On April 23, 2024, the U.S. Department of Labor (DOL) issued its highly anticipated final rule that will raise the standard minimum salary level needed for most white-collar exempt employees on July 1, 2024, and then increase it again beginning January 1, 2025. The final rule will also increase the total compensation minimum for highly compensated employees (HCEs) and will adopt a mechanism to update these thresholds going forward every three years. While there may be legal challenges that prevent the rule from taking effect, employers should still look at their current exemptions and prepare to make adjustments if current salaries fall short of the new minimums.
How Did We Get Here?
Last Fall, the DOL proposed changes to the federal wage law overtime exemption requirements—specifically, the minimum salary for what is commonly referred to as the white-collar overtime exemptions (executive, administrative, and professional exemptions). The proposed changes were published on September 8, 2023, and were open to public comment for 60 days ending November 8.
Since then, employers have been waiting for the DOL to announce the effective date of the changes. Most were making plans to update their exempt salaries where needed, but veteran HR professionals were still a bit wary because in 2016, when the salary minimums were scheduled to be substantially increased, a court blocked the implementation at the last minute.
Two-Step Around Objection
During the public comment period in 2023, opponents of the new rule expressed concern about the amount of the increase (65%) and its adverse impact on employers during a challenging economic environment. As a result, to assist in the transition, the DOL announced a two-part approach to compliance with the new final rule.
Effective July 1, 2024, the Fair Labor Standards Act’s (FLSA) annual salary-level threshold for the salaried white-collar exemptions will increase from the current annual amount of $35,568 ($684 per week) to $43,888 ($844 per week). And on January 1, 2025, the annual salary threshold will rise to $58,656 ($1,128 per week).
Likewise, for those employees who qualify for the HCEs overtime exemption, the total compensation annual minimum will increase from $107,432 to $132,964 (consisting of a salary of at least $844 per week plus other compensation) as of July 1, 2024, and then to $151,164 (consisting of a salary of at least $1,128 per week plus other compensation) on January 1, 2025. See the DOL’s website for more information on the final rule as well as frequently asked questions: https://www.dol.gov/agencies/whd/overtime/rulemaking.
Spare Change(s)
In addition—perhaps because salary increases over the last 50 years have been fairly irregular and not in keeping with wages—the final rule includes a three-year automatic adjustment mechanism for updating the salary threshold.
The final rule doesn’t make any changes to the treatment of bonuses. Employers may use nondiscretionary bonuses (such as those tied to productivity or profitability) and incentive payments (such as commissions) to satisfy up to 10% of the standard salary threshold requirement, provided such payments are made on an annual or more frequent basis. Such nondiscretionary bonuses and incentive payments can also be used to satisfy the HCE total compensation threshold.
The DOL estimates that approximately 1 million currently exempt workers earn below the new $43,888 salary threshold and another 3 million currently exempt employees earn less than $58,656. Therefore, for currently exempt employees whose salary rates fall below these minimums, employers need to consider either increasing their salary rates to meet the new minimum levels or reclassifying them as nonexempt and entitled to overtime pay.
What to Do Next
Business organizations—and possibly some states—are likely to file legal challenges to try and block the final rule from taking effect, as they did successfully in 2016. However, the outcome of such challenges is far from certain. Therefore, covered employers should still review your current exemptions because misclassification could result in substantial liability.
That exemption review—now and when the final rule is effective—should include making sure the employees whom you have classified as salaried exempt: (1) are paid on a salary basis at least at the current minimum salary level; and (2) perform duties that fit squarely within the applicable exempt category’s duties test. To avoid confusion, be sure to tell these employees about their exempt status.
For employees who don’t meet the duties test or the new minimum salary levels—salaried, nonexempt employees who are just like employees hired on an hourly basis—you will need to:
- Confirm their schedules and work hours (this is especially important for employees who work remotely);
- Communicate their overtime eligibility;
- Review daily timekeeping policies and obligations;
- Review meal break and other break policies;
- Confirm overtime advance approvals as applicable; and
- Train managers and supervisors on monitoring work hours and timekeeping.
Finally, if you have employees in multiple states, some state laws have different wage laws including but not limited to higher minimum salaries for overtime-exempt employees. Just as checking compliance with the FLSA final rule is recommended, staying up to date with those state laws will help reduce the likelihood of unfavorable wage audits or wage claims.
Andrea G. Chatfield and James P. Reidy are attorneys with Sheehan Phinney Bass & Green PA in Manchester, New Hampshire, and can be reached at achatfield@sheehan.com and jreidy@sheehan.com.