At first glance, law firms may assume the new Section 70202: No Tax on Overtime rules are irrelevant to them – but that could be a costly mistake. It’s part of the One Big Beautiful Bill Act, commonly referred to as the OBBBA or OB3, and it allows an above-the-line deduction for qualified overtime compensation under the Fair Labor Standards Act (FLSA), subject to a limit and phase-out.
This specifically refers to the amount of qualified overtime under section 7 of the FLSA that exceeds the taxpayer’s regular rate. However, how does this relate to law firms? Lawyers don’t get overtime, right? Lawyers aren’t the only workers in a law firm. Law firms also employ paralegals, legal assistants, record clerks, bookkeepers, computer support specialists and general operation managers.
Exempt vs. Non-Exempt: How Common Employer Mistakes Create Overtime Exposure
Since this new provision follows Section 7 of the FLSA, it is important to differentiate between exempt and non-exempt employees, as exempt employees are not required to be paid overtime and, as a result, any overtime paid voluntarily is unlikely to qualify. However, mistakes can also convert exempt employees to non-exempt status, which may cause qualifying overtime obligations.
Common employer mistakes that cause loss of overtime exemption:
- Docking pay for partial-day absences: Payment of an exempt employee based on hours worked versus salary may cause non-exempt status.
- Failing to pay a guaranteed salary: Reduction of an exempt employee’s salary based on performance or work quantity can remove the exemption.
- Requiring time tracking: If the employer closely tracks hours, such as clocking in and out, it may weaken the claim that those employees are exempt.
- Altering job duties and removing exempt responsibilities: This may shift employee duties to routine tasks, failing to meet the duties test for exemption.
- Inconsistently applying exemptions: If employers selectively pay overtime to some exempt employees, but not others, it weakens the exemption claims of those employees.
Does voluntarily paying overtime waive an employee’s exemption status?
No. In Rodriguez v. City of Corpus Christi, 2025 WL (5th Cir. Mar. 3, 2025), the City of Corpus Christi, Texas, temporarily paid overtime to Annette Rodriguez, an exempt employee, during the COVID-19 pandemic. Rodriguez argued this payment of overtime changed her employee status to non-exempt, which the 5th Circuit rejected citing 29 CFR Section 541.604(a): “An employer may provide an exempt employee with additional compensation without losing exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of a least the minimum weekly-required amount paid on a salary basis.” As a result, paying overtime to an exempt employee will not automatically convert the employee into a non-exempt worker unless their pay structure is fundamentally altered or violates an exemption rule.
How the FLSA Defines Overtime Exempt Employees
The FLSA requires employers to meet three distinct criteria for an employee to qualify as overtime exempt.
Common FLSA Exemption Tests
- Salary Basis Test
a. An employer must pay an employee a guaranteed salary, not hourly wages. - Salary Level Test
a. An employee must earn at least the minimum amount set by the Department of Labor, which differs between exemption types. - Duties Test
a. An Employee is not exempt because of their job title, but rather by what their primary duties are in their role.
b. Focuses on the list of specific jobs identified as exempt under the FLSA.
Brief Exemption Summary *
| Exemption Type | Salary Basis Test | Salary Level Test | Duties Test** |
|---|---|---|---|
| Learned Professional | X – Salary or fee | X – Standard | X |
| Creative Professional | X – Salary or fee | X – Standard | X |
| Teachers | X | ||
| Practice of Law or Medicine | X | ||
| Highly Compensated employees | X – Salary or fee | X – HCE test | X |
| Executive | X – Salary | X – Standard | X |
| Business Owners | X | ||
| Computer Employee | X – Standard or $27.63/hour | X | |
| Outside Sales | X | ||
| Drivers who Sell | X |
**The duties test differs between exemption types.
Earnings Thresholds for Executive, Administrative, and Professional Exemption FLSA
| Earnings Threshold | Minimum Salary Amount Before July 1, 2024 | Minimum Salary Amount Beginning July 1, 2024 | Minimum Salary Amount Beginning January 1, 2025 |
|---|---|---|---|
| Standard Salary Level | $684 per week (equivalent to a $35,568 annual salary) | $844 per week (equivalent to a $43,888 annual salary) | $1,128 per week (equivalent to a $58,656 annual salary) |
| Total Annual Compensation Requirement for Highly Compensated Employees (HCEs) | $107,432 per year, including at least $684 per week paid on a salary or fee basis. | $132,964 per year, including at least $844 per week paid on a salary or fee basis. | $151,164 per year, including at least $1,128 per week paid on a salary of fee basis. |
Summary
As Section 70202: No Tax on Overtime takes effect, it is important for the firm to review all roles and its wage‑and‑exemption procedures. If an employee qualifies as exempt under the applicable FLSA exemption test(s), any overtime the firm voluntarily pays will not change that employee’s exempt status and the voluntarily paid overtime will remain taxable. However, the way the firm tracks hours, docks pay and administers wages can affect an employee’s exemption status or create an obligation to pay overtime. These considerations should remain top of mind while this section of the One Big Beautiful Act is in effect.
Author: Sabrina Yan | [email protected]
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