Department of Labor Dramatically Raises Exempt Salary Requirements

The U.S. Department of Labor published its final rule increasing the salary threshold under the Fair Labor Standards Act (FLSA) for White Collar Exemptions on April 26, 2024. Exempt status applies to employment positions that are not eligible for overtime compensation because they involve the performance of certain types of duties (executive, administrative, or professional) and, generally speaking, because the positions are paid an irreducible minimum weekly or annual salary amount that is at least the amount established by the Department of Labor.

The FLSA Requirements – Exempt Status Requirement

Under the Fair Labor Standards Act, all covered employees must receive pay at a rate of at least time and one half (1.5x) their regular rate of pay for all hours worked in excess of 40 hours in any given workweek established by the employer. However, the FLSA exempts “any employee employed in a bona fide executive, administrative, or professional [(EAP)] capacity” from the minimum wage and overtime pay requirements. This provision is usually referred to as the “White-Collar exemption” or the EAP exemption. Typically, those implementing the EAP exemption are required to meet three tests. The first test requires that the employee be paid a predetermined and fixed salary that is not subject to reduction because of the variations in the quality or quantity of work performed. This is considered the Salary Basis Test. Second, the salary amount must meet a minimum specified value. This is considered the Salary Level Test. Lastly, the employee’s job duties must primarily consist of executive, administrative, or professional duties which are defined further in the regulations.[1] This test is called the Duties Test. With a few notable exceptions referenced later in this article, an employee must meet all three of the requirements in order to be treated as exempt from overtime entitlement.  

The FLSA gives the Secretary of Labor the authority to define and establish the characteristics for the exemptions, including establishing the salary level required.  The new rule makes substantial adjustments to the required salary levels, but does not make any changes to the duties test requirements.

Final Rule’s Salary Level Revisions

The new rule implements three key revisions related to determining the required salary. First, the rule dramatically increases the standard salary level. Presently, the required weekly salary level is $684 per week ($35,568 annually based on 2,080 annual work hours). That represents an increase in 2020 from $455 per week ($23,660 annually). Under the new rule, that required weekly rate jumps to $844/week ($43,888 annually) effective July 1, 2024. On January 1, 2025, that rate jumps again up to $1,128/week ($58,656 annually). These revisions reflect an increase of nearly 65% in six months and nearly a 150% increase from 2020.

Second, the rule updates another compensation basis that qualifies an employee for the salary level of the exemption known as the Highly Compensated Employee (HCE) threshold. This is based on total annual compensation, as opposed to minimum weekly compensation. The current HCE rate is $107,432 per year. As of July 1, 2024 the HCE total annual compensation threshold will be $132,964. On January 1, 2025, the HCE total annual compensation threshold will be $151,164 per year.

Lastly, the rule also provides that the regular salary level and the HCE rate will be updated at least every three years using available data and methodologies to update the salary levels. This will next occur as of July 1, 2027, unless the Department’s regulations are changed in the meantime.

Notably, these wage rates are the same for all employers in the United States – whether the job is in lower Manhattan or Iron County, Wisconsin.

Potential Challenges to the DOL Rule

The DOL attempted significant modifications to the salary level back in 2016. At that time, the rule was prevented from taking effect by several court decisions finding that the rule exceeded DOL’s authority. If a similar challenge is brought, the Supreme Court has alluded to the possibility of eliminating the salary threshold entirely. In Helix Energy Sols. Grp., Inc., Justice Kavanaugh said “it is questionable whether the Department’s regulations – which look not only at an employee’s duties but also at how much an employee is paid and how an employee is paid – will survive if and when the regulations are challenged.” [2]

In addition, the rule’s three-year update procedure arguably violates the notice and comment requirements of the Administrative Procedure Act, which requires the issuance of a notice of proposed rule, followed by the opportunity to comment, and then issuance of a final rule in circumstances that involve implementation of the agency’s statutory authority.

Recommendations for Employers

First, there are certain jobs that are exempt positions that are not covered by the salary basis/salary level requirements of the FLSA. Those positions are teachers, lawyers, and doctors. These individuals are not entitled to an irreducible weekly or annual pay rate and can be paid effectively on an hourly basis without making them eligible for overtime compensation. For the rest of employees, it is critical that employers evaluate whether each position remains eligible for overtime exempt status and whether any pay adjustments are needed. Also note that an employee may always categorize an employee as non-exempt, establish an hourly rate of pay, and pay for all hours worked, including time and a half for overtime hours. That is the case even if the position may qualify for an exemption. 

In addition to determining whether significant pay increases will be necessary to maintain an exemption, and if so whether that is worth doing, employers should also use this time to review application of the duties tests (Executive, Administrative, Professional) to evaluate whether the position is appropriately classified in that regard. Misclassification allegations and lawsuits are common, and often it is because the classification has not been evaluated for an extended period of time over which the position may have changed, or perhaps it was misclassified from the beginning.

Special Rule for Educational Establishment

For educational institutions, exempt academic administrative employees meet the salary level requirement for the exemption provided that the salary provided is at least as much as the salary paid by that educational establishment to entry level teachers.

Conclusion

The motive of the new rule is not entirely clear, but it is likely to require that certain employees no longer be treated as exempt from overtime. Doing so will require that employer’s set expectations to track hours, record absences, and where applicable pay overtime. 

[1] 29 CFR part 541.

[2] Helix Energy Sols. Grp., Inc. v. Hewitt, 598 U.S. 39, 67 (2023).