The Department of Labor (“DOL”) issued a final rule on April 23, 2024,* raising the salary threshold for the so-called “White-Collar” and “HCE” Exemptions to the Fair Labor Standards Act’s (“FLSA”) overtime pay requirement (the “Final Rule”). According to the DOL, the intent is to account for growth in employees’ earnings since 2019. While legal challenges temporarily (or even permanently) blocking the Final Rule are expected, employers should nevertheless familiarize themselves with the Final Rule and begin to consider how to address its changes if—or when—it comes into effect.
The White-Collar and HCE Exemptions’ Salary Basis Requirement
The FLSA requires that employers pay non-exempt employees minimum wage and at least one-and-a-half times their regular hourly rate of pay for all hours worked over 40 in a workweek. However, employees who meet (1) the “job duties” test (i.e., they are employed as a bona fide executive, administrative, professional, or computer employee within the meaning of the FLSA), and (2) the FLSA’s defined salary threshold are exempt from minimum and overtime pay requirements. These exemptions are commonly referred to as the “White-Collar” or “EAP” Exemptions.
Furthermore, so-called “highly compensated employees” are exempt from the FLSA’s minimum and overtime pay requirements if (1) their primary duty includes performing office or non-manual work; (2) they meet the HCE-specific “job duties” test; and (3) they are compensated according to the FLSA’s defined, HCE-specific salary threshold. This exemption is commonly known as the “Highly Compensated Employee” or “HCE” Exemption.
The Final Rule Raises the White-Collar and HCE Exemptions’ Minimum Salary Level
Assuming it is not temporarily (or permanently) blocked by the courts first, the Final Rule will increase the minimum salary level and total annual compensation level for the White-Collar and HCE Exemptions to $844 per week and $132,964 per year, respectively, effective July 1, 2024. The minimum salary and total annual compensation levels will then increase to $1,128 per week and $151,164 per year, respectively, effective January 1, 2025, and then every 3 years after the initial July 1, 2024 update.
For ease of reference, the DOL’s Wage and Hour Division posted the following table showing the scheduled salary level increases:**
Importantly, the Final Rule did not make any other changes to the White-Collar and HCE Exemption requirements. For example, employers can still satisfy up to 10% of the new salary level for the White-Collar Exemptions through the payment of nondiscretionary bonuses and incentive payments (including commissions) paid annually or more frequently. And, if employers have not met their financial obligations after the 52-week period, they will still be able to make a final “catch-up” payment within one pay period after the end of the 52-week period to bring an employee’s compensation up to the required level.
The Steps Employers Can Take Now to Prepare
As previously mentioned, the Final Rule will very likely be challenged in court, which may temporarily delay—or even permanently block—its enforcement. There are also some arguments that made their way into a 2022 Supreme Court of the United States (“SCOTUS”) dissent suggesting that the DOL has no authority to set minimum salary levels in the first place. If a similar challenge is brought against the Final Rule and eventually winds its way up to SCOTUS, there is a chance that the entire salary level test may be invalidated in the future.
However, such challenges could take years to resolve, during which time the Final Rule might remain in effect. There is also a chance that any legal challenges will ultimately fail. Employers should therefore begin to plan for the Final Rule to take effect as scheduled, including by:
- Reviewing existing employee classifications to determine whether they will be exempt under the new salary threshold for the White-Collar and HCE Exemptions.
- If certain employees will no longer be exempt under the new salary threshold, consider (a) raising their salaries so that they remain exempt; or (b) reclassifying them as non-exempt employees entitled to overtime.
- If previously exempt employees are reclassified as non-exempt employees (and are therefore entitled to overtime), consider (a) how to begin tracking their hours worked; (b) updating timekeeping policies and practices as needed; and (c) training newly non-exempt employees on how to follow the timekeeping policies and practices.
* April 23, 2024, was a busy day for labor and employment attorneys across the nation, as the Federal Trade Commission released an unrelated final rule of its own that same day. Click here to read more on this ruling.
** Final Rule: Restoring and Extending Overtime Protections, U.S. Department of Labor, Wage and Hour Division (last accessed Apr. 29, 2024), https://www.dol.gov/agencies/whd/overtime/rulemaking
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