DOL Increases Salary Level Thresholds for Overtime Exemption in Newly Released Final Rule

The U.S. Department of Labor (“DOL”) released a Final Rule that substantially increases the salary threshold used to determine if employees are exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”). This Final Rule also increases the annual compensation threshold for determining “highly compensated employees” exempt from overtime requirements and establishes a mechanism for implementing regular automatic increases to FLSA salary thresholds in the future. Significantly, the DOL anticipates that roughly 4 million workers will lose their exemption status, and therefore become eligible for overtime pay, once this Final Rule is fully implemented.

Background of the FLSA

The FLSA requires covered employers to pay employees a minimum wage and, for employees who work more than 40 hours in a week, overtime premium pay of at least 1.5 times the employee’s regular rate of pay. The FLSA exempts from minimum wage and overtime pay requirements “any employee employed in a bona fide executive, administrative, or professional capacity.” Traditionally, to meet the requirements for this exemption, three tests must be met.

First, the “Salary Basis Test” requires that the employee be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed. Second, the “Salary Level Test” requires that the amount of the employee’s salary meet a specified threshold. Finally, the “Duties Test” requires that the employee’s job duties primarily involve executive, administrative, or professional duties as defined by the regulations. Alternatively, the “Highly Compensated Employee Exemption,” can be applied in certain circumstances where an employee’s salary is so high that the DOL has determined there is no need for a detailed duties analysis.

Old Thresholds:

Currently, salaried workers who would otherwise be exempt due to the Salary Basis and Duties Tests above, but make less than $35,568 annually, qualify for overtime pay when they work more than 40 hours in a week. The current salary level for the Highly Compensated Employee Exemption is $107,432 annually.

New Thresholds:

The effective date of this Final Rule is July 1, 2024. On July 1, 2024, the Salary Level threshold will increase to $43,888 per year, while the Highly Compensated Employee threshold will increase to $132,964 per year. On January 1, 2025, these thresholds will increase again to new ceilings of $58,656 and $151,164, respectively. The Final Rule also includes a mechanism in which the DOL plans to automatically increase these thresholds every three years from the initial July 1 effective date. As a result, the next increase is scheduled for July 1, 2027.

What it Means for Employers:

Employers have some decisions to make, and quickly. Based on current salaries, roughly 4 million workers will no longer be exempt from the FLSA’s overtime provisions by the time the new ceilings are implemented in 2024 and 2025. While the Final Rule may face legal challenges, employers need to review their payroll and employment records to determine how this Final Rule will apply to their workforces and what changes need to be implemented to their payroll practices. Employers will need to either increase salaries to preserve the overtime exemption, or reclassify their employees as non-exempt and begin paying overtime for hours over 40 in a workweek. Employers who do not take the necessary precautions put themselves at risk of misclassifying workers and subjecting themselves to potential wage and hour audits by the DOL, or to FLSA federal court lawsuits.

For questions regarding this Final Rule or the analysis you need to do regarding your current workforce and exemption classifications, please contact Gaetano Urgo at gurgo@dcamplaw.com or by telephone at (312) 995-7128.