On April 23, 2024, the United States Department of Labor released a final rule raising the salary threshold for “white collar” workers—i.e., executives, professionals, and administrative personnel. While we expect there will be legal challenges to this rule, if it takes effect, businesses will need to raise their employees’ salaries to meet the new threshold or reclassify them as eligible for overtime.
The Salary Basis Test—Generally
The Fair Labor Standards Act (“FLSA”) generally requires employers to compensate employees who work more than forty hours per week with overtime pay. 29 U.S.C. § 207(a). However, the statute exempts from coverage “any employee employed in in a bona fide executive, administrative, or professional capacity.” Id. § 213(a)(1). Congress delegated to the Department of Labor the responsibility of developing regulations defining the scope of these exemptions. A job title alone is insufficient to establish the exempt status of an employee. 29 C.F.R. § 541.2. The exempt or nonexempt status of any particular employee must be determined on the basis of whether the employee’s salary and duties meet the requirements of the regulations. Id.
An employee will be considered to be paid on a “salary basis” if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.
The current rule requires a total salary of $35,568 which equals a guaranteed weekly payment of at least $684/week.
The New Final Rule
The new final rule increases the salary threshold significantly. On July 1, 2024, the rule will raise the salary threshold for the “white collar” exemptions to $43,888—i.e., $844/week. On January 2025, the rule will raise the salary threshold for “white collar” exemptions to $58,656, i.e. —$1,128/week. The rule contemplates automatic updates every three years from that point.
The updated methodology for the January 2025 increase ties the salary threshold to the 35th percentile of non-hourly workers in the lowest-earning Census region (currently the South) and will be used to determine the salary threshold going forward.
The final rule also raises the minimum salary for highly compensated employees. That increase will also take effect in two steps. On July 1, 2024, the salary threshold will rise from $107,432 to $132,964 per year. On January 1, 2025, it will rise to $151,164. This level will be tied to the 85th percentile of all non-hourly workers nationwide and will also be updated every three years.
Can Anything Stop This Rule from Going Into Effect?
Because the final rule is considered a “major rule,” it cannot take effect for 60 days which is why the Department announced a July 1st effective date. Past salary threshold increases have been challenged in court and we expect similar challenges here. We will continue to update this blog with information concerning legal challenges and results.
What Should Employers Do To Prepare?
Employers need to start to immediately review their current salaries and determine what is necessary to come into compliance with the new overtime rule should it become effective. As noted above, the employer really has two choices: (i) increase the employee’s salary to meet the new threshold or (ii) reclassify the employee as non-exempt and begin paying them overtime. We recommend you consult with experienced counsel given the challenges that come from reclassifying previously exempt employees.
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