After months of anticipation, on April 23, the DOL announced its final rule modifying the requirements for employees to satisfy the white-collar exemptions under the Fair Labor Standards Act ("FLSA"). The final rule is scheduled to take effect on July 1, 2024.
Under the FLSA, employees are entitled to wages at or above the federal minimum wage (i.e., $7.25/hr.) and must be paid time and one-half for work over forty (40) hours in any work week. However, certain employees are exempted from this requirement if they are classified as executive, administrative or professional employees and are paid on a salary basis. All other employees, subject to limited exceptions, are considered non-exempt and must be paid at least minimum wage and overtime for hours worked over forty (40) in a week. Generally, employers have the burden to demonstrate that an employee is exempt from overtime by satisfying both the specific duties tests, as defined by DOL regulations, and the salary basis test (i.e., predetermined salary not subject to adjustment based on the quantity or quality of the work performed). Currently, the weekly salary minimum required to qualify for salaried-exempt status is $684 per week or $35,568 annually. The DOL's April 23 announcement addresses only this minimum salary threshold.
Effective July 1, 2024, the DOL's final rule sets the new minimum salary threshold at $844 per week (equivalent to $43,888 per year for a full-year worker) and increases to $1,128 per week (equivalent of $58,656 per year for a full-year worker) on January 1, 2025, marking a drastic increase in the current thresholds that have been in place since January 1, 2020. In addition, the final rule sets the total annual compensation requirement for highly compensated employees at $132,964 annually (presently, $107,432 per year) and at least a weekly salary of $844.1 The annual compensation for highly compensated employees will increase to $151,164 or at least $1,128 per week on January 1, 2025.2 Although a topic of discussion, the new rule leaves the current duties tests unchanged.
Employers will continue to be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the minimum salary threshold. These payments include nondiscretionary incentive bonuses tied to productivity and profitability. The final rule retains the ability of employers to make such payments on an annual or more frequent basis and allows for a "catch-up" payment in order to credit nondiscretionary bonuses and incentive payments toward a portion of the required salary level within one pay period of the end of the 52-week period. Any "catch-up" payment will count only toward the prior year's salary amount and not toward the salary amount in the year in which it is paid. However, the final rule retains the requirement that highly compensated employees must receive at least the full minimum salary each pay period without regard to the payment of nondiscretionary bonuses and incentive payments and continues to permit nondiscretionary bonuses and incentive payments (including commissions) to count toward the total annual compensation requirement.
The DOL estimates that the new rules will extend the right to overtime compensation to an estimated 4 million workers who are currently classified as exempt.
The final rule is available here.
Due to the July 1 effective date, employers are advised to take immediate steps to prepare for those changes now, including:
- Consider potential costs to absorb and manage overtime.
- Review the salary ranges of positions within your organization that are currently considered exempt under the executive, administrative and professional exemptions.
- Identify positions earning less than the $43,888 threshold (as well as those earning less than $58,656 in anticipation of the increase on January 1, 2025) and determine for which positions an increase in salary is necessary.
- Reclassify employees to non-exempt as necessary.
- Evaluate positions to determine particular tasks the employee performs on a weekly basis and the number of hours required in order to assess potential overtime impact.
- Determine if certain job duties can be redistributed or eliminated or if a function can be outsourced.
- Consider whether nondiscretionary bonuses or incentive payments (including commissions) will be sufficient to satisfy the new salary threshold for exemption. Keep in mind that the new rule continues to allow employers to credit these payments in an amount up to 10% of the salary threshold.
- Review possible alternative compensation plans rather than simply moving to hourly status (e.g., fixed salary for fluctuating hours).
- Consider restricting hours and schedule adjustments to limit potential overtime.
- Implement policies restricting after-hours use of electronic communication devices for newly classified non-exempt employees.
- Evaluate hours tracking methods and reporting and develop a plan to begin tracking hours worked. Employers are required to keep accurate records of hours worked on a weekly basis for non-exempt workers. It may be helpful to begin tracking those hours now in order to plan for the conversion to overtime status.
The new rule will dramatically impact the way employers handle certain aspects of their businesses. Stay tuned for additional guidance as new developments unfold.
Footnotes
1. The increase in both weekly and annual salary requirements are similar to those proposed under the 2016 final rule, which was invalidated prior to its effective date.
2. The final rule includes a mechanism to update the earnings thresholds for exemption every three years.
Originally published Apr 24, 2024
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