With the salary threshold increase for exempt employees taking effect this Monday, businesses across industries are bracing for a transformative shift in their payroll practices.

The Fair Labor Standards Act (“FLSA”) sets the federal minimum hourly wage and one-and-a-half rate overtime pay for hours worked above 40 per week.  These requirements apply to most employees in the United States. However, certain classes of employees, such as white-collar workers, are exempt from both the minimum wage and the overtime rate requirements under FLSA. 

Whether an employee is “exempt” may be determined by whether an employee receives a salary, whether the amount of the salary meets the threshold, and whether the employee performs certain executive, administrative, and/or professional duties. Currently, to be considered an exempt employee, one must earn a fixed salary of more than $684 per week ($35,568 per annum) and satisfy the standard duties test.  As of July 1, 2024, all employees in the United States who earn less than $844 per week ($43,888 per annum) cannot be considered exempt from the requirements of the FLSA’s minimum wage rates and overtime pay requirements.  The final threshold will increase again on January 1, 2025, to a minimum salary of $1,128 per week ($58,656 per annum).

The updated rule will also raise the salary threshold for the “highly compensated employee” exemption.  Unlike the executive, administrative, and professional exemption for white-collar workers, the “highly compensated employee” exemption does not require the employee to receive a fixed or weekly salary and only a reduced duties test needs to be satisfied if the employee earns above the threshold. Presently, this threshold is set at $107,432 per annum.  As of July 1, 2024, the annual salary threshold will increase to $132,964.  On January 1, 2025, the annual salary threshold will increase again to $151,164. 

The Department of Labor has stated that it intends to update these thresholds every three years beginning on July 1, 2027.

With the first increase going into effect next week, employers should review the salaries of currently-exempt employees to ensure that they meet the July 1, 2024 and January 1, 2025 thresholds.  From there, employers should consider whether to increase salaries or to reclassify such employees and issue payment in conformity with FLSA requirements.  Employers should also consider state-based requirements which may exceed the federal threshold limits, such as those in New York and California.