Current law

Under the current legal standard, an employee must meet three requirements to be classified as exempt from overtime pay requirements under the FLSA’s executive, administrative, or professional exemptions – the so-called “white collar” exemptions:

1. Satisfy a “duties test” (i.e., have and perform certain white-collar job duties);

2. Be paid on a salary or fee basis (as opposed to an hourly basis); and

3. Be paid at least $684 per week, which is roughly $35,568 a year.

There are some exceptions to the above requirements. For example, employees earning at least $107,432 a year may also be exempt under the “highly-compensated employee” exemption if they satisfy a relaxed version of the “duties” test. Likewise, certain types of employees need not meet the above salary tests to be exempt, such as doctors, lawyers, and teachers.

DOL’s final rule

As we previously reported, DOL issued a notice of proposed rulemaking in August 2023 proposing to substantially increase the dollar thresholds applicable to the white collar and highly-compensated employee exemptions. In its final rule, issued April 23, 2024, following a notice-and-comment period, DOL elected to implement not one, but two separate increases slated to take effect over the next nine months. Specifically, under the final rule:

• The salary threshold for the white-collar exemptions increases on July 1, 2024, to $844 per week, or $43,888 a year, and increases again on January 1, 2025, to $1,128 per week, or $58,656 a year; and
• The salary threshold for the highly-compensated employee exemption increases on July 1, 2024, to $132,964 a year, and increases again on January 1, 2025, to $151,164 a year.

The final rule also provides for automatic updating of these compensation thresholds starting July 1, 2027, and every three years thereafter, based on then-current earnings data, but builds in flexibility for DOL to delay the scheduled updates “due to unforeseen economic or other conditions.”

Although the proposed rule would have also adjusted the separate compensation thresholds for exempt status currently applicable in the U.S. territories and to the motion picture industry, the final rule leaves those existing thresholds in place and states that DOL will address them in a future rule.

What happens next?

The final rule is scheduled to go into effect July 1, 2024. However, the rule will likely face court challenges and could also be rescinded if there is a change in presidential administrations. Congress could also decide to overturn the final rule pursuant to the Congressional Review Act. A similar rule substantially increasing the compensation thresholds for FLSA exempt status promulgated by the Obama administration in 2016 was blocked by a Texas federal court and later rescinded by the Trump administration. The Department of Labor under the Trump administration subsequently promulgated more modest increases in the compensation thresholds that remain in effect today. The current thresholds are themselves subject to ongoing litigation challenging DOL’s authority to set any compensation thresholds for exempt status under the FLSA, which, if successful would invalidate both the current thresholds and those established in the final rule.

Next steps for employers

Despite uncertainty over the final rule’s future, given the impending July 1 effective date, employers should prepare now by taking the following steps:

• Identify all employees currently classified as exempt under the white-collar or highly-compensated employee exemptions who will not be exempt under the proposed new thresholds.

• Estimate the additional payroll costs your organization will incur if the impacted employees are reclassified as nonexempt, or if their salary is increased to maintain their status as exempt.

• Determine the potential actions to take with respect to each affected employee if the rule is finalized. Options include reclassifying the employee as nonexempt; increasing the employee’s salary to the new compensation threshold in order to maintain exempt status; determining whether another exemption applies (such as the exemption for hourly computer professionals); and/or restructuring or reassigning work in order to reduce the need for overtime.

• For employees whose compensation will be increased, consider whether to make the necessary adjustments in two stages—by July 1 and again by January 1—or to make a single round of adjustments by July 1 that anticipates the January 1 threshold increases.

• Plan for potential increases in payroll costs imposed by the new rule, which may include the need to reduce certain employees’ compensation and/or fringe benefits, or potential layoffs.

• Identify organizational changes that could be required if employees are reclassified as nonexempt, such as stricter regulation of after-hours or remote work (which can create unexpected overtime obligations if nonexempt employees work after hours without authorization), and train newly nonexempt employees on accurate timekeeping.

• Consider whether to conduct a comprehensive wage-and-hour audit to identify and correct any existing FLSA misclassification issues.

Employers should also bear in mind that some state laws may impose stricter standards for overtime exemptions than does federal law. DOL’s final rule does not preempt these stricter state law standards.