US Department of Labor raises threshold for exempt employee salaries

The U.S. Department of Labor has raised the salary exemption threshold for classifying employees as exempt from Fair Labor Standards Act (FLSA) overtime regulations, effective July 1, 2024.

The rulemaking was proposed in August 2023 and the rule was finalized by the DOL on April 23, 2024.

At least 4 million workers are expected to feel the impact of the final rule by 2025, marking a 65% increase in the exemption threshold for white collar employees and a 40% increase for HCEs.

Changes to the thresholds under the FLSA are as follows:

For White Collar Employees (executive, administrative and professional exemptions) whose threshold now is at $684 per week (equivalent to $35,568 annually):

• A rise to $844 per week ($43,888 yearly), effective July 1, 2024.
• Another increase to $1,128 per week ($58,656 yearly), set on January 1, 2025.
• Further increments will occur every three years, commencing July 1, 2027.

It’s crucial to understand that merely paying the minimum salary does not automatically classify an employee as exempt; they must also meet the relevant “duties test” under the FLSA, which remains unchanged by the final rule.

For “Highly Compensated Employees” (HCE) whose threshold now is at $107,432 per year:

• A rise to $132,964 per year, effective July 1, 2024.
• Another increase to $151,164 per year, set on January 1, 2025.
• Further increments will occur every three years, commencing July 1, 2027.

It’s noteworthy that the January 1 threshold compensation requirement for the HCE exemption aligns with the one used by the Federal Trade Commission to define “senior executive” in noncompete agreements, although the non-monetary criteria are not identical.

Additional Information:

• These adjustments are the first since January 1, 2020.
• Future updates planned every three years starting 2027 will be based on then-current wage data. 
• The DOL will announce the new earnings levels at least 150 days before scheduled updates in the Federal Register. 
• The final rule permits the DOL to temporarily postpone a scheduled update to the salary levels should there be unforeseen economic or other conditions.

Expected Action:

• Prior to the July 1 and January 1 deadlines, employers who have salaried employees are advised to examine the exempt status and salaries of their staff to guarantee compliance with the DOL’s final rule. 
• Following this review, employers must make necessary adjustments to salaries and/or reclassify employees who no longer satisfy the exempt criteria because of the heightened salary thresholds.
• Employers should review and update classification policies, as well as overtime authorization, timekeeping, and pay practices to ensure compliance and alignment with business needs. Additionally, they should consider state-specific requirements for overtime exemption when assessing policies and practices.

Impact/ Limitations: 

• Certain categories remain unchanged by the law, inculding DOL regulations regarding earnings thresholds for white collar exempt employees in U.S. territories, the motion picture industry, and computer employees.
• Further, the treatment of bonuses for meeting the compensation threshold also remains unchanged. 
• Employers have the option to utilize nondiscretionary bonuses and incentive payments, such as commissions, to fulfill up to 10% of the standard salary test requirements for white collar employees, provided these bonuses are paid at least once a year. 
• Employers can factor in nondiscretionary bonuses and incentive payments earned over a 52-week period for calculating the compensation threshold for the HCE exemption, as long as they are not utilized to satisfy the weekly standard salary level portion of the exemption test.
• While there have been no lawsuits filed as of now against the changes, there is a possibility of litigation that could impact the effective date and enforcement of this final rule if employers challenge the new law.

Background of Overtime Pay in the US

• The salary threshold refers to a minimum salary level that employees must earn to qualify for exemption from overtime pay under the Fair Labor Standards Act (FLSA).
• If the employee’s salary exceeds the threshold (along with other DOL criteria for exemption), they will not be eligible for receiving overtime pay and they will be exempt.
• In the context provided, starting from July 1, 2024, there will be a higher salary threshold that employers must meet to classify their employees as exempt from overtime regulations ($844 per week/ $43,888 yearly).
• This means that employees whose salaries fall below this threshold may now be eligible for overtime pay, whereas they might have been exempt before the threshold increase.
• Such employees will be compensated at a rate of time-and-a-half for hours worked beyond 40 hours in a work week.
• Other criteria for exemption include primarily engaging in certain exempt job duties, receiving compensation on a salary basis (not hourly), and earning at least a minimum threshold salary.

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