U.S. Department of Labor Increases Annual Salary Threshold for Certain Overtime Exemptions

On April 23, 2024, the U.S. Department of Labor ("DOL") announced that it is publishing a final rule ("Final Rule") increasing the minimum annual salary threshold for white-collar employees under the Fair Labor Standards Act ("FLSA").  This increase to the current minimum salary threshold is set to take place in two stages, with the first occurring effective July 1, 2024, and the second effective January 1, 2025. 

What's New

Effective July 1, 2024, the "standard salary level" used to determine white-collar exemptions to the FLSA's overtime provisions will increase from $684 per week ($35,568 per year) to $844 per week ($43,888 per year).  An additional increase will be implemented effective January 1, 2025, increasing the "standard salary level" to $1,128 per week ($58,656 per year).  It is anticipated that, unless salaries are increased to these minimum levels, the July 1, 2024 change will make approximately 1 million currently exempt workers eligible for overtime, and an additional 3 million employees will become eligible upon the January 1, 2025 increase.  Newly overtime-eligible employees who do not meet the new salary threshold under the FLSA must be paid 1.5 times their regular hourly rate for hours worked in excess of forty (40) hours per week.

What Isn't Changing

Though the Final Rule changes existing overtime laws under the FLSA, there are several aspects of the FLSA that will not change.

For example, the methodology used to determine employees exempt from receiving overtime remains the same.  To be exempt from receiving overtime, an employee governed by certain exceptions must: 1) be paid a guaranteed salary, meaning that the employee is paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality of work performed; 2) be paid a minimum salary level, the amount of which is specified in the two stage threshold increase implemented by the Final Rule; and 3) perform certain duties, primarily those which are executive, administrative, or professional as provided in the U.S. DOL's regulations.

Additionally, under the Final Rule, employers are permitted to continue using non-discretionary bonus and incentive payments (including commissions) to satisfy up to ten percent (10%) of the standard and special salary thresholds under specifically delineated circumstances.

Looking Ahead

Every three (3) years, the minimum threshold will be automatically updated using current wage data collected by the DOL.  This means that the next expected change will occur July 1, 2027.  However, should the DOL choose to engage in rulemaking to change or update methodology, updates may be temporarily delayed.

Key Takeaways for Employers:

While the DOL anticipates the Final Rule will face legal challenges, employers must prepare for its implementation by completing the following:

• Identify employees who may be affected.
• Compare the cost of increasing an employee's salary to meet the new minimum threshold with the cost of compensating overtime hours.
• Budget for increases in salary and overtime expenses.
• Prepare to increase compensation or change exempt classification for employees who will be affected by both the initial salary threshold increase and the subsequent January 1, 2025 salary increase.
• Should an employer choose to update salaries to meet the new minimum threshold, the employer should make sure that each such employee meets the applicable "duties test" under the FLSA.
• Develop a communication plan for implementing any reclassification of employees, including necessary training on timekeeping requirements and rules regarding outside of regularly scheduled hours work.
• If an employer reclassifies employees from exempt status to non-exempt status, the employer should consider how this change will impact employee engagement and morale. 
• Identify other company policies that are based on an employee's exempt or non-exempt status.
• Inform employees and managers in advance of the changes, including the impact the changes will have on time-keeping requirements.  Specifically, an employer should make sure employees and managers understand what counts as "hours worked." 
  

If you have any questions or concerns regarding this Client Alert, please contact the MacDonald, Illig, Jones & Britton LLP Labor & Employment team.