Businesses with salaried workers earning $35,568 to $55,656 annually should prepare accordingly.
On April 23, 2024, the Department of Labor (DOL) released a final rule raising the minimum salary thresholds for certain overtime exemptions under the federal Fair Labor Standards Act (FLSA), which effectively expands the number of employees potentially eligible for overtime wages. The current threshold, which was last increased on January 1, 2020, is a salary of $35,568/year. The threshold will initially increase in two phases:
- On July 1, 2024, the threshold will increase to $43,888/year.
- Six months later, on January 1, 2025, the threshold will increase to $58,656/year.
The rule also raises the total annual compensation requirement for the highly compensated employee (HCE) exemption from $107,432/year to $132,964/year on July 1, 2024, and to $151,164/year on January 1, 2025.
What does this mean for my business?
As a reminder, employees must be paid overtime for all time worked beyond 40 hours in each workweek unless those employees qualify as exempt from overtime pursuant to particular tests set out in the FLSA. Most commonly, employees qualify as exempt by being employed as a bona fide executive, administrative, or professional (often referred to as the “white-collar” or “EAP” exemptions). If these employees are employed in an EAP role and earn a minimum threshold of compensation dictated by the DOL, those employees may be compensated on a salary basis, rather than an hourly basis. This means that the employees are paid a consistent rate of pay on a weekly basis, and need not be paid overtime for any hours worked over 40.
The final rule changes that minimum compensation threshold, so that even if an employee is employed in an EAP or HCE role if the employee’s annual salary is less than the new minimums set by the final rule, the employee will not be considered exempt from overtime.
As an example, take an office worker whose work satisfies the job duties test for an administrative exemption, and currently earns a salary of $40,000/year. An employer would generally need to do the following on or before July 1, 2024, to comply with the final rule:
a. Raise the employee’s salary from $40,000/year to $43,888/year; or
b. To maintain the employee at roughly the same rate of compensation, reclassify the employee as non-exempt and pay compensation at a rate of $19.25/hour (annualizes to $40,040/year). Conversion from an exempt to a non-exempt status would require tracking of the employee’s hours and would require the employer to pay the employee time-and-a-half ($28.88/hour) for any hours worked beyond 40 in a workweek.
Of note, if the employer elects to increase the employee’s salary to retain the employee’s exempt status, the employer would need to either raise the employee’s salary again on January 1, 2025, to $58,656/year, or revert to option B, and reclassify the employee as hourly.
What else do I need to know about the final rule?
Another important feature of the final rule is that it provides for automatic updates to these minimum thresholds based on current wage data. The updates will begin on July 1, 2027, and then occur every three years thereafter.
Will the final rule be challenged in court?
It is highly likely that lawsuits will be filed to prevent these rules from being implemented, though the outcomes of any potential litigation are uncertain.
For historical context, the DOL under President Obama passed a final rule in the spring of 2016 with an effective date of December 1, 2016, that would have increased the minimum threshold to $47,476/year, with the threshold being automatically updated every three years.
Pursuant to a lawsuit filed by various states and interest groups, a federal court in Texas issued a preliminary injunction that stopped the rule from going into effect in November 2016: nine days before the DOL’s proposed rule was to become effective, and just after the 2016 presidential election. Ultimately, the Obama administration’s final rule never went into effect, and the minimum threshold remained status quo until the January 1, 2020 change, which was implemented under the Trump administration. The final rule under the Trump administration resulted in an increase of the minimum threshold from $23,660/year to the current $35,568/year and did not provide for automatic updates to the threshold.
The Biden administration is on similar footing as the Obama administration in terms of the timing of the final rule’s passage, as well as the inclusion of an automatic update to the threshold on a triannual basis. However, the DOL is instituting the increase in two phases rather than one.
What should employers do now to prepare for these changes?
While litigation is likely and will be closely monitored by employment lawyers, the prospect of litigation certainly does not guarantee a delay in the implementation of the final rule. As such, employers should prepare as if the final rule will go into effect as early as July 1, 2024, and evaluate their exempt workers earning in the $35,000 to $58,000/year range.
Decision-making around how to effectively address these overtime changes will not be a one-size-fits-all approach. To the contrary, it will necessarily be very specific to the business, based on factors such as the nature of the business, the size of the workforce, the number of employees, and the current classifications and compensation structure of the employees. Employers would be well-advised to partner with trusted counsel to navigate these decisions and comply with the final rule.
