Effective July 1, 2024, the U.S. Department of Labor’s (“DOL’s”) final rule on salary minimums for exempt employees (the “Overtime Rule”) under the Fair Labor Standards Act (“FLSA”) has come into effect. This rule applies to executive, administrative, professional, outside sales, and certain computer employees, common known as the “EAP” or “white collar” exemptions. It also includes an increase in the annual compensation threshold for employees classified as “highly compensated.” Additionally, the rule outlines scheduled increases in salary thresholds, with subsequent adjustments planned for January 1, 2025, July 1, 2027, and every 3 years thereafter.
The limited exception to the Overtime Rule relates to a lawsuit filed by the State of Texas, in which a federal court in Texas has blocked the DOL from enforcing the increased salary thresholds under the Overtime Rule for Texas state employees. However, the Overtime Rule took effect for all other employers on July 1, 2024. More details about this lawsuit and other legal challenges to the Overtime Rule are provided below.
The Increased Salary Thresholds
Before July 1, 2024:
Under the previous FLSA overtime rule, employees needed to earn at least $684 per week ($35,568 annually) and fulfill specific job duty criteria to qualify as exempt from FLSA overtime requirements. Highly compensated employees, on the other hand, had to earn at least $107,432 annually, including a weekly salary of $684, along with other minimum job duty requirements, to be classified as such.
As of July 1, 2024:
The Overtime Rule raises the minimum salary threshold for exemption to $844 per week ($43,888 annually) and maintains the same job duty requirements for exemption status. It also increases the minimum annual compensation threshold for highly compensated employees to $132,964 annually, including a weekly salary of $844, and maintains the additional job duty criteria.
As of January 1, 2025:
The Overtime Rule further increases the minimum salary threshold for exempt employees to $1,128 per week ($58,656 annually) for white collar exemptions, and sets the minimum annual compensation for highly compensated employees at $151,164, including a weekly salary of at least $1,128. Starting January 1, 2025, the methodology for determining these thresholds shifts from using the 20th percentile of weekly earnings in the lowest U.S. wage region, the South, to the 35th percentile, updated with current wage data.
As of July 1, 2027 (and every 3 years thereafter):
The standard salary thresholds for FLSA overtime exemptions will be recalculated using the updated methodology tied to the 35th percentile of weekly earnings in the lowest U.S. wage region, based on current wage data. Threshold increases will occur every 3 years thereafter.
Other Exemption Classification Requirements
In addition to meeting the applicable salary thresholds discussed above, employees must satisfy other criteria to qualify as exempt under the FLSA, including:
- Receiving a “salary,” defined as a fixed and predetermined amount that isn’t subject to reductions based on the quantity or quality of work performed. This may also apply to hourly employees in certain cases;
- Being paid at least a specified weekly salary; and
- Primarily engaging in executive, administrative, professional, outside sales, or computer-related duties as outlined in the DOL’s regulations. More details on these duties can be found here: DOL’s Fact Sheet on Overtime Exemptions.
To comply with the FLSA, highly compensated employees must be salaried (as defined above), earn more than the applicable annual compensation threshold, and regularly perform at least one duty or responsibility of those meeting white collar exemption standards. Additional information about requirements for the “highly compensated” employee classification can be found here: DOL’s Fact Sheet on Highly Compensated Employees.
Consequences of Misclassification
While the Overtime Rule itself does not alter penalties for misclassifying exempt employees, the FLSA imposes significant financial repercussions for such errors. Employers found to have misclassified employees as exempt may be liable for all unpaid overtime owed to the employee for up to 3 years prior to the employee’s claim. Additionally, courts have the authority to impose liquidated damages equivalent to the total unpaid overtime, effectively doubling the amount owed to the misclassified employee by the employer. Furthermore, employers who willfully or repeatedly misclassify employees as exempt may face civil penalties of up to $1,000 per violation, and in severe cases, criminal prosecution. Employers should also be aware of potential state-imposed penalties if misclassification violates state or local wage and hour laws.
Additionally, it’s crucial for employers to consider the impact of the Overtime Rule on classification status concerning the enforceability of restrictive covenants in states where exemption status is a prerequisite. For instance, in Rhode Island and Massachusetts, compliance with FLSA overtime requirements may determine whether certain post-termination restrictive covenants are enforceable.
Limitation of the Overtime Rule Against the State of Texas and Other Legal Challenges
On June 28, 2024, the final business day before the Overtime Rule took effect on July 1, a Texas federal judge issued a preliminary injunction that delays the rule’s implementation specifically for Texas state employees. This decision, made in the case of State of Texas v. U.S. Department of Labor, suggests that the judge believes Texas is likely to succeed in arguing that the DOL exceeded its statutory authority by focusing on compensation rather than job duties in determining overtime classification under the FLSA.
The court’s rationale in State of Texas indicates that the DOL’s adjustment to the minimum salary thresholds for exemption contradicts the clear text of the FLSA’s EAP exemption, which emphasizes that employers should primarily base overtime classification on an employee’s job, rather than focusing on the employee’s compensation. This injunction applies only to Texas state employees, while all other employers must now comply with the new salary thresholds outlined in the Overtime Rule. However, the outcome of the State of Texas case may set a precedent for similar challenges to the Overtime Rule. The judge highlighted the potential impact on other pending cases and indicated his decision might shape future interpretations of the rule’s legality.
In another case before a Texas federal court, Flint Ave., LLC v. U.S. Department of Labor, a software company seeks a nationwide injunction against the Overtime Rule, similarly arguing that the DOL’s adjustment of the salary level test exceeds the DOL’s statutory authority. According to the employer’s brief supporting its motion for injunctive relief, “[the] DOL has usurped Congress’s prerogative to establish overtime wages by unilaterally grafting the salary level test” to the FLSA. Additionally, a case currently under consideration by the Fifth Circuit questions the DOL’s authority to establish any minimum salary requirements for overtime exemptions. This case predates the announcement of the Overtime Rule but could significantly impact its enforcement, depending on the Fifth Circuit’s ruling.
Next Steps for Employers
Employers are strongly encouraged to prepare for the impacts of the Overtime Rule and ensure compliance immediately. Here are recommended steps:
- Review current employee classifications and compensation data to identify those who may need reclassification based on the updated salary thresholds. This is also an opportunity to correct any inadvertent misclassifications.
- Evaluate compliance strategies, such as considering reclassification, adjusting compensation, or redistributing exempt duties, based on the review of employee classifications.
- Develop communication plans to inform affected employees about changes to their employment status.
- Ensure newly classified non-exempt employees have the necessary timekeeping resources if they previously did not track their time.
- Seek guidance from our Employment group regarding employee classification, compliance strategies, or any other FLSA-related concerns.
