New Minimum Salary Requirements

On April 23, 2024, the U.S. Department of Labor (DOL) issued a final rule raising the minimum salary employers must pay exempt employees under the federal Fair Labor Standards Act (FLSA). Though the rule is facing legal challenges, employers are preparing for what comes next.

If you have exempt employees, here is what you need to know.

What Was the State of the Law Before the Change?

In order to be exempt from federal minimum wage and overtime laws, an employee must:

1. Be paid on a salary basis (i.e., be paid a predetermined, set amount not subject to reduction based on quality or quantity of work performed);
2. Be paid at least the minimum salary level; and
3. Satisfy the duties test required for the applicable exemption.

The minimum salary level was previously set at $684 per week/$35,568 per year for most exemptions and $2,066 per week/$107,432 per year for highly compensated employees.

What Changed?

The new rule only changes the salary level requirements. The salary basis and job duties requirements remain the same.

Under the new rule:

• The minimum salary level for executive, administrative, and professional exempt employees increased to $844 per week/$43,888 per year on July 1, 2024, and will increase again to $1,128 per week/$58,656 per year on January 1, 2025.
• The minimum salary level for highly compensated employees increased to $2,557 per week/$132,964 per year on July 1, 2024, and will increase again to $2,907 per week/$151,164 per year on January 1, 2025.

Who Do the Changes Affect?

The new rule raises the minimum salary threshold for employees who are exempt under the executive, administrative, professional, and/or highly compensated employee exemptions. Employers utilizing these exemptions will also be impacted — especially if their employees’ salaries are near the current minimum threshold.

DOL estimates that more than four million currently exempt employees will be affected nationwide and that the rule will cost employers $803 million per year — for the next 10 years.

When Do the Changes Go Into Effect?

Provided there is no legal ruling that invalidates or changes the rule or its requirements, the new salary requirements go into effect as follows:

• The first increase was effective July 1, 2024.
• The second increase will go into effect January 1, 2025.
• The minimum threshold will automatically be updated every three years after that, starting on July 1, 2027.

What Should Employers Do Now?

As of the date this article was written, the final fate of the new rule remained unknown. Nonetheless, many employers are using this as an opportunity to review their employees’ exempt status and prepare for potential changes.

If you have exempt employees, you may want to consider one or more of these steps:

1. Review (and update if necessary) exemption classifications. Ensure job descriptions and classifications are current and accurately reflect employees’ current jobs. If reclassification is required, doing so now, in connection with changes to the salary thresholds, will raise fewer questions or concerns.

Note, if conducting an internal audit — or if you have questions about proper classification — work with an employment attorney to ensure legal compliance and that the audit and its analysis are protected by the attorney-client privilege.

2. Identify exempt employees affected by the new minimum salary levels. While this is an opportune time to review every employee’s exemption status, pay particular attention to employees who are at or near the existing minimum threshold. Keep in mind that the salary level will increase again in January 2025.

3. Keep state exemption requirements in mind. Some states have higher salary thresholds, different duties tests, or do not recognize certain exemptions at all. Be sure to consider all applicable laws when assessing classification status and/or salary requirements.

4. Create an action plan for affected employees. If an exempt employee’s salary is at or near the existing minimum threshold, you will need to decide whether to increase the employee’s salary to meet the new threshold — or reclassify the employee as nonexempt. If reclassifying, you will need to ensure the Bank and employee comply with all nonexempt wage and hour requirements moving forward. This includes accurate timekeeping, payment above minimum wage, and overtime pay.

5. Determine the best way to communicate any changes. If an employee’s position is reclassified, be deliberate — and considerate — in how the change is communicated to him or her. Some employees may view the change as a demotion and/or not want to make the change. Therefore, the Bank must communicate the changes in a way that allows the affected employees to be heard, while also ensuring they understand what the change in status entails and what is expected of them moving forward.

6. Update any required wage disclosures. Some states, like Minnesota, require employers to provide advance written notice of wage or benefit changes.

7. Keep abreast of any legal developments or changes. This is a dynamic situation — both because there are pending legal challenges to the rule and because the rule itself has multiple built-in increases.