The most notable difference between the proposed and final rules is that the final rule increases the earnings thresholds in two phases.
On April 23, 2024, the U.S. Department of Labor (DOL) published its long-awaited final overtime rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees. The rule implements a two-part increase to the standard minimum salary level applicable to the overtime exemptions for executive, administrative and professional (EAP) employees under the Fair Labor Standards Act (FLSA). The first part increases the standard minimum salary level to $844 per week on July 1, 2024. The second part increases the standard minimum salary level to $1,128 per week on January 1, 2025, which represents a nearly 65 percent increase from the current level of $684 per week.
The final rule will have a major impact on employers across all industries that utilize the EAP exemptions, requiring them to reevaluate the classification status of exempt employees currently paid a salary below the new earning thresholds.
The final rule also implements a two-part increase to the annual salary threshold for “highly compensated employees” (HCE) and establishes a procedure to update the earnings thresholds every three years.
Background
To classify an employee as exempt from the FLSA’s minimum wage and overtime requirements pursuant to the EAP exemptions, an employer must generally show, subject to certain exceptions, that the employee meets the following three tests: (1) is paid a minimum salary level, (2) is paid on a salary basis and (3) performs certain job duties.
In 2004, the DOL updated its regulations to set the minimum salary level applicable to the white-collar exemptions at $455 per week (or $23,660 annually for a full-time worker) and to relax the job duties test for HCEs (at the time, those earning at least $100,000 annually).
The 2016 Rule
During the Obama administration, the DOL issued a final rule in May 2016 that increased both the standard and HCE earnings thresholds and provided for their regular updating. The 2016 rule, among other things, increased the standard minimum salary level from the 2004 salary level of $455 to $913 per week (or $47,476 annually for a full-time worker), the then-40th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region (the South).
However, in November 2016, the U.S. District Court for the Eastern District of Texas granted an emergency motion for a preliminary injunction to block the 2016 rule from going into effect on December 1, 2016. In doing so, the court held that while the FLSA’s accompanying regulations give the DOL “significant leeway to establish the types of duties that might qualify an employee for the exemption, nothing in the [white-collar] exemption indicates that Congress intended the Department to define and delimit with respect to the minimum salary level.” The significant increase to the salary level, in the court’s opinion, essentially created a “de facto salary-only test,” and Congress “did not intend salary to categorically exclude an employee with [white-collar] duties from the exemption.”
The Department of Justice appealed the ruling, but shortly after the presidential election, the Trump administration dropped the appeal and rescinded the 2016 rule.
The 2019 Rule
In September 2019, the DOL under the Trump administration published its own final rule regarding the “salary level” test.
The 2019 rule, among other things:
- Increased the standard minimum salary level from the 2004 salary level of $455 to $684 per week (or $35,568 annually for a full-time worker), the 20th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region;
- Increased the HCE annual salary threshold from $100,000 to $107,432 per year (annualized value of the 80th percentile of weekly earnings of full-time salaried workers nationally); and
- Allowed employers to credit nondiscretionary bonuses, incentive payments and commissions paid at least quarterly toward up to 10 percent of the standard minimum salary level. The 2019 rule abandoned the automatic updating mechanism from the 2016 rule, noting it would “deprive the department of flexibility to adapt to unanticipated circumstances.”
The 2019 rule went into effect on January 1, 2020.
The 2023 Proposed Rule
On August 30, 2023, the DOL under the Biden administration unveiled its own proposed rule, which contained:
- An increase to the standard minimum salary level from $684 to at least $1,059 per week (or $55,068 annually for a full-time worker), the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region;
- An increase to the HCE annual salary level from $107,432 to $143,988, the annualized value of the 85th percentile of weekly earnings of full-time salaried workers nationally; and
- A mechanism to update the earnings thresholds automatically every three years. Under the proposed rule, the increased earnings thresholds would have become effective within 60 days of publication of the final rule.
Adjusting the salary level thresholds to reflect current wage growth has consistently remained the DOL’s primary goal. In fact, the proposed rule explains in a footnote that the ultimate thresholds would likely be higher than the figures in the proposed rule, depending on the timing of publication of the final rule, because the DOL would use the most current wage data from the Bureau of Labor Statistics to finalize the rule.
The DOL’s second phase increase to $1,128 per week is slightly less than the DOL’s projected amount for a rule finalized in the first quarter of 2024, which was $1,158 per week (or $60,209 annually for a full-time worker). In other words, while the new earning threshold is substantial, it does not exceed the DOL’s projection.
The Final Rule
The final rule focuses on three key updates to the earnings thresholds for the EAP exemptions: (1) increasing the standard minimum salary level, (2) increasing the annual salary threshold for HCE employees, and (3) implementing an automatic update to the earnings thresholds every three years.
The DOL abandoned its proposals to apply the standard salary level to the U.S. territories subject to the federal minimum wage and update the special salary levels for American Samoa and the motion picture industry.
The most notable difference between the proposed and final rules is that the final rule increases the earnings thresholds in two phases.
Rather than an immediate implementation of the DOL’s new methodology, the first phase increases the standard minimum salary level to the 20th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region and the annual salary threshold for HCEs to the annualized value of the 80th percentile of weekly earnings of full-time salaried workers nationally. This is the same methodology used to update the earnings thresholds in 2004 and 2019.
As a result, effective July 1, 2024, the standard minimum salary level for the EAP exemptions will increase from $684 to $844 per week (or $43,888 annually for a full-time worker), and the annual salary threshold for HCEs will increase from $107,432 to $132,964.
The second phase uses the methodology the DOL initially introduced in its proposed rule: increasing (1) the standard minimum salary level to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region and (2) the HCE annual salary threshold to the annualized value of the 85th percentile of weekly earnings of full-time salaried workers nationally.
As a result, effective January 1, 2025, the standard minimum salary level will increase from $844 to $1,128 per week (or $58,656 annually for a full-time worker), and the annual salary threshold for HCEs will increase from $132,964 to $151,164.
The final rule explains that the DOL decided to implement its proposed increase in phases to address concerns it received about the logistics of implementing a substantial increase to the standard minimum salary within 60 days. The rule specifically notes that “[a] longer effective date for the new standard salary level and HCE compensation methodologies would provide employers with more time to make adjustments after they are informed of the exact levels of the thresholds set in this final rule.”
What This Means for Employers
The DOL expects the January 2025 updates to affect nearly 3 million employees classified as exempt and paid a salary below $1,128 per week and 300,000 HCEs who are currently exempt under the HCE test but do not meet the full job duties test.
Continued Uncertainty
The final rule still faces some uncertainty. Given the upcoming presidential election, the potential for a change in administration may affect whether the rule goes into effect, as was the case for the 2016 rule. The new rule is also likely to face legal challenges similar to those faced by the 2016 rule, which the DOL anticipated and attempted to address by including a severability clause in the final rule that could allow each individual update to take effect even if another aspect of the rule does not.
One Phase or Two?
Despite the uncertainty, employers should take immediate steps to determine their affected positions for both updates and make informed decisions on whether to follow the DOL’s phased approach for implementation or to implement the second increase early by the July 1, 2024, effective date. While the two-part approach allows employers the option to avoid having to implement the more substantial second increase within the short time period given for compliance, for some employers, it may not make sense to work through the same increase implementation process twice within an eight-month period.
Whether to address the second increase immediately or wait until it goes into effect on January 1, 2025, will depend on many factors, including the number of affected employees for each increase, their current salaries, their nondiscretionary bonuses, incentive payments and/or commissions (if any), the strength of their exempt classification and various operational considerations.
Employers that decide not to implement the second increase immediately should still begin preparing for it right away and consider the likely impact of the second increase when making decisions about how to implement the first increase. For example, an employer that is not likely to increase an employee’s salary to meet the second increase of $1,128 per week may prefer to reclassify the employee immediately instead of increasing the employee’s salary to $844 per week and reclassifying the employee as nonexempt six months later.
Increase Salary or Reclassify?
Whether implementing the updates in one phase or two, employers with exempt employees paid salaries below the new earnings thresholds must decide whether to increase those employees’ salaries to meet the new thresholds or convert the employees to nonexempt status.
The process of evaluating options and making decisions on classification status requires careful consideration of numerous factors. For example, to make an informed decision, employers may want to track hours worked by the affected positions to assess how much overtime the employer would be required to pay in a typical workweek if the exempt employee becomes nonexempt.
This process also requires employers to determine how they would pay their reclassified employees. Employers may opt to continue to pay salaries to workers reclassified to nonexempt status, but must ensure proper calculation of these employees’ regular rates of pay for overtime purposes, which must factor in nondiscretionary bonuses, commissions and other types of compensation.
In addition, employers must assess the logistical challenges of implementing processes to track and record hours worked by previously exempt workers. The company may want to explore whether alternative time-keeping technology is better suited to ensure reclassified workers accurately record time worked.
Further, employers should consider the negative impact on employee morale that may stem from reclassifying employees as nonexempt. Employees who were exempt may not want to track and record their hours worked and may be upset at the loss of flexibility they previously enjoyed as exempt workers.
Due to the time it takes to work through these issues, it would be better for employers to begin this process immediately, with the assistance of counsel, rather than take a wait-and-see approach.
State Law Compliance
Employers should also take the opportunity to review and confirm compliance with applicable state or local law regarding overtime exemptions, which may differ from federal law.
For instance, some jurisdictions have higher earnings thresholds for overtime exemptions than the FLSA, such as California, which requires $1,280 per week, and New York, which currently requires $1,200 per week for New York City, Westchester and Long Island, increasing to $1,237.50 per week on January 1, 2025, and $1,275.00 per week on January 1, 2026. The remainder of New York state currently requires $1,124.20 per week, increasing to $1,161.65 per week on January 1, 2025, and $1,199.10 per week on and after January 1, 2026.
For More Information
If you have any questions about this Alert, please contact Natalie F. (Hrubos) Bare, Niyah Dantzler, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.