The U.S. Department of Labor (DOL) has updated the minimum salary thresholds necessary to be considered exempt from federal minimum wage and/or overtime regulations in a new final rule that is poised to become effective on July 1, 2024. Among other things, this final rule increases the minimum salary rates that employees must be paid in order to qualify as an exempt executive, administrative, or professional employee (known as the “white collar” or “EAP” exemption categories) or an exempt highly compensated employee (the “HCE” exemption category) under the federal Fair Labor Standards Act (the “FLSA”). The U.S. Department of Labor has estimated that the new rule could extend federal overtime protections to approximately 3.6 million salaried workers who previously were not entitled to overtime pay under the FLSA.
Background
Most employers are familiar with the FLSA’s general requirement to pay each non-exempt employee no less than the federal minimum wage rate and to apply an overtime rate of at least 1.5 times the employee’s regular base rate of pay for any time worked beyond 40 hours in a workweek. Employees who qualify as exempt under one of the statutory exemption categories are not eligible for overtime pay.
Whether an employee is correctly classified as exempt depends on more than just their job title, a written job description, or the mere fact that the employee is paid a salary. To qualify for one of the EAP exemptions, an employee generally must meet three requirements, which the employer bears the burden of proving:
- The employee must be paid a salary, meaning that they are paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed (known as the “salary basis test”);
- The employee’s salary rate must be no less than the minimum salary threshold currently in effect (known as the “salary level test”); and
- The employee must primarily perform executive, administrative, or professional duties, as defined under the FLSA’s regulations (known as the “duties test”).
The current minimum salary threshold is $684 per week, equivalent to $35,568 per year. For HCEs, the minimum compensation level is a total of $107,432 per year, including at least $684 per week paid on a salary or fee basis.
Changes Under the New Final Rule
The new final rule makes the following changes to those earnings thresholds, effective as of the applicable dates shown below:
July 1, 2024:
- The minimum salary threshold for EAP exemption categories will increase to $844 per week, equivalent to $43,888 per year.
- The HCE total annual compensation threshold will increase to $132,964 per year, including at least $844 per week paid on a salary or fee basis.
January 1, 2025:
- The minimum salary threshold for EAP exemption categories will increase to $1,128 per week, equivalent to $58,656 per year.
- The HCE total annual compensation threshold will be $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):
- The earnings thresholds for exemption will be updated in line with the U.S. Department of Labor’s earnings data available at that time. The methodology will be the same as was used to determine the changes to the earnings thresholds on July 1, 2024 and January 1, 2025.
Notably, the changes imposed under the new final rule are significantly different from what the U.S. Department of Labor initially proposed in August 2023. The initial proposed rule would have increased the threshold for EAP exemptions to $1,059 per week ($55,068 per year), and the threshold for HCEs would have been increased to $143,988 per year. In addition, the initial proposed rule would have made the increases effective all at one time, rather than implementing the changes in two phases as the final rule requires (the first phase takes effect on July 1, 2024, and the second on January 1, 2025). Ultimately, the final rule includes the largest change in the federal exemption salary thresholds in decades.
Legal Challenges
The new final rule is already facing legal challenges, much like similar rules have faced in the past. As one example, just days before it was scheduled to go into effect, a 2016 final rule that sought to increase the salary threshold for exemption status was delayed by legal challenges. That rule was eventually implemented, but with a smaller salary threshold increase than it initially contained. So, it remains to be seen whether the current rule will be implemented as it is written.
Takeaways
If the new final rule withstands the pending legal challenges and goes into effect as scheduled, employers will need to ensure that their wage and hour practices and compensation structures are compliant with the new salary thresholds. For instance, employers may need to decide whether it makes more sense to increase certain employees’ salaries to maintain exempt status, or to instead change their status from exempt to non-exempt. With the July 1, 2024 effective date approaching quickly, employers should review their exempt positions now to determine whether adjustments may be needed in order to comply with the significant increases to the federal exemption salary thresholds.
FMJ’s HR & Employment Law Practice Group is available to help audit your company’s wage and hour practices, review and analyze compensation structures, draft new policies and practices, create and implement strategies for the future, and train your staff on new policies related to wage and hour practices and employee classifications. If you are interested in connecting with the team to discuss questions or concerns about any of these new changes, or any other HR and Employment law matters, please contact Shannon McDonough, Natolie Hochhausen, or V. John Ella.
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