On Tuesday, the U.S. Department of Labor (DOL) announced a Final Rule that drastically expands overtime protections to millions of workers across the country. This Rule, which raises the salary threshold for certain exemptions, forces employers to quickly determine whether they will make the substantial salary increases necessary to keep employees exempt under the bona fide executive, administrative, and professional exemptions (the “white collar” exemptions), or else be prepared to track hours and pay overtime compensation, as required for non-exempt employees by the Fair Labor Standards Act (FLSA).

According to the Final Rule, federal overtime standards will be impacted in three phases:

• Effective July 1, 2024, the salary threshold for the white collar exemptions will increase to $844 per week ($43,888 per year) and the minimum salary level for highly compensated employees will increase to $132,964 annually.
• Effective January 1, 2025, the salary threshold for the white collar exemptions will increase again to $1,128 per week ($58,656 per year). The annual salary for highly compensated employees will increase to $151,164.
• Starting July 1, 2027, salary thresholds will update every three years, using up-to-date wage data to determine new salary levels.

These new standards will be applied in conjunction with the existing overtime requirements under the FLSA. The FLSA is the federal law that sets minimum wage and overtime requirements for nearly every employer in the country. Under the FLSA, employees are generally required to pay an overtime premium of 1.5x the employee’s regular rate of pay per hour, if the employee works more than 40 hours per week, unless the employee qualifies as “exempt” from overtime. To be exempt from overtime under federal law, most workers must qualify as a bona fide executive, administrative or professional employee.  These white collar exemptions require that the employees: (1) be paid a fixed weekly salary; (2) meet minimum salary requirements; and (3) perform specific job duties.

Highly-compensated employees may also be exempt from overtime. This exemption applies to those who: (1) meet the minimum annual compensation threshold set by the FLSA; (2) primarily perform office or non-manual work; and (3) customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.

By approving this Final Rule, the DOL is aiming to keep pace with increases in employee pay.

The initial updates to the salary thresholds on July 1, 2024, will be based on the methodologies in place at that time (i.e., the 2019 rule methodologies). However, beginning with the 2025 updates, the salary level will be set at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region ($1,128 per week or $58,656 annually for a full-year worker) and the highly compensated employee compensation threshold will be set at the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally ($151,164).

The DOL believes that “fewer lower-paid white-collar employees who perform significant amounts of nonexempt work” will qualify for any exemption under federal law. Further, the DOL has substantially increased the bar for the highly-compensated employee exemption in order to “reserve the test for those employees who are ‘at the top of the [e]conomic ladder.’”

The DOL estimates that approximately 1 million employees who earn at least $684 per week but less than $844 per week will be impacted by the initial update in 2024, and approximately 3 million employees who earn at least $844 per week but less than the new standard salary level of $1,128 per week will be impacted by the subsequent update in 2025.

Notably, the DOL is not making substantive changes to any provisions related to the salary basis or job duties tests.

Impact on Your Workforce

Just like the DOL’s prior attempts to increase the minimum salary threshold for exempt employees, there likely will be legal challenges ahead. It remains to be seen whether this Final Rule will take effect as scheduled, as opponents of the Rule are expected to contest the DOL’s authority to unilaterally and immediately implement such salary changes. If challenged, a federal court could enjoin (prevent) the Rule from taking effect pending litigation over the issue.

The DOL appears to have taken these anticipated legal challenges into account by building in a severability provision to the Rule. The severability clause states that if any part of the new salary standards are held to be invalid or unenforceable, or stayed pending further agency action, the provision in question should be given the fullest effect permitted by law, unless the provision is held to be completely invalid or unenforceable, in which case, the Rule calls for the provision to be severable and not to affect the remaining provisions. In other words, if a court strikes one part of the Rule, the remaining portions still may be implemented.

Nonetheless, prudent employers will take proactive steps to examine their workforce and evaluate what positions may be impacted by this Rule and how to be prepared for the salary changes in the coming months, should the Rule go into effect. Employers should audit their workforce to identify employees who are currently classified as exempt but whose wages will not meet the salary threshold of $43,888 in 2024, and $58,656 in 2025. For those employees, employers should identify what positions would be eligible for a salary increase to remain exempt under the modified white collar exemption standards, and which positions will be converted to non-exempt, and overtime eligible. Employers must also consider the logistics of implementing these salary and overtime changes, including when and how to notify impacted employees, and how to ensure that you have accurate timekeeping for all non-exempt employees who are eligible for overtime pay.