The U.S. Department of Labor (“DOL”) just announced significant revisions to the Fair Labor Standards Act (“FLSA”) regulations, increasing exempt employee salary thresholds, resulting in an estimated 4 million additional employees becoming eligible to receive overtime. The DOL emphasized that the new thresholds provide clear and predictable guidance for employers and are intended to “ensur[e] that lower-paid salaried workers receive their hard-earned pay or get much-deserved time back with their families.” The changes under the rule will begin to take effect July 1, 2024.
Existing Law: Unless they fall within an FLSA exemption, workers covered by the FLSA are entitled to overtime compensation for hours worked in excess of 40 in a given workweek (subject to more stringent state and local law requirements regarding exemptions and overtime compensation). Common federal exemptions include the executive, administrative and professional (“EAP”) exemptions, referred to collectively as the “white collar exemptions.” Employees currently qualify for an EAP exemption if they: (i) are paid on a salary basis, earning a minimum weekly salary of $684 ($35,568 per year), and (ii) primarily perform duties defined by law as exempt (e.g., managerial duties, exercising discretion and independent judgment with respect to matters of significance, etc.). Current regulations also provide that highly compensated employees (“HCEs”) are exempt from the overtime rules if they: (i) earn at least $107,432 per year, and (ii) regularly perform one or more of the job responsibilities identified in an EAP exemption. (Notably, the HCE exemption is not recognized in all jurisdictions.)
Key Changes:
- Salary Threshold Increases: The minimum salary threshold for the white collar exemptions will increase significantly, from $684 per week ($35,568 per year) to $844 per week ($43,888 per year) on July 1, 2024, and $1,128 per week ($58,656 per year) on Jan. 1, 2025.
- Highly Compensated Employees: The annual salary threshold for the HCE exemption will increase from $107,432 to $132,964 on July 1, 2024, and to $151,164 on Jan. 1, 2025. Notably, the highly compensated employee salary threshold for 2025 serves as the basis for one of the narrow exceptions to a similarly profound FTC rule issued today banning most noncompete agreements.
- Automatic Updates: Starting July 1, 2027, salary thresholds will automatically update (upward or downward) every three years to reflect current wage data.
What Isn’t Changing: The salary threshold is just the first hurdle in classifying employees as exempt; workers also must satisfy the applicable “duties” test (i.e., the employee’s primary duties must meet specified tests under each exemption). The rule does not modify the duties tests. Additionally, the rule does not change the way that bonuses and incentive pay may be counted toward meeting the salary threshold; nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis could still be used to satisfy up to 10% of the salary levels.
What Employers Should Do Now: Employers have about nine weeks to prepare for these changes, and savvy employers will use this time to audit their exempt employee workforce, preferably in conjunction with legal counsel:
- First, employers should identify workers whose classification will be impacted by the salary threshold increases, a straightforward assessment. Once identified, strategize on the best way to handle those employees (i.e., by reclassifying them as hourly versus increasing their salaries to meet the new thresholds), taking into account budgetary and other business considerations. For example, how many hours per week does the employee normally work? What will that mean to the bottom line if the employee is reclassified as non-exempt and overtime-eligible? Assuming the employee meets the “duties” test for the applicable exemption, does it make more sense to increase the employee’s compensation to meet the new salary thresholds? Or is it better to make the employee non-exempt and adjust staffing to minimize overtime costs? Employers should factor in the January 2025 increase as well as the automatic adjustments going forward, the latter of which will add a level of uncertainty in long-term planning.
- Second, employers can use this unique opportunity to more broadly assess employee exemption status to determine whether workers meet both the salary threshold(s) and the duties tests. This new rule provides companies with a justification for making appropriate adjustments—including reclassifying employees as non-exempt—without raising some of the red flags and morale issues that might normally be triggered by employee reclassification.
On a related note, employers should bear in mind that transitioning workers from exempt to non-exempt status comes with additional timekeeping burdens, and training will be important to ensure, for instance, that employees properly track their time and take meal and rest breaks as appropriate.
Conclusion: Employers must assess these issues quickly, given the impending compliance deadlines. Now is the time for employers to proactively “right-size” compensation and/or adjust classification status for employees who are currently near or below the anticipated new salary thresholds, as well as other workers who may not meet the duties tests for exempt status. And it allows an opportunity to plan any necessary transitions from the standpoint of budgetary impact, other effects on the business and messaging to employees. Working with legal counsel well versed in these issues is critical to ensure compliance with federal, as well as state and local, requirements as they are being continuously modified, in addition to ensuring that internal audits are protected by the attorney-client privilege to the extent possible.
This document is intended to provide you with general information regarding the Department of Labor's new overtime rule. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.