In a highly anticipated announcement, the U.S. Department of Labor (DOL) published its final rule on April 23, 2024, increasing salary threshold amounts required for certain employees to be “exempt” from federal Fair Labor Standards Act (FLSA) overtime requirements.

The new rule finalizes the rule first proposed in August 2023 and significantly expands federal overtime eligibility, initially raising the annual salary requirement for the so-called “white collar” exemptions from $35,568 to $43,888 (starting July 1, 2024) and $58,656 (starting Jan. 1, 2025). Unless later enjoined by court action, the final rule takes effect July 1, 2024, and based on DOL estimates, will expand overtime protection to cover more than 4 million additional workers in the first year.

Per DOL, “in Year 1, the rule will impose approximately $1.4 billion of direct costs on employers, including $451.6 million in regulatory familiarization costs, $299.1 million in adjustment costs, and $685.5 million in managerial costs.” DOL further estimates that the new rule “will result in a Year 1 income transfer of approximately $1.5 billion from employers to workers, predominantly from new overtime premiums, or pay raises to maintain the exempt status of some affected employees.”

Background

The FLSA requires most employees to be paid the federal minimum wage and overtime pay for all hours worked over 40 in a workweek. However, the FLSA exempts several categories of employees from the overtime requirement of the act, including so-called “white collar” executive, administrative and professional (EAP) employees.

To qualify for one of these exemptions, as a general rule an employee must:

1. perform certain job duties (the “duties” test);
2. be paid on a pre-determined fixed salary not subject to reduction due to work quality or quantity (the “salary basis” test); and
3. earn a salary above a DOL-determined threshold, with some exceptions (the “salary threshold” or “salary level” test’).

DOL’s new rule revises and increases the prior minimum salary level, which was last changed effective January 2020. As a result, for overtime-exempt employees who make less than the new salary level, employers will need to (a) re-classify their employees to “non-exempt” status (and pay appropriate overtime); or (b) adjust salaries upward to meet the new thresholds.

DOL Final Rule

Below is a summary of key takeaways of the final rule:

• The federal salary level for most overtime-exempt white collar employees will increase from $684 per week / $35,568 per year to (a) $844 per week / $43,888 per year (starting July 1, 2024); and (b) $1,128 per week / $58,656 per year (starting Jan. 1, 2025). The level set to take effect in January 2025 is slightly higher than the change DOL originally proposed.
• The required federal compensation level for employees to qualify for the less-demanding duties test for highly compensated employees (HCE) will increase from $107,432 per year to (a) $132,964 per year (starting July 1, 2024); and (b) $151,164 per year (starting Jan. 1, 2025), of which at least $844 and then $1,128 per week (i.e., the new applicable standard salary level) must be paid on a salary or fee basis. The announced January 2025 HCE level also is higher than the change DOL originally proposed.
• DOL says that it will update the salary levels every three years, theoretically to maintain consistency and keep pace with inflation. The first update will occur July 1, 2027.
  • Scheduled updates to the basic salary level “will apply updated earnings data to the methodologies in effect at the time of the updates.”
  • Scheduled updates to the HCE salary level will “reflect current earnings data using the most recent available four quarters of data, as published by [the U.S. Bureau of Labor Statistics] and using the methodologies in effect at the time of each update.”
  • Per the DOL, the new rule “therefore establishes triennial updates of the standard salary level and the HCE total compensation threshold using the same methodologies used to set those thresholds. Assuming the Department has not engaged in further rulemaking, the Department anticipates the second update under the updating mechanism—which will occur 3 years after the date of the initial update . . . will use the methodologies established by this final rule as those will become effective before the second update. Accordingly, the second update will reset the standard salary level to the 35th percentile of weekly earnings of full-time workers in the lowest-wage Census Region and will reset the HCE total annual compensation threshold to the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally based on contemporaneous data at that time.”
  • Further, per DOL, “[t]he rule includes a provision allowing the Department to temporarily delay a scheduled update where unforeseen economic or other conditions warrant.”
• Despite the prior proposal, the final rule does not remove special federal salary levels currently applied in U.S. territories. As before, for Puerto Rico, the Commonwealth of the Northern Mariana Islands (CNMI), Guam and the U.S. Virgin Islands, the special salary level remains $455 per week / $23,660 per year. Also, for American Samoa, the special salary level remains $380 per week / $19,760 per year. Per DOL, “[a]lthough the Department proposed changes to these special salary levels in the 2023 [Notice of Proposed Rulemaking], the Department did not finalize these proposed changes and will address the special salary levels for U.S. territories in a future final rule.”
• Likewise, despite the prior proposal, the final rule does not change the special federal base rate used for certain exempt employees in the motion picture industry. Per DOL, that amount remains $1,043 per week (or a proportionate amount based on the number of days worked), to be potentially revised “in a future final rule” as well.
• The first increases will become fully effective on July 1, 2024. The new EAP and HCE amounts taking effect on that date are both just over 23% higher than the levels currently in place. The amounts set to take effect in January 2025 will represent a further increase of over 33% in the EAP required basic salary level, but only a 13% further increase in the required HCE total compensation level.
• In addition, salary levels are not calculated on a full-time equivalent basis for purposes of part-time personnel, albeit as a practical matter many part-time employees will not work more than 40 hours a week to earn potential federal overtime.

Resources

DOL has released several resources to accompany its announcement, including:

• a press release;
• frequently asked questions; and
• a chart regarding earnings thresholds for EAP employees.

McGuireWoods will continue to provide updates as the final rule is analyzed in detail. The firm also will host a webinar on the topic May 9, 2024.