

Also known as: exemption reclassification, status change

Proactive reclassification before a DOL audit typically limits back-wage exposure to two years; post-investigation findings can extend liability to three years for willful violations.

FLSA Overtime Exemption Glossary. 22 Key Terms HR and Payroll Leaders Must Know

Foundational Concepts

Fair Pay Starts at the Clock

Salary-Basis Rules

Exemption Tests

DOL Rulemaking

State-Law Overlay

Audit and Compliance

How These Terms Relate

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