DOL releases final rule increasing 'white collar' overtime minimum salary levels

On April 23, 2024, the U.S. Department of Labor (DOL) released its long-anticipated final rule updating the salary exemption threshold for executive, administrative, and professional (EAP) employees under the Fair Labor Standards Act (FLSA).

By way of background, the FLSA generally requires non-exempt employees to be paid minimum wage (currently $7.25 an hour) and overtime at time a half their regular rate for hours worked over forty in a given workweek. EAP employees may be considered exempt from these requirements if they satisfy a three-part test:

• The employee must be paid on a salary basis (meaning they receive a predetermined amount of pay which is fixed and not subject to variation based on the number of hours worked in a week) (the “salary-basis test”);

• The employee must be paid a minimum salary (currently $684 per week or $35,568 annually) (the “salary-level test”); and

• The employee must primarily perform executive, administrative, or professional duties (the “duties test”).

The final rule makes no changes to either the salary-basis test or the duties test. It does, however, increase the salary levels below which an employee is classified as non-exempt irrespective of their duties. This increase comes in two phases, becoming fully effective on January 1, 2025:

• As of July 1, 2024, to be classified as exempt, an employee must make at least $844 per week ($43,888 annually)

• As of January 1, 2025, to be classified as exempt, an employee must make at least $1,128 per week ($58,656 annually).

When fully implemented, the $58,656 will represent an increase of almost 65% over its current level. Going forward, the rule includes an escalator clause, which will automatically increase the salary threshold every three years.

Finally, the new rule updates the so-called “Highly Compensated Employee” (HCE) exemption. An employee may qualify for the HCE exemption where they earn a minimum HCE salary, and customarily perform at least one executive, administrative, or professional duty. The current HCE threshold is $107,432. The final rule increases the HCE threshold in two phases, raising it to $132,964 as of July 1, 2024, and to $151,164 as of January 1, 2025 (a 41% increase from its current level). And, as with the standard exemption, the HCE exemption will be automatically increased by way of the escalator clause.

The EAP threshold was last increased from $455 per week ($23,660 annually) to its current level in 2019. At that time, the HCE threshold was raised from $100,000 (where it was first set in 2004) to the current $107,432.

Options for employers

As a practical matter, employers face a choice with respect to those employees who are currently exempt and earn more than $35,656 annually but less than the adjusted thresholds as they become effective: they may either reclassify the employee as non-exempt (meaning they now must be paid minimum wage and overtime), or raise their salary to meet the new thresholds. Each comes with its own downside for employers. Many previously exempt employees consider themselves salaried professionals, and may view reclassification as a demotion or diminution in status; they will also now be required to closely track their time, and may find that their schedules are more limited and afford them less flexibility. Alternately, increasing salaries to maintain the exemption may come at considerable cost, and will likely result in salary compression and the pressure to raise salaries for employees already above the threshold—a supervisor currently earning $65,000 a year overseeing employees who make $40,000 a year will likely not be thrilled to learn his direct reports now make $60,000 while his or her salary remains unchanged.

Legal challenge likely

The rule is almost certain to be subject to legal challenge, an important fact for employers to bear in mind. In 2016, the Department attempted to increase the EAP and HCE thresholds in a similarly dramatic fashion, and to adopt an automatic escalator provision. A coalition of business groups brought suit to challenge the rule (as did a coalition of state attorneys general; the suits were ultimately consolidated into a single case). The rule, which would have increased the EAP threshold from $23,660 to almost $48,000, was first enjoined and later struck down by the court—but preliminary relief came only eight days before the increase was scheduled to become effective. By that time, many employers had already taken steps to either reclassify employees or increase salaries to maintain the exemption, and found it difficult to put the metaphorical genie back in the bottle.

Related: Benefits disconnect? Employees prioritize pay & 401(k), while employers do not

Preparing for possible increases

While the fate of the rule is uncertain, employers should begin thinking abut what it would take to come into compliance. That may mean evaluating potential options, whether reclassifying some workers as non-exempt, raising employee salaries, or some combination of both depending upon the nature of the position. That said, employers may wish to hold off actually implementing these changes for as long as is practicable—as seen in 2016, many employers who tried to be “ahead of the curve” by increasing salaries or reclassifying employees prior to the scheduled effective date of the increase found themselves in a difficult position when the rule was enjoined. In any event, given the complexity of the issues, and the potentially dramatic economic consequences, employers are advised to work closely with labor and employment counsel in evaluating options.

Jim Paretti, Shareholder, Littler Mendelson P.C. Workplace Policy Institute