On April 23, 2024, the U.S. Department of Labor (DOL) announced a final rule that increases the salary thresholds required to classify certain employees as exempt from overtime pay requirements under the Fair Labor Standards Act (FLSA). The final rule, applicable to employees who otherwise satisfy the “white-collar” (bona fide executive, administrative, and professional) and “highly compensated” exemptions, is similar to the proposed rule DOL issued last August, although the salary thresholds in the final rule have been increased to align with the latest Census salary data.
The final rule represents a sharp increase—approximately 65%—from the current salary thresholds implemented in 2019 under the Trump Administration. The rule is scheduled to take effect in two phases, with the first phase effective July 1, 2024 and the second on January 1, 2025. Thus, employers have only a small window to determine how the rule will impact their operations and make any necessary adjustments.
Overview of the Final Rule
Currently, certain “white-collar” employees may be exempt from FLSA overtime pay requirements if they are paid on a salary basis, meet a minimum salary of at least $684 per week ($35,568 annually), and perform certain exempt job duties as described in the relevant regulations. An employee who performs at least one exempt duty and makes $107,432 annually may also be exempt as a “highly compensated” employee. The final rule does not make any changes to the “duties test,” so there will be no change to which types of workers qualify as “white-collar” based on the job duties they perform.
Under the new rule, the minimum salary thresholds for the white-collar and highly compensated exemptions will increase in two phases:
White-Collar Exemption
- July 1, 2024: $844 per week (or $43,888 annually)
- January 1, 2025: $1,128 per week (or $58,656 annually)
Highly Compensated Exemption
- July 1, 2024: $132,964 annually
- January 1, 2025: $151,164 annually
Significantly, instead of issuing future salary threshold changes through formal agency rulemaking, under the new rule salary thresholds will automatically update every three years to align with the latest Census salary data unless DOL decides to change its methodology or unforeseen economic conditions require a delay.
Possible Challenges to the Final Rule
The final rule may face legal challenges, similar to DOL rules issued under the Obama and Trump Administrations. For example, a Texas federal court invalidated the Obama Administration’s 2016 overtime regulations. More recently, in September 2023, a different Texas federal court rejected a challenger’s attempt to overturn the Trump Administration’s 2019 rule, holding that DOL permissibly used its authority to issue new salary thresholds. The U.S. Court of Appeals for the Fifth Circuit is currently considering that decision on appeal, and the outcome could pave the way for challenges to the final rule and delay implementation. A change in administration following the 2024 Presidential Election could also impact the future of the final rule.
Practical Tips for Employers
Despite legal and political uncertainty, employers should promptly consider how the changes will affect their workforce. As an initial matter, employers should identify whether they have exempt employees whose compensation will now fall beneath the new thresholds, and consider adjustments. Such employees could be reclassified as nonexempt (and thus overtime-eligible) or receive an increase in compensation by the July deadline to maintain their exemption. If employees will be reclassified as nonexempt, employers may want to assess budgetary impacts stemming from overtime costs, if such employees work outside of normal business hours. In addition, for newly classified nonexempt employees, employers will need to carefully track hours worked and ensure that employees receive all overtime compensation to which they are entitled.
As part of any reclassification plan, employers should be alert to morale issues that could stem from converting exempt employees to nonexempt, including using care in messaging the changes so that employees understand they are not being demoted or otherwise suffering an adverse employment action. Employees may also be frustrated with necessary changes to their timekeeping habits and reduced schedule flexibility, and managers may feel overburdened if they are required to take on extra work that used to be performed by reclassified employees. Employers should engage legal and human resources support to anticipate and manage issues arising from these changes.
Employers should also keep in mind that some states, such as California and New York, continue to have stricter requirements and higher salary thresholds for overtime exemption than the FLSA.
Although the timeline for implementation is somewhat uncertain, the new rule provides an opportunity for employers to assess the FLSA status of all employees and plan for any needed changes to ensure compliance if and when the rule becomes effective, which could be as early as July 1, 2024.