Department of Labor increases minimum salary and compensation levels for overtime exemptions under the Fair Labor Standards Act (update)

At a glance

• On April 23, 2024, the Wage and Hour Division of the Department of Labor (DOL) issued its final rule regarding the executive, administrative, and professional (EAP) and the highly compensated employee (HCE) exemptions under the Fair Labor Standards Act (FLSA).
• The rule is scheduled to take effect on July 1, 2024, but legal challenges are expected.
• The DOL made no changes to the duties tests for these exemptions, but substantially increased the minimum salary and compensation thresholds for the EAP and HCE exemptions. 

---

Update: 25 September 2024

Effective January 1, 2025 (pending legal challenges), the DOL’s final rule will again increase the salary threshold for workers to qualify as exempt employees under the FLSA and therefore be exempt from overtime requirements.

• As of July 1, 2024, exempt employees must earn USD844 per week (or USD43,888 per year). This number will increase on January 1, 2025 to USD1,128 per week (or USD58,656 per year).
• As a reminder, to be properly classified as exempt from the FLSA, employees must (i) meet the salary threshold requirement and (ii) meet the duties test for one of the exemptions.
• The rule also increases the total annual compensation threshold for the employees who meet the 'highly compensated employee' exemption. The new requirements are as follows: As of July 1, 2024, highly compensated employees must earn USD132,964 per year. This number will increase on January 1, 2025 to USD151,164 per year.
• Legal challenges are pending.

On April 23, 2024, the Wage and Hour Division of the DOL issued its final rule regarding the EAP and the HCE exemptions under the FLSA. The DOL made no changes to the duties tests for these exemptions. However, it substantially increased the minimum salary and compensation thresholds for the EAP and HCE exemptions.

The rule is scheduled to take effect on July 1, 2024. While legal challenges are expected – and have hampered similar efforts by past administrations – employers are encouraged to consider the implications of the new rule and prepare for any necessary adjustments to their compensation plans and / or exempt classifications, while closely monitoring the legal landscape.

Summary of changes

The new rule increases the minimum salary level for EAP exemptions in two steps. Initially, effective July 1, 2024, the minimum salary for exemption will increase from the current USD684 per week (USD35,568 per year) to USD844 per week (USD43,888 per year). Next, effective January 1, 2025, the minimum salary will increase again to USD1,128 per week (USD58,656 per year). The January 1, 2025 salary level represents a roughly 65-percent increase from the current minimum salary for the EAP exemptions.  

The new rule also increases the minimum compensation for the HCE exemption in two steps. Effective July 1, 2024, the minimum compensation for the HCE exemption will increase from the current USD107,432 to USD132,964. Then, effective January 1, 2025, the minimum compensation for the HCE exemption will increase again to USD151,164 annually. The January 1, 2025 compensation level represents a roughly 41-percent increase from the current minimum compensation for the HCE exemption.

The new rule also calls for automatic increases to the minimum salary and minimum compensation thresholds for the EAP and HCE exemptions every three years, starting from July 1, 2024, with the amount of the increase tied to the salary rate for the 35th percentile of weekly earnings for full-time, salaried employees in the lowest earning census region (currently the South) for the EAP exemptions, and the 85th percentile for the HCE exemption.  

The changes to the salary thresholds will not apply to employees in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the US Virgin Islands.

The new rule will likely be challenged, as was the DOL’s 2016 rule issued under the Obama Administration, which ultimately was stayed prior to implementation. Still, employers are encouraged to assess the implications of the new rule and prepare to make any necessary changes to their compensation plans and / or exempt classifications if legal challenges fail.

Background

As we previously reported, on August 30, 2023, the DOL issued a proposed rule to increase the minimum salary for EAP exemptions and the minimum compensation for the HCE exemption. The proposed rule was open for comment through November 7, 2023. 

The DOL received 33,000 comments which covered the gamut of responses, from opposition to any increases – often noting that employers had voluntarily provided substantial pay increases in the wake of the COVID-19 pandemic – to advocacy for even higher thresholds. Specifically, concerns were raised that, because the DOL was setting new minimum compensation thresholds after significant voluntary raises since 2020, employers were effectively penalized for voluntary wage increases since the new thresholds for exemption were based off those voluntary increases. The DOL rejected these arguments, concluding:

• the fact that employee salaries have grown substantially since 2019 underscores the need for this rulemaking to the extent that employers have already been providing raises to exempt EAP workers since January 1, 2020 (the effective date of the 2019 final rule), as some commenters contended, those increases should be appropriately reflected in the earnings thresholds to ensure their effectiveness.

As a consequence, the new minimum salary and compensation thresholds set by the DOL represent an unprecedented increase in minimum compensation packages for exempt employees.

Anticipated challenges to the new rule

The DOL’s prior rule to increase minimum salary and compensation levels for the EAP and HCE exemptions in 2016 was successfully challenged in court. Nevada v U.S. Department of Labor, 275 F. Supp.3d 795 (E.D. Texas 2017). The district court concluded that the DOL had exceeded its authority both in setting the salary and compensation thresholds too high and in requiring automatic updates to those thresholds. Similar challenges to the DOL’s new rule may be expected here. However, it is unclear whether a ruling on any such challenge will be rendered before the July 1, 2024 effective date of the new rule.

Implications

Employers are encouraged to analyze whether and how to (1) raise the salaries of any currently-exempt employees whose salaries would not meet the updated minimum salary level (ie, USD844 per week by July 1, 2024 and USD1,128  per week by January 1, 2025) to maintain their exempt status; (2) reclassify currently-exempt employees whose salaries would not meet the updated minimum salary level and provide all requisite training regarding how to accurately record work time and comply with scheduling requirements applicable to non-exempt employees; and (3) coordinate with internal / third-party payroll providers to make regular rate calculations, pay overtime compensation, and issue wage statements for any employees reclassified from exempt to non-exempt.

At the same time, employers are encouraged to remain strategic when making decisions about increasing salaries or reclassifying employees in response to the new rule, including by monitoring anticipated legal challenges to the rule.