Seyfarth synopsis: Today, the U.S. DOL unveiled its final overtime rule. The rule significantly increases the minimum salary for so-called “white collar” employees to be exempt from the federal FLSA’s overtime pay requirements. This development requires attention from virtually all employers.
The DOL’s final overtime rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, revises the Fair Labor Standard Act’s overtime exemptions for executive, administrative, professional, and highly compensated employees. Effective July 1, 2024, an executive, administrative, or professional employee must receive a salary equivalent to $43,888 per year in order to be classified as exempt. This will increase to $58,656 on January 1, 2025. Meanwhile, the annual compensation threshold for the highly compensated employee exemption will increase to $132,964 on July 1, 2024, and then again to $151,164 on January 1, 2025.
These numbers are higher than what the DOL previewed in its August 2023 proposed rule. And they represent a significant jump from the current $35,568 salary level for executive, administrative, and professional employees, and the $107,432 minimum compensation level for highly compensated employees.
These significant increases will have substantial implications and impacts across industries and command employers’ attention.
The Changes
The final rule presents three core changes to the rules framing whether and when an employee may be classified as exempt from the FLSA’s overtime pay requirements:
- Increased salary for “white collar” employees:The proposed rule increases the minimum salary level from $684 per week ($35,568 per year) to $844 per week ($43,888) effective July 1, 2024, and to $1,128 ($58,656) effective January 1, 2025.
- Increased total compensation threshold for the “HCE” exemption:The rule raises the total annual compensation requirement for the highly compensated employee exemption from $107,432 to $132,964 by July 1, 2024, and to $151,164 by January 1, 2025.
- Automatic updating every three years:The rule implements a triennial automatic update to these thresholds, designed, the DOL says, to align with shifts in worker salaries and provide employers with a predictable timetable for future adjustments. The updates will begin on July 1, 2027, and then occur every three years thereafter.
As expected, the changes leave the “duties” tests for the exemptions untouched. So, as before, an employee generally must meet both the duties and pay requirements of at least one exemption in order to be classified as exempt.
The Rule’s Road Ahead
The final rule will go up on the Federal Register for public inspection before formal publication, likely in the next few days.
The rule will face challenges in courts and potential scrutiny in the event of presidential administration turnover following the November 2024 election. It is worth remembering that the Obama Administration’s 2016 rule revising the FLSA exemptions in a similar fashion—i.e., an increased salary threshold with automatic, inflation-based increases—was stymied by legal challenges and a new administration and never came into effect.
The DOL’s new rule is not immune to similar challenges, particularly as we approach another election cycle where compensation issues often become political footballs. Depending on Congress’s make up, the rule might also face challenges under the Congressional Review Act.
Next Steps for Employers
Despite likely legal challenges, employers cannot and should not bank on their success. Businesses must prepare for a final rule that takes effect on July 1, 2024, with a more pronounced change on January 1, 2025. While there are major variables in the upcoming presidential election, employers need to prepare for the current finalized rule.
Employers should promptly develop an accurate picture and understanding of their exempt workforce—i.e., what roles it comprises, how many incumbents occupy the roles, where they are located, what functions they perform, and, of course, how much they are paid. Understanding the contours of the exempt population will allow employers to begin thinking strategically to identify and triage the roles that are most impacted by the new rule or that otherwise command attention during this time of change.
Employers should partner with their attorneys internally and externally to understand how these changes affect their workforce. Seyfarth is on the cutting edge of these changes, with its comment on the proposed rule having been cited by DOL 17 times in the preamble to the final version. With the new rule, many exempt employees will become non-exempt, implicating a new set of state-by-state laws with which to comply. Employers may need to consider other workforce changes, as well as important training and communication strategies.