On April 23, 2024, the U.S. Department of Labor (DOL) announced a final rule increasing the minimum salary threshold for executive, administrative, professional, and highly compensated employees exempt from minimum wage and overtime requirements under the Fair Labor Standards Act (FLSA). This final rule is set to become effective on July 1, 2024, although read on for more about that effective date.

To understand the changes in the new rule and how it might affect Hawaii employers, it helps to review the current rules. FLSA is the federal law that sets minimum wage, overtime, recordkeeping and youth employment standards. FLSA requires that most employees are paid minimum wage and overtime for any hours worked exceeding 40 hours in a workweek. These employees are often referred to as “non-exempt” employees because they are not exempt from FLSA’s minimum wage and overtime requirements. Under FLSA, however, there are some exemptions for certain employees from being paid minimum wage and overtime if they meet specific requirements.  These employees are often referred to as “exempt” employees because they are exempt from minimum wage and overtime requirements. While there are numerous exemptions under FLSA, the most common are the executive, administrative and professional exemptions, which are often referred to as “EAP” or “white collar” exemptions. 

While Hawaii’s wage and hour law also has exemptions for executive, administrative and professional employees, most such employees in Hawaii are also covered by FLSA’s EAP and highly compensated exemptions.  Recall that there are two ways that employees are covered by FLSA: (1) if they work for certain businesses and organizations (“enterprise coverage”) ; or (2) if the employee’s work regularly involves them in interstate commerce (“individual coverage”). Under FLSA’s enterprise coverage, FLSA applies when the employee works for a business organization with two more employees and: (1) has an annual dollar volume of sales or business of at least $500,000; or (2) is a hospital, business providing medical or nursing care for residents, schools and preschools, and government agencies. Under FLSA’s individual coverage, FLSA applies when the employee is individually engaged in interstate commerce or in the production of goods for interstate commerce, or in any closely related process or occupation directly essential to such production. The DOL construes “interstate commerce” activities extremely liberally. Some specific examples given by the DOL of an individual engaged in interstate commerce include: (1) a secretary typing letters in an office for a company that produces goods that will be sent out of state or makes telephone calls to out-of-state residents; (2) a waitperson or cashier in a restaurant or an employee in a professional office who handles a credit card transaction; and (3) an employee ordering or receiving goods from an out-of-state supplier. Given the DOL’s broad application of FLSA coverage, most EAP and highly compensated employees in Hawaii are covered by FLSA.

Current Rules: Under FLSA, to qualify for the EAP exemption, the employee must:

(1) be compensated on a salary basis that equates to $684 per week ($35,568 per year); and
(2) have primary duties meeting the duties requirement for the applicable EAP exemption. 

To qualify for the highly compensated exemption, the employee must:

(1) be compensated on a salary basis that includes at least $684 weekly salary and earn at least $107,432 per year;
(2) have primary duties that include office or non-manual work; and
(3) customarily and regularly perform at least one of the exempt duties of an EAP employee.

Future Rules: The new DOL rules raise the minimum salary that an employee must receive to be covered under FLSA’s EAP or highly compensated exemptions. The salary increases under the new rule will occur in three steps:

(1) Beginning July 1, 2024, the salary threshold for the EAP exemptions will increase from $684 per week ($35,568 per year) to $844 per week ($43,888 per year).  The minimum annual salary for highly compensated employees will increase from $107,432 per year to $132,964 per year.
(2) Beginning January 1, 2025, the salary threshold for the EAP exemptions will increase to $1,128 per week ($58,656 per year).  The minimum annual salary for highly compensated employees will increase to $151,164 per year.
(3) Beginning July 1, 2027, the salary threshold increase for EAP exemptions and highly compensated employees will be determined using data available at that time.  Also from this date, the salary thresholds will update every three years.

The DOL has published its own detailed FAQs and Small Entity Compliance Guide to assist employers with the new rule.  The rule is set to take effect on July 1, 2024, however, it is anticipated that it will be subject to legal challenges before that date.  In that event, the July 1 effective date could be delayed or even blocked depending on the outcome of any litigation.

HB2463 HD2 SD2 Relating to Hawaii’s Wage and Hour Law

Separate from the final rules issued by the DOL regarding EAP and highly compensated employees, at the state level, Hawaii is proposing changes to its wage and hour laws by increasing the minimum salary amount for one category of exempt employees in HB2463 HD2 SD2.  This bill passed Final Reading and was sent to Governor Josh Green to sign, veto, or take no action.  Since this bill was part of the Governor’s Package this session, he is likely to sign it, and the bill could become law as soon as Governor Green approves it (or at the very latest, on July 10, 2024).

Current Rules: As mentioned above, like FLSA, Hawaii’s wage and hour law provides some exemptions for certain employees from being paid minimum wage and overtime if they meet specific requirements listed in Hawaii Revised Statute (HRS) §387-1 (and further defined in Hawaii Administrative Rules (HAR) §12-20-1 to  §12-20-7).  Unlike FLSA, Hawaii has a “catchall” exemption that is not based on job duties.  Instead, as long as an employee is paid at least $2,000 per month, that employee is exempt from Hawaii’s laws on minimum wage and overtime.

Proposed Rule: The catchall exemption will increase to $4,000 per month. This means that any Hawaii employee not exempt under HRS §387-1 will only be exempt from Hawaii’s minimum wage and overtime requirements if they are paid a guaranteed salary of at least $4,000 per month. 

While the anticipated increase to Hawaii’s catchall exemption is significant, remember that it will affect only those employees who are not covered under FLSA and do not meet any other exemption listed in HRS §387-1.  This is because FLSA provides minimum standards and does not preempt a state from establishing higher standards to classify an employee as exempt and not entitled to overtime compensation.  Therefore, when both FLSA and Hawaii wage and hour laws are applicable, the law with the higher standard applies.  To illustrate this point, an employee could be covered under FLSA’s agricultural exemption but does not qualify under Hawaii’s agricultural exemption because there are different requirements.  This results in the employee being exempt from overtime under FLSA, but entitled to overtime under Hawaii’s wage and hour laws unless Hawaii’s catchall provision applies because it is a higher standard to establish exempt status.  This means, if the employee is currently making under $48,000 annually, under the proposed Hawaii change, the employee will be considered non-exempt and entitled to overtime in Hawaii.

Best Practices to Undertake Until the Changes Take Effect:

With the uncertainty of the effective date of the rules, employers may want to delay increasing salaries or reclassifying employees until there is more certainty.  Nevertheless, this is still a good time to review all your exempt positions to anticipate the changes to the rules.  Specifically, for the DOL’s rule, it is a good idea to identify all EAP and highly compensated employees who are currently below the proposed salary thresholds and consider whether to increase these employees’ wages to meet the new minimum salary thresholds, or maintain the current salary levels and reclassify these employees as non-exempt and eligible for overtime payments.

In anticipation of the proposed change to Hawaii’s wage and hour law, it is important to identify all employees who are currently exempt under Hawaii’s $24,000 per year catchall exemption. From there, employers should confirm that these employees do not fall under FLSA or an exemption under Hawaii’s wage and hour law and decide whether to increase these employees’ salary to $48,000 per year or reclassify these employees as non-exempt and eligible for overtime payments.

Now is also the ideal time to consider when and how to communicate any salary increase or change in exempt status to impacted employees.  For any employees you decide to reclassify as non-exempt, you should prepare to train them on keeping track of their hours (including orienting them to any rules you have about meal and rest breaks) and on any company benefits and policies that may differ for exempt and non-exempt employees.  Don’t forget any corresponding training you will need to provide for managers and supervisors who have never previously managed non-exempt employees and will need to understand and enforce all rules and policies relating to non-exempt employees.

We understand that the rules on FLSA and Hawaii wage and hour law exemptions and the overlaps between the two can be complicated.  We will continue to monitor these rules and associated timelines and provide appropriate updates.  In the meantime, members can contact your Human Resources Consultant or our HR Hotline if you have questions regarding these anticipated changes.