Labor Department clarifies overtime exemption rules

The U.S. Department of Labor has issued new opinion letters addressing several recurring questions under the Fair Labor Standards Act, offering employers additional guidance on employee classification and overtime exemptions.

While the letters do not create new law, they provide clarification in areas that frequently generate wage-and-hour disputes.

One opinion letter confirms that the FLSA does not require employers to classify employees as exempt even if they meet the duties and salary requirements for an exemption, such as the learned professional exemption. Employers may instead choose to classify those employees as non-exempt and pay overtime, provided minimum wage and overtime obligations are satisfied. The guidance reinforces that exemption status under the FLSA is permissive rather than mandatory.

Another opinion letter addresses the application of the section 7(i) overtime exemption for certain commissioned employees of retail or service establishments. The department clarified that the federal minimum wage governs the minimum pay threshold under the FLSA for purposes of the exemption’s “rate of pay” requirement, even in states with higher minimum wages. However, employers must still comply with any more protective state wage laws.

The DOL explained that tips are not treated as commissions for purposes of the section 7(i) exemption test and generally are not considered compensation paid by the employer for purposes of the exemption.

However, to the extent an employer takes a federal, state, or local tip credit to satisfy a wage obligation, the portion of tips used to satisfy that credit is considered compensation and must be included when determining if more than half of an employee’s earnings are commissions.

For HR teams, the letters offer several practical reminders:

• Employers may elect to classify otherwise exempt employees as non-exempt as a risk-management decision but must then comply fully with overtime requirements.
• When relying on the section 7(i) exemption, employers should carefully confirm that pay calculations meet the federal rate-of-pay test and that more than half of compensation truly derives from commissions.
• Tips and other forms of compensation must be evaluated correctly when applying exemption tests, particularly where tip credits are involved.
• Payroll systems and compensation plans should be reviewed to ensure bonuses, commissions and incentive pay are properly categorized and counted when required.
• Multi-state employers should analyze exemption decisions under both federal and applicable state law, as state wage statutes may impose stricter standards.

Taken together, the letters highlight the importance of documenting classification decisions, periodically auditing exemption status, and coordinating closely between HR, payroll and legal teams to reduce wage-and-hour exposure.