On April 23, 2024, the US Department of Labor (USDOL) issued its highly anticipated final rule (“Final Rule”) that will raise the standard minimum salary level needed for most white-collar exempt employees on July 1, 2024, and then increase it again beginning January 1, 2025. This Final Rule will also increase the total compensation minimum for highly compensated employees (HCEs) and will adopt a mechanism to update these thresholds going forward every three (3) years. While there may be legal challenges that prevent the Final Rule from taking effect, employers should still look at their current exemptions and prepare to adjust salaries if current salaries fall short of the new minimums.
How did we get here? Last Fall the USDOL proposed changes to the federal wage law overtime exemption requirements, specifically, the minimum salary for what is commonly referred to as the white-collar overtime exemptions (executive, administrative and professional exemptions). The proposed changes were published on September 8, 2023, and were open to public comment for 60 days ending November 8, 2023. Since then, employers have been waiting for the USDOL to announce the effective date of the changes. Most employers were making plans to update their exempt salaries where needed but veteran human resources professionals were still a bit wary because in 2016, when the salary minimums were scheduled to be substantially increased, a court blocked the implementation at the last minute.
During the public comment period in 2023, opponents to the new Rule expressed concern about the amount of the increase (65%) and its adverse impact on employers during a challenging economic environment. As a result, to assist in the transition. USDOL announced a two-part approach to compliance with the new Final Rule. This two-step process raises the salary threshold level on July 1, 2024, and again on January 1, 2025. Effective July 1, 2024, the Fair Labor Standards Act’s (FLSA’s) annual salary-level threshold for the salaried white-collar exemptions will increase from the current annual amount of $35,568 ($684 per week) to $43,888 ($844 per week). And then as of January 1, 2025, the annual salary threshold will rise to $58,656 ($1,128 per week). Likewise, for those employees who qualify for the HCEs overtime exemption, the total compensation annual minimum will increase from $107,432 to $132,964 (consisting of a salary of at least $844 per week plus other compensation) as of July 1, 2024 and then to $151,164 (consisting of a salary of at least $1,128 per week plus other compensation). See the USDOL’s website for more information on the Final Rule as well as frequently asked questions: https://www.dol.gov/agencies/whd/overtime/rulemaking.
In addition, perhaps because salary increases over the last fifty (50) years have been fairly irregular and not in keeping with wages, the Final Rule includes a three (3) year automatic adjustment mechanism for updating the salary threshold.
The Final Rule does not make any changes to the treatment of bonuses. Employers may use non-discretionary bonuses (such as those tied to productivity or profitability) and incentive payments (such as commissions) to satisfy up to 10 percent of the standard salary threshold requirement, provided that such payments are made on an annual or more frequent basis. Such non-discretionary bonuses and incentive payments can also be used to satisfy the HCE total compensation threshold.
In News Releases from USDOL, the Agency estimated that approximately 1 million currently exempt workers earn below the new $43,888 salary threshold and another 3 million currently exempt employees earn less than $58,656. Therefore, for currently exempt employees whose salary rates fall below these minimums, employers need to consider either increasing their salary rates to meet the new minimum levels or reclassifying these employees as non-exempt and entitled to overtime pay.
Business organizations (and possibly some states) are likely to file legal challenges to try and block the Final Rule from taking effect, as they did successfully in 2016. However, the outcome of such challenges is far from certain; therefore, covered employers should still review their current exemptions because misclassification could result in substantial liability for employers.
That exemption review, now and when the Final Rule is effective, should include making sure the employees whom the employer has classified as salaried exempt: 1) are paid on a salary basis at least at the current minimum salary level;2) and perform job duties that fit squarely within the applicable exempt category’s job duties test. To avoid confusion, this exempt status should be shared with those employees.
For employees who don’t meet the duties test or the new minimum salary levels, in other words, salaried nonexempt employees who are just like employees who are hired on an hourly basis, employers will need to: (a) confirm their schedule and work hours (this is especially important for employees who work remotely); (b) communicate their overtime eligibility; (c) review daily timekeeping policies and obligations; (d) review meal break and other work break policies; (e) confirm overtime advance approvals as applicable; and (f) train managers and supervisors on monitoring work hours and timekeeping.
Finally, it is important to remind employers with operations in other states that some state laws have different wage laws including but not limited to higher minimum salaries for overtime-exempt employees. Just as checking compliance with the FLSA Final Rule is recommended, staying up to date with those state laws will help reduce the likelihood of unfavorable wage audits or wage claims.
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