On April 23, 2024, the U.S. Department of Labor (DOL) announced a final rule that increases the minimum salary thresholds required for employees who are exempt from the Fair Labor Standards Act’s (FLSA) overtime requirements. Effective July 1, 2024, the minimum salary threshold for exempt employees will increase from $35,568 to $43,888. Six months later, on January 1, 2025, the salary threshold will increase again to $58,656.
The FLSA requires employers to pay at least the minimum wage for each hour employees work and overtime at a rate of one and one-half times the regular rate of pay for any hours worked over 40 hours in a workweek. However, employees who are paid a required minimum salary are exempt from the FLSA’s overtime requirements if they also satisfy the “duties test” for one of the “white-collar” exemptions, which include executive, administrative, professional, outside sales, and certain computer-related roles.
The outside sales exemption does not require payment of a minimum salary, and the computer employee exemption allows for covered employees to be paid either the required minimum salary or at an hourly rate of no less than $27.63 (which remains unchanged by the new final rule). The FLSA also has an exemption for highly compensated workers who earn a minimum of $107,432 each year, primarily perform office or non-manual work, and customarily and regularly perform at least one exempt duty.
What the Final Rule Does
The final rule made the following critical changes to the overtime requirements under the FLSA:
- The salary thresholds required for exempt status will increase from $35,568 to $43,888 starting on July 1, 2024, and to $58,656 starting on January 1, 2025.
- The salary threshold for highly compensated workers will increase from $107,432 to $132,964 starting on July 1, 2024, and to $151,164 starting on January 1, 2025.
- The salary thresholds will be updated every three years starting on July 1, 2027.
Notably, the final rule does not change any of the duties tests associated with the white-collar exemptions.
The final rule impacts a large swath of employees whose salaries fall between the current $35,568 and forthcoming $43,888 and $58,656 thresholds. To comply with the final rule once it becomes effective, employers will need to assess how to handle the classification of employees who currently earn at least $35,568 but less than $43,888 and $58,656. Further, employers will have to determine whether to make these changes in incremental steps by the July 1, 2024 and January 1, 2025 deadlines or all at once.
Anticipated Court Challenges
The final rule will almost certainly face court challenges in the coming weeks and months. The challenges to the 2016 final rule during the Obama Administration may shed some light on the road ahead. Under the Obama Administration, the DOL issued a final rule that would have substantially increased the minimum salary threshold for exempt employees from $23,660 to $47,476. Almost immediately, multiple states filed suit to prevent the rule from going into effect. Judge Amos Mazzant of the Eastern District of Texas granted the request for an emergency preliminary injunction before the final rule’s effective date and later granted a motion for summary judgment. Judge Mazzant reasoned that the 2016 final rule would have made previously exempt employees eligible for overtime pay solely based on their salary level and not the required duties-test component.
Under this new final rule, the first increase by July 1, 2024 may be less likely to draw court challenges; the DOL has not increased the salary threshold since January 1, 2020, and the $43,888 salary threshold increase is in line with the methodology used in previous increases that were not challenged in court (in 2004 and 2019). The second increase by January 1, 2025, however, is almost certain to draw challenges. As was the case for the December 1, 2016 final rule, the second increase to $58,656 may be perceived by courts as too much too soon. The question will then become whether courts allow the $43,888 salary threshold to go into effect and remain in effect regardless of the ultimate fate of the $58,656 increase.
Key Takeaways for Employers
Despite the anticipated legal challenges, employers must still be prepared to comply with the final rule. Employers should do the following before the first threshold increase on July 1, 2024:
- Identify the universe of exempt employees with salaries between the current salary threshold ($35,568) and the proposed new thresholds ($43,888 and $58,656) and decide whether to increase salaries to keep employees classified as exempt or convert them to non-exempt roles.
- Review and revise employee compensation budgets to reflect increased salary expenses and potentially increased overtime expenses.
- Plan for the rollout of reclassification decisions, which will include training reclassified, newly non-exempt employees on timekeeping requirements and rules against off-the-clock work (including, for example, responding to emails or phone calls during non-working hours – tasks that many exempt employees do on a regular basis), as well as managing employee relations issues if employees express concern about losing their salaried status and being required to “punch a clock.”
- Review exemption determinations more broadly. The change in the law may provide employers with an opportunity to reclassify employees whose duties may not clearly fall within one of the white-collar exemptions. While any reclassification carries risk, this update in the exemption requirements provides employers with an explanation for reclassification decisions.
Employers should take time to prepare for changes to their exemption classifications and related increases in labor costs as a result of the final rule. Understanding what the final rule does and does not do, as well as taking advantage of the time leading up to its July 1, 2024 and January 1, 2025 effective dates, may provide employers with opportunities to minimize the rule’s impact on their workforces. Employers should also continue to monitor court challenges to the final rule and prepare for uncertainty given the nature of litigation.
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