DOL Increases Minimum Salary Required for Overtime Exemptions

On April 23, 2024, the U.S. Department of Labor (DOL) released a final rule increasing the compensation employers must pay to certain categories of employees to be exempt from the overtime and minimum wage requirements of the Fair Labor Standards Act (FLSA). The rule increases the minimum salary required for the executive, administrative and professional employee exemptions (known as the EAP or white collar exemptions) and includes additional increases for the highly compensated employee exemption (HCE). These changes will become effective in two stages, with an initial increase on July 1, 2024, and a more substantial increase on January 1, 2025.

The DOL estimates that this rule will, in its first year, affect more than 4 million employees nationwide who are currently exempt and will result in direct employer costs of $803 million per year over the first 10 years. While lawsuits challenging the final rule are likely, employers should not count on a court to block its implementation.

Summary of Key Changes

As described below, the DOL’s final rule:

• Increases the minimum salary level requirement for all EAP and HCE exempt employees to $844 per week ($43,888 per year) on July 1, 2024, with an additional increase to $1,128 per week ($58,656 per year) on January 1, 2025.
• Increases the total annual compensation threshold for HCE exempt employees to $132,964 per year on July 1, 2024, with an additional increase to $151,164 per year on January 1, 2025.
• Includes a new mechanism for regular updates to minimum required salary levels for all EAP and HCE exemptions and the total annual compensation threshold for HCE employees, with updates every three years beginning on July 1, 2027.
• Does not change the existing job duties tests for any exemption.

Increase in Salary Threshold for EAP Exemptions

To qualify for exempt status under the administrative, executive, or professional exemptions, an employee generally must meet three tests: (i) the employee must be paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed (salary basis test); (ii) the salary be at or above a specified weekly level (salary level test); and (iii) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by DOL regulations (duties test).

The DOL’s final rule updates the salary level requirement by first increasing the minimum salary level from its current level of $684 a week ($35,568 annually) to $844 per week ($43,888 annualized) on July 1, 2024. Then, effective January 1, 2025, all EAP exempt employees must be paid $1,128 per week ($58,656 annualized). The 2025 threshold is a 64% increase from the current threshold.

The final rule does not change the special salary levels for employees in Puerto Rico, Guam, the U.S. Virgin Islands, the Commonwealth of the Northern Mariana Islands, or American Samoa, or the special base rate for employees in the motion picture industry, as the DOL had initially proposed last year.

Increase in Compensation Thresholds for HCE Exemption

The DOL’s final rule also raises the compensation thresholds for the HCE exemption under the FLSA, which applies to employees who are paid a minimum required salary, receive a total annual compensation amount that meets or exceeds a set threshold, and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee. To qualify for this exemption, an HCE employee must currently receive at least $107,432 in total compensation per year, including at least $684 per week paid on a salary or fee basis. Beginning on July 1, 2024, an HCE employee must be paid at least $132,964 per year in total compensation, including at least $844 per week paid on a salary or fee basis. By January 1, 2025, all HCE employees must be paid at least $151,164 per year in total compensation, including at least $1,128 per week on a salary or fee basis—a 40% increase from the current threshold.

Regular Future Updates

The final rule also provides for regular updates every three years, starting on July 1, 2027, based on the most recent earnings data. Under the rule, the minimum required salary level will be set at the 35th percentile of weekly earnings of full-time non-hourly employees in the lowest-wage Census Region, while the HCE total annual compensation threshold will be set at the annualized earnings amount of the 85th percentile of full-time non-hourly workers nationally.

The DOL will publish these future updates to the required minimum thresholds at least 150 days before their effective date. To avoid increases during unforeseen economic or other conditions, the rule includes a provision allowing the DOL to delay a scheduled update.

Employer Action Items

This final rule will have significant effects for many employers that have executive, administrative, professional, or highly compensated exempt employees. Employers should:

1. Identify exempt employees affected by the new required compensation levels.
2. Develop an action plan for any affected employees by preparing to either increase salaries to meet the new thresholds or reclassify employees as nonexempt and comply with overtime pay requirements by the dates set forth above.
3. Create a communication plan following these widely publicized changes, being mindful of potential morale issues following any reclassifications to nonexempt status, along with the need to communicate practical information like timekeeping policies and procedures to newly nonexempt employees.

While the final rule did not change the job duties tests for any exemptions, this is an opportune time for employers to audit whether the job duties test is also satisfied for its exempt employees. If an employer decides to reclassify employees to nonexempt status after its audit based on job duties, doing so in connection with the change in salary thresholds may raise fewer red flags. Employers should strongly consider working with legal counsel to protect the audit by the attorney-client privilege.

Finally, employers should remember that some states have higher salary thresholds, different duties tests, or do not recognize certain exemptions at all. Increasing an exempt employee’s salary to comply with the new DOL rule does not ensure compliance with state laws that provide greater protections to employees.

Please contact any Fredrikson Employment & Labor attorney with questions or for assistance in navigating these changes.