By: Laura M. Raisty

On April 23, 2024, the U.S. Department of Labor released a final rule that will substantially increase the salary threshold to qualify for certain overtime exemptions under the Fair Labor Standards Act (“FLSA”). While the final rule may not survive expected legal challenges, its current effective date is July 1, 2024. Employers are therefore well advised to prepare for its implementation by reviewing salary levels and classification of current employees to ensure compliance.

Changes to the Salary Threshold for the White-Collar Exemptions

The FLSA requires employers to pay employees an overtime premium of 1.5 times their regular rate of pay for all hours worked over 40 in a workweek unless they fall under one of the FLSA’s exemptions. Among these exemptions are the “white-collar” exemptions, which apply to professionals, executives, and administrative personnel who meet both the FLSA’s salary and duties tests.

The duties test requires that the employee primarily perform duties consistent with the specific exemption (1).  The salary test currently requires that the employee must be paid at least $684 per week ($35,568 annually) on a “salary basis,” – which is a set amount each week regardless of the number of hours worked.

The new final rule makes significant changes to the salary test. Specifically:

  1. As of July 1, 2024, the new salary threshold will increase to $844 per week, which is $43,888 annually. This is a 23% increase over the current level.
  2. As of January 1, 2025, the salary threshold will increase again to $1,128 per week, which is $58,656 annually. This is a nearly 65% increase over the current level.
  3. Thereafter, the salary threshold will increase every three years based on wage data at the time.

Changes to the Salary Threshold for Highly Compensated Employees

The new final rule also affects the FLSA’s special rule for “highly compensated” employees. A highly compensated employee is also exempt from the overtime requirement of the FLSA if they, like those to whom the white-collar exceptions apply, meet a salary and duties test.

The duties test requires that the employee performs primarily office or non-manual work and customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee. The salary test currently requires that the employee must be paid total annual compensation of at least $107,432, which includes at least $684 per week paid on a salary basis (2).

The new final rule also changes the salary test for highly compensated employees as follows:

  1. As of July 1, 2024, the new minimum salary threshold will increase to $132,964 annually, which must include at least $844 per week on a salary basis. This is a 23% increase over the current level.
  2. As of January 1, 2025, the minimum salary threshold will increase again to $151,164 annually, which must include at least $1,128 per week on a salary basis. This is 41% increase over the current level.
  3. Thereafter, the salary threshold will increase every three years based on wage data at the time.

Legal Challenges and Next Steps

A previous attempt to raise the overtime salary threshold during the Obama Administration failed in 2017. Because the new final rule released on April 23, 2024, includes many of the same provisions and methodology that were struck down in 2017, legal challenges are expected that will delay or void the current July 1, 2024, effective date.

If, however, the final rule withstands legal challenges, employers must review employee salaries and job descriptions to determine if the final rule will require reclassification of currently exempt employees or raising their salaries. With the current effective date of July 1, 2024 still in place, employers should not wait to begin this review. Moreover, this review can be complicated and is fraught with potential legal risk. Accordingly, employers as well-advised to consult with counsel to assist in the process.

Our team will continue to monitor developments relating to the final rule, and employers and employees with questions are encouraged to contact an employment attorney at Kenney & Sams.

(1) A full analysis of the duties tests for the white-collar exemptions is beyond the scope of this article.  Generally, however, it assesses whether an employee’s job responsibilities, such as managerial, administrative, or professional tasks, meet the criteria for exempt status.  Employers with any questions or concerns relating to the duties test and proper classification of their employees are encouraged to contact an employment attorney at Kenney & Sams.
(2) Because a highly compensated employee’s compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation, it is also important to ensure that they are also meeting the new weekly salary thresholds and being paid on a salary basis for the exemption to apply.

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This alert is for informational purposes only and may be considered advertising. It does not constitute the rendering of legal, tax, or professional advice or services. You should seek specific detailed legal advice prior to taking any definitive actions.