On April 23, 2024, the U.S. Department of Labor (DOL) issued its much-anticipated final rule raising the salary threshold for employees to be exempt from federal overtime requirements under the Fair Labor Standards Act (FLSA). The new rule significantly increases the minimum salary requirement for executive, professional, and administrative employees (aka “white-collar workers”), effective July 1, 2024.

Currently, to be exempt from federal overtime requirements under the FLSA, a white-collar worker must – in addition to satisfying the applicable “duties” test – receive a guaranteed base salary of at least $684 per week ($35,568 per year). The rule increases this minimum salary threshold, initially to $844 per week ($43,888 per year) as of July 1, 2024, and then to $1,128 per week ($58,656 per year) as of January 1, 2025. Thereafter, the rule provides for an automatic update to the threshold every three years based on wage data.

The rule also raises the annualized salary threshold for white-collar workers to qualify under the “highly compensated employee” overtime exemption. As of July 1, 2024, this threshold would increase from $107,432 to $132,964, then on January 1, 2025, it would increase to $151,164, and thereafter the threshold would be updated every three years based on wage data.

The new rule does not modify the duties test for either the white-collar or highly compensated employee exemption, which also must be satisfied for an employee to properly be classified as exempt from federal overtime pay requirements.

While the increased thresholds would not have any immediate effect in some states – such as California and New York, where state law minimum salary thresholds for exemption already exceed the new FLSA requirements – the rule is expected to impact approximately four million employees. Employers of those workers must determine whether, if the rule becomes effective, they will increase base salaries in line with the new thresholds or reclassify workers as non-exempt and pay them for any overtime hours worked at the rate of time and one-half (1.5x) their regular hourly rate.

We recommend that employers hold off making any immediate changes to become compliant with the new rule, particularly as the rule may be delayed or blocked following legal challenge, similar to litigation that successfully stymied a 2016 rule that had also sought to raise the then-existing salary threshold.¹

Given that there could be a small window between a court ruling on a legal challenge and the rule’s effective date, we suggest that employers not delay in identifying any employees currently classified as exempt who are receiving salaries that would be insufficient following the proposed July 1 and/or January 1 increases. They should then determine – on a case-by-case basis – whether to increase pay or reclassify the worker as non-exempt.

Footnotes

1. In an apparent effort to insulate itself from such a challenge, the DOL set the amount for the July 1 increase using the same methodology used in 2019, when the threshold was raised from $23,660 to $35,568. The new rule’s methodology for subsequent increases is more aggressive, however, and thus more vulnerable to successful challenge.