The Wage and Hour Division of the U.S. Department of Labor recently released a rule that prospectively changes the salary threshold for exempt executive, administrative, and professional employees. Although not immediately effective, the new rule stands to dramatically increase exempt salary threshold requirements.

Background

Under federal law, employees are entitled to minimum wage and overtime at 1.5 times their regular hourly rate for all time worked over 40 hours a week, unless they are “exempt.” Most exempt employees must meet both a “primary duties” test and a “salary basis” test. Under the current rule, an employee meets both tests (and is exempt from overtime) if the employee primarily performs executive, administrative, or professional duties and is paid a salary of at least $684 per week, or $35,568 per year. The new DOL rule increases the salary basis threshold.

Salary Threshold Increases Under the New Rule

With limited exceptions, the rule will periodically raise the minimum salary required for executive, administrative, and professional employees to maintain exempt status. The salary requirement will increase over time:

• Before July 1, 2024: No change, $684/week or $35,568/year
• July 1, 2024: $844/week or $43,888/year ($8,320 increase)
• January 1, 2025: $1,128/week or $58,656/year ($14,768 increase)
• July 1, 2027: updated every three years based on current wage data

Importantly, the rule is continuing, and every three years employers can expect to consider whether to raise exempt salaries to meet the rule or pay overtime for time worked past 40 hours a week.

How the DOL Rule Impacts State Wage & Hour Law

Several states have their own minimum wage and overtime laws with similar exemptions for executive, administrative, and professional employees. Where state law conflicts with the new rule, employers should follow the rule that is most beneficial to its employees.

For example, if the federal rule imposes a higher salary threshold, employers should comply with it even if the state rule is satisfied with a lower number. Likewise, where state rules prescribe a higher bar, such as a narrower view on which duties are “executive” or an (even) higher salary threshold, employers should comply with the state law.

What Employers Should Do Now

The new DOL rule does not go into effect until July 1, 2024. And, it is possible that the effective date will be delayed by legal challenge, but employers should not bet on it.

The main consideration is whether to give your exempt employees with a current salary under the impending threshold a raise, or pay them hourly. The answer will largely be employer- and position-specific. Some employees rarely work more than 40 hours per week, while others do so consistently. Additionally, the size of the raise needed to maintain exempt status may not be worth the cost of just paying overtime. For example, the threshold increase from January 1, 2024 to July 1, 2025 is nearly $15,000. If an employee is not expected to work enough overtime to cover the difference, there is little incentive for their employer to raise their base salary level.

Lastly, it is too early to predict how high the salary thresholds will raise in 2027 and beyond, but five figure bumps appear to be within the realm of possibilities. Employers should stay up-to-date on upcoming threshold increases and, if not raising salaries, should be prepared to update payroll accordingly when employees go from exempt to hourly.