Once again, the U.S. Department of Labor (“DOL”) released a Final Rule increasing the minimum salary thresholds for administrative, executive, and professional exemptions under the Fair Labor Standards Act (“FLSA”).  Starting on July 1, 2024, administrative, executive, or professional employees must earn salary of at least $844/week to qualify for an exemption from overtime pay and minimum wage and, starting on January 1, 2025, the minimum increases to least $1,128/week.  As a result, employees who were formerly exempt from minimum wage and overtime requirements (based on the current $684/week threshold) may need to be reclassified as non-exempt.  

The DOL is adopting a phased approach to the increased thresholds, but employers should not delay in analyzing the impact of these changes and planning for the future.

As a reminder, the FLSA permits employers to exempt certain employees from minimum wage and overtime requirements, including administrative, executive, and professional employees who meet the minimum requirements of the FLSA.  The administrative, executive, and professional exemptions, often referred to as the “white collar exemptions”, are only available if an employee meets both a duties test and a salary test.  There is another exemption for workers classified as “highly compensated employees” and these workers must have a minimum total annual compensation and work in non-manual labor jobs that meet at least one prong of one of the white collar exemption duties tests.

In addition to the minimum salary threshold, the FLSA duties tests require employees meet all of the requirements for the applicable exemption, which are:

For the Executive Exemption

• The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
• The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
• The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

For the Administrative Exemption

• The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
• The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

For the Professional Exemption

• The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
• The advanced knowledge must be in a field of science or learning; and
• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

What is new?

The DOL’s new Final Rule is adjusting the minimum annual compensation thresholds for the administrative, executive, professional, and highly compensated exemptions.  The current thresholds were set in 2020 and allow employers to apply the exemption only when the applicable duties test is satisfied and the administrative, executive, or professional employee earns $684/week (or $35,568 annually) on a salary basis.  Currently, workers classified as “highly compensated employees” must earn at least $107,432.

Starting on July 1, 2024, administrative, executive, or professional employees must earn at least $1844/week (or $43,888 annually) on a salary basis and highly compensated employees must earn at least $132,964/year.

On January 1, 2025, these salary thresholds will increase once again such that administrative, executive, or professional employees must earn at least $1,128/week (or $58,656 annually) on a salary basis and highly compensated employees must earn at least $151,164/year.

The Final Rule permits employers to satisfy up to 10 percent of the standard salary requirement with nondiscretionary bonuses, incentive payments, and commissions, provided those forms of compensation are paid at least quarterly. Since bonuses, incentive payments and commissions are typically tied to the employee meeting certain criteria, if an employee fails to meet the criteria and, therefore, fails to earn the bonus, incentive payment, or commission, which, in turn, results in the employee being paid less than the threshold amount, the employer might have to pay overtime retroactively to that employee.

What is the same?

The DOL did not alter any of the duties tests.  The standard that an employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations to qualify for the white collar exemption remains unchanged.

What is next?

We expect legal challenges to these new thresholds, including applications to stay the implementation of the Final Rule.  That creates uncertainty for employers as the outcome of those challenges remains in question. 

Unlike the Final Rule released in 2020, this version does not provide for review and updating of the thresholds every three years.

What should employers do now?

First, employers should identify any exempt employees with compensation below the new threshold salary level and either plan to start treating those employees as non-exempt or increase their compensation to the new threshold amount.  Employers should analyze how to best structure their workforces and their compensation systems in light of the potential for increased labor costs due to the effect of the new overtime rules.  For example, employers should weigh whether it will cost them more to start paying more employees overtime, increase salaries to meet the new threshold, or hire more staff to avoid overtime.  In addition, employers may want to consider increasing fixed salaries and decreasing bonuses, commissions or equity payments in order to meet the higher salary requirement.

Second, employers should immediately ensure they are properly using the white collar exemption, including for employees with salaries above the threshold.  A salary that meets the threshold does not in and of itself make an employee exempt from overtime.  Separate and apart from the Final Rule, there are specific tests for executive, administrative, professional, computer, outside sales and highly compensated employee exemptions that depend on the duties those employees perform.  Those tests have evolved over time, and recent court rulings have refined and narrowed their application. Also, employees’ job duties are constantly changing, and courts will be asked in the future to examine new fact scenarios to determine whether employees have been properly characterized.  Even though the new Final Rule does not change those compliance tests, employers would be well-advised to take this opportunity to evaluate whether their employees are properly characterized under the current versions of the compliance tests and use this change as an opportunity to roll out any needed reforms.

Employers who have questions or concerns about compliance should consult with their counsel and consider a wage and hour audit to determine if they are currently in compliance with applicable federal and state laws regarding overtime pay. Flaster Greenberg’s Labor and Employment lawyers are fully versed in the new overtime rule and stand ready to assist clients and potential clients.

Third, employers should be careful not to forget about compliance with applicable state wage laws, which differ from the federal law and will not automatically change, even if the federal law does. 

In sum, employers should review their compensation structures for compliance with the Final Rule and include with that review an analysis of their overall compliance with wage and hour laws.

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