On April 23, 2024, the U.S. Department of Labor (DOL) issued a final rule raising the salary threshold that must be met for employees to be classified as exempt from overtime requirements imposed by the Fair Labor Standards Act (FLSA). DOL estimates that more than 3 million currently exempt employees will be impacted. It further estimates that total annualized direct employer costs over the first 10 years will be about $600 million. Employers should take steps now to ensure that they are prepared to comply with the final rule.
Background
The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for bona fide executive, administrative, professional and outside sales employees. These exemptions are often called the "white-collar" or "EAP" exemptions. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis.1
Historically, the salary basis has been not less than $684 per week. [These salary requirements do not apply to outside sales employees, teachers, and employees practicing law or medicine.] The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee's work. Subject to certain exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked.
In addition to the "white-collar" or "EAP" exemptions, DOL created the highly-compensated employee test for certain highly compensated employees. The test is based on the rationale that employees who earn at least a certain amount annually—an amount substantially higher than the annual equivalent of the weekly standard salary level—will almost invariably pass the standard duties test. In 2019, DOL set the total annual compensation threshold for highly-compensated employees at $107,432 per year.
DOL's Final Rule
DOL's final rule makes three changes:
- The final rule will increase the standard salary threshold for employees subject to the "white-collar" or "EAP" exemptions as follows:
| Date | Standard Salary Level |
|---|---|
|
Before July 1, 2024 |
$684 per week (equivalent to $35,568 per year) |
|
July 1, 2024 |
$844 per week (equivalent to $43,888 per year) |
|
January 1, 2025 |
$1,128 per week (equivalent to $58,656 per year) |
|
July 1, 2027, and every three years thereafter |
To be determined by applying to available data the methodology used to set the salary level in effect at the time of the update |
These salary increases will apply to employees in all territories
that are subject to the federal minimum wage. The rule also updated
the salary level that will apply to employees in American Samoa
because that territory remains subject to special minimum wage
rates, as well as the motion picture industry.
2. The final rule will update (by increasing) the earnings threshold for the highly compensated employee exemption as follows:
| Date | Highly Compensated Employee Total Annual Compensation |
|---|---|
|
Before July 1, 2024 |
$107,432 per year, including at least $684 per week paid on a salary or fee basis |
|
July 1, 2024 |
$132,964 per year, including at least $844 per week paid on a salary or fee basis |
|
January 1, 2025 |
$151,164 per year, including at least $1,128 per week paid on a salary or fee basis |
|
July 1, 2027, and every three years thereafter |
To be determined by applying to available data the methodology used to set the salary level in effect at the time of the update |
3. The final rule imposes an automatic updating mechanism that will
allow for regular increases to the salary levels every three
years.
What Should Employers Do Now?
The new rule is already subject to a legal challenge. Although we cannot predict what a court ruling on a legal challenge will hold, employers should work with legal counsel now to ensure compliance by the rule's effective date.
At a minimum, employers should review their current classifications to ascertain who may be impacted by the proposed increases on July 1, 2024, or January 1, 2025. They should assess the impact of re-classifying the employee as non-exempt or instead increase the employee's salary to raise the employee to the new salary threshold. To the extent that employers are considering re-classifying certain employees as non-exempt, they will need to ensure that they have timekeeping mechanisms and policies in place to measure hours worked and also to preclude "off the clock" work (e.g., limits on email outside of work hours). Employers should be prepared to implement any necessary changes quickly.
Finally, employers should be aware that some state laws (e.g., California) impose minimum salary thresholds for exemptions that already exceed the new FLSA requirements.
Footnote
1. The new rule does not modify the duties test.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.