On April 23, 2024, the U.S. Department of Labor (“DOL”) issued its final rule on “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees”, which extends overtime protections to a significant number of salaried employees unless their salaries are increased to meet the new threshold. The effective date for the new rule is July 1, 2024, although the rule’s effect may be delayed based on anticipated legal challenges.
The Fair Labor Standards Act (“FLSA”) requires most employers to pay employees overtime compensation at the rate of one and one-half times the regular rate of pay for all hours worked over 40 in a workweek, unless the employee qualifies for an exemption. To qualify as an exempt executive, administrative, or professional employee under the FLSA, generally the employee must satisfy the applicable duties test, be paid on a salary basis regardless of how many hours are worked during the workweek, and the employee’s earnings must meet or exceed a minimum salary threshold also known as the standard salary level.
Under the current regulations, executive, administrative, and professional employees (white collar workers) are considered exempt from overtime pay if the employee satisfies the applicable duties test and is paid at least $684 per week ($35,568 annually). The new rule does not alter the existing duties tests for any of the white-collar exemptions. However, it does increase the minimum salary threshold to $844 per week ($43,888 annually) on July 1, 2024, using existing methodology, and to $1,128 per week ($58,656 annually) on January 1, 2025, based on a new methodology. The new methodology uses the 35th percentile of weekly earnings of full-time salaried employees in the lowest-earning wage Census region (currently, the South). The DOL predicts that the first increase in July 2024 will impact approximately 1 million workers while the second increase in January 2025 will affect approximately 3 million workers.
The final rule also raises the minimum salary threshold for highly compensated employees from the current standard of $107,432 to $132,964 on July 1, 2024, using existing methodology, and to $151,164 on January 1, 2025, based on a new methodology. The new methodology for highly compensated employees uses the 85th percentile of all salaried workers nationwide.
The rule contains an automatic updating mechanism that will update the minimum salary thresholds every three years based on then-current earnings data, using the new methodology. The rule is applicable to employers in all fifty states and the District of Columbia. Unlike the DOL’s proposed rule published on August 30, 2023, the final rule will not affect employees in the U.S. territories of Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of Northern Mariana Islands (CNMI). A comprehensive chart of the earning thresholds for each exemption classification is available here.
The new salary thresholds will not impact the exemption status for employees who earn above the new salary minimums. Additionally, some state laws have stricter standards, including higher salary thresholds, to be exempt from state minimum wage and overtime protections than those under the FLSA. The Final Rule does not preempt such stricter state standards. Therefore, if a state has a higher standard than the FLSA, the higher standard applies in that state. Employers should evaluate their classifications of all other salaried, exempt employees to determine whether adjustments must be made to comply with the new overtime rule.
If you have any questions regarding the issues raised in this client alert, please contact your Labor and Employment counsel at Smith, Gambrell & Russell, LLP.