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DOL Issues Heightened Salary Requirements For White-Collar Overtime Exemptions

April 23, 2024 Posted in Legal Updates Share

Are you ready to start paying your exempt employees a salary of at least $58,656? As of January 1, 2025, the Department of Labor will require employers to pay a salary at or above that threshold to any employee for whom the employer claims one of the standard “white-collar” exemptions from the FLSA’s overtime and minimum-wage requirements. 

The salary threshold for the white-collar exemptions currently sits at $35,568 annually and has been at that level since January 1, 2020. Between 2004 and 2019, the threshold had remained constant at $23,660. Each past increase has required the DOL to go through the notice-and-comment rulemaking process.  

On April 23, 2024, the Department of Labor published an updated Final Rule that has two primary goals:

• Raise the salary thresholds that are applicable to these exemptions, using a two-step process;
• Provide for subsequent raises at three-year intervals, with those raises being indexed to increases in the earnings of nonexempt workers.

The new threshold of $58,656 represents a 65% increase over the 2020 threshold and a 248% increase over the threshold set in 2004.  For comparison purposes, the increase in CPI from 2020 to present has been approximately 21%, while the increase from 2004 to the present has been approximately 68%.

White-Collar Exemptions

The rule implements the increased salary threshold in two steps:

• Starting July 1, 2024, employees must earn at least $844 per week ($43,888 annually).

• Starting January 1, 2025, employees must earn at least $1,128 per week ($58,656 annually).

DOL says that these amounts represent the 20th percentile and the 35th percentile of weekly earnings of full-time non-hourly workers in the lowest-wage Census Region.

The rule does not alter the exemption’s other requirements. Accordingly, for the exemption to apply, employees must also:

• Not be subject to salary reductions based on the quality or quantity of work performed (the salary basis test); and
• Must be employed in a bona fide executive, administrative, or professional capacity, which means that their primary duty must meet the “duties tests” established in one or more of those exemptions.

Highly Compensated Employee Exemption

The final rule also raises the total annual compensation threshold for the “highly compensated employee” (HCE) exemption. This exemption permits the application of a looser version of the duties test to highly compensated employees.

The rule increases the overall compensation amount for HCEs from the current threshold of $107,432 (at least $684 of which needed to be paid per week on a salary or fee basis). Once again, the increase will take place in two steps:

• Starting July 1, 2024, highly-compensated employees must be paid at least $132,964 per year (at least $844 of which needs to be paid per week on a salary or fee basis).
• Starting January 1, 2025, highly-compensated employees must be paid at least $151,164 per year (at least $1,128 of which needs to be paid per week on a salary or fee basis).

The exemption’s other requirements remain intact under the new rule. Thus, for the exemption to apply, an employee must:

• Meet the heightened total compensation level;
• Perform office or non-manual work as part of the employee’s primary duty; and
• Customarily and regularly perform any one or more exempt duties or responsibilities of an executive, administrative, or professional employee, as set forth in the DOL’s regulations.

Caveat: Some types of employees may still be treated as exempt under the white-collar regulations without being subject to the salary thresholds. These include individuals who practice law or medicine, certain types of computer professionals, and certain outside-sales employees.

Indexing of Future Adjustments

Because the DOL does not want to have to go through the full notice-and-comment rulemaking process each time it wants to update the salary thresholds, it has created a system under which future increases will be indexed to data provided by the Bureau of Labor Statistics. Specifically, DOL will reset the salary threshold every three years, with the target threshold being the 35th percentile of weekly earnings of full-time non-hourly workers in the lowest-wage Census Region.

The first increase will take place on July 1, 2027 and will be determined using then-available data from the Bureau of Labor Statistics. Future adjustments will then take place on a three-year cycle, with the next increase taking place on July 1, 2030.

Action Steps for Employers

Assess. Employers should determine which of their exempt employees are at risk of falling below the new thresholds.

Strategize. If an employee’s current salary will not satisfy the new threshold, the employer will need to consider its options, which generally include:

• Raising the employee’s salary or total compensation to satisfy the exemption for which the employee otherwise qualifies; or
• Moving the employee to a non-exempt status, and then paying the required overtime premium whenever the employee works more than 40 hours in a workweek.

While these choices may appear simple, they demand careful consideration of various factors: How far off is the employee’s current pay from the requisite threshold? How many hours of overtime is the employee likely to work? Is the employee paid bonuses or commissions that would complicate the calculation of overtime pay? How would a change in the employee’s exemption status affect their time-keeping requirements? How about their benefits? Their overall morale?

Comply. Compliance with the Final Rule will have potentially far-reaching impacts. The DOL has estimated that the rule will provide over 3.4 million more employees the right to overtime pay (unless their employers choose to increase their salaries) and will collectively cost employers $1.2 billion in Year 1.

Like previous attempts by the DOL to increase exemption thresholds, the rule may face court challenges prolonging or preventing enforcement. There is certainly a possibility that its enforcement could be delayed as a result. Employers may remember that in 2017, an earlier DOL attempt to increase the salary thresholds was struck down by a U.S. District Court in Texas only a few days before it was scheduled to take effect.

But given the complications and consequences involved with overtime pay regulations, employers should be careful about “betting the farm” on a successful challenge to this rule. Employers will need to start seriously evaluating the new rule’s potential effect on employees’ exemption status and overtime pay entitlements. If changes will be required, employers will need to determine when to implement those changes and how to communicate the basis for their decisions to their employees.

This article is intended to provide general information about the new Final Rule and is not intended as legal advice. If you have specific questions, Johnson Jackson attorneys are available to provide further information at 813-580-8400.