DOL Raises Salary Threshold for FLSA Exempt Employees

Recent changes to federal labor laws are set to significantly impact the landscape of overtime eligibility for salaried employees across the United States. On April 23, 2024, the U.S. Department of Labor (DOL) released its final ruling on updating the minimum salary requirements for overtime exemptions under the Fair Labor Standards Act (FLSA).

Key Takeaways:

• The Department of Labor’s (DOL) final rule significantly increases the minimum salaries required for certain FLSA overtime exemptions.
• Based on the latest wage data, the rule mandates updates to the earnings thresholds every three years.
• An initial threshold increase will take effect by July 1, 2024.
• The full increase will become effective on January 1, 2025.

FLSA Background

The FLSA mandates that most U.S. employees receive at least the federal minimum wage for all hours worked and overtime pay at a rate of at least time and a half for hours over 40 in a workweek. However, Section 13(a)(1) exempts bona fide executive, administrative, professional, and outside sales employees from both minimum wage and overtime pay, known as the “white-collar” or “EAP” exemptions. To qualify, employees must meet specific job duty tests and be paid on a salary basis, historically at least $684 per week. This amount cannot be reduced based on work quality or quantity, and exempt employees must receive their full salary for any week they work.

Additionally, the DOL established a highly-compensated employee (HCE) test, assuming those earning a significantly higher annual amount will meet the standard duties test. In 2019, the HCE threshold was set at $107,432 per year.

New Salary Thresholds for Exempt Employees

Starting July 1, 2024, salaried employees must earn at least $844 per week (equating to $43,888 annually) to be exempt from overtime pay. This threshold will further increase to $1,128 weekly (or $58,656 annually) on January 1, 2025. 

The highly compensated employee (HCE) exemption threshold will also see adjustments, rising to $132,964 annually on July 1, 2024, and then to $151,164 annually on January 1, 2025.

This move aims to keep pace with economic realities and ensure fair compensation for employees. Changes made by the new final rule closely align with the proposed rule published in September 2023. These updates mark the first revisions to the overtime exemption salary thresholds since 2019. 

The new rule is expected to increase the number of employees eligible for overtime pay under the FLSA, potentially expanding the types of jobs that qualify. Although states like California and New York, with higher state-mandated salary thresholds for overtime exemption, may not feel the immediate impact, this new federal rule is projected to affect an estimated four million employees across the United States.

Employers must decide whether to raise base salaries to meet the new thresholds if the rule takes effect or reclassify the workers as non-exempt and compensate them for any overtime hours worked at a rate of one and a half times (1.5x) their regular hourly rate.

VantagePoint is prepared to help employers review employee classifications and implement any necessary changes. We will also continue to monitor developments in this area closely.

What is the White-Collar Exemption Rule?

Under the FLSA, employees are entitled to overtime pay for all hours worked beyond 40 in a single workweek, unless specifically exempted. The FLSA includes three primary white-collar exemptions: executive, administrative, and professional (EAP). Additionally, current regulations exempt highly compensated employees (HCEs) from overtime rules if they earn at least $107,432 annually and regularly perform one or more duties covered by the EAP exemptions.

The new DOL final rule will implement three key changes to the FLSA exemptions:

1. The minimum weekly salary will increase to $844 per week, equivalent to $43,888 per year, starting July 1, 2024 (calculated using the 2019 methodology). This threshold will then rise to $1,128 per week, or $58,656 per year, on January 1, 2025, based on the 35th percentile of salaries in the lowest-wage Census Region (the South).
2. The total annual compensation for the HCE exemption will increase to $132,964 on July 1, 2024 (calculated using the 2019 methodology). This threshold will further increase to $151,164 on January 1, 2025, reflecting the 85th percentile of full-time salaried workers nationally.
3. Future updates to the earnings thresholds will occur every three years, based on the latest wage data.

In a departure from the proposed rule, the new rule does not apply the standard EAP exemptions to the U.S. territories of Puerto Rico, Guam, the U.S. Virgin Islands, and the Northern Mariana Islands. In a footnote, the DOL mentioned that it “will address these aspects of the proposal in a future final rule.”

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Recommendations for Employers

• Review Current Exempt Workforce: Employers must carefully evaluate how these changes impact their workforce. Many employees previously exempt from overtime may now be eligible, potentially leading to increased business labor costs. 
• Develop a Compliance Strategy: Employers have several options for compliance. They can raise the salaries of exempt employees to meet the new thresholds or reclassify employees as nonexempt, which may increase overtime costs. Additionally, employers should verify that they comply with any state-specific overtime salary thresholds.
• Assess the Impact of the New Rule: In light of these changes, employers are advised to review their employee classifications, budget for potential increases in labor costs, and communicate any modifications to their staff. 
• Make the Right Decision: We also advise employers to hold off on immediate changes to comply with the new rule, as it may be delayed or blocked by legal challenges. However, employers should identify any exempt employees whose salaries may fall short of the proposed increases for July 1 and January 1. They should then decide on a case-by-case basis whether to raise salaries or reclassify these employees as non-exempt.
• Additional Considerations: Nonexempt employees must accurately track their time according to the employer’s policies. With the potential increase in nonexempt employees due to the new rule, employers should review and ensure their timekeeping policies and procedures are compliant and accurate.

These updates to the FLSA represent a substantial shift in how overtime eligibility is determined, with the potential to affect millions of workers and companies nationwide. Staying informed and proactive in adapting to these changes will be crucial for businesses to navigate this evolving landscape successfully.

Seeking guidance from the VantagePoint team, with their expertise in workforce development and navigating labor regulations, can ensure compliance with these new regulations and a smooth transition for all parties involved. Get in touch with us!