On April 23, 2024, the U.S. Department of Labor (DOL) issued a Final Rule, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees,” which raises the salary threshold for certain federal overtime exemptions. The Final Rule will significantly expand federal overtime eligibility – the DOL estimates that it will expand overtime eligibility to 4 million additional workers. According to the DOL, the increased salary thresholds will account for increased wages and will assist with screening out lower-compensated employees from overtime exemptions.
As we discussed in a previous First Alert, the Fair Labor Standards Act (FLSA) generally requires that employees are paid overtime at 1.5 times their regular rate of pay for all hours worked above 40 hours per week. The FLSA exempts certain employees, including executive, administrative, and professional (“EAP” or “white collar”) employees from overtime pay requirements. To qualify for the EAP exemption:
- the employee’s salary must meet a certain minimum amount (the salary level test);
- the employee must be paid a predetermined and fixed salary that is not subject to reductions because of variations in the quality or quantity of work performed (the salary basis test); and
- the employee’s job duties must primarily involve executive, administrative, or professional duties (the duties test).
Currently, the minimum salary level for the EAP exemption is $684 per week ($35,568 per year).
Additionally, the FLSA exempts highly compensated employees (HCE). To qualify for the HCE exemption, employees must meet the minimum salary threshold and must also customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee. The minimum salary level for the HCE exemption is currently $107,432.
On September 8, 2023, the DOL proposed to increase the salary threshold for the EAP exemption to $1,059 per week ($55,068 per year) and to increase the salary threshold for the HCE exemption to $143,988 per year. The proposed rule also included provisions providing for regular updates to the salary thresholds every three years.
The Final Rule is similar to the proposed rule in that it raises the salary threshold for the EAP and the HCE exemption, and it will impose an automatic updating mechanism for the salary thresholds. However, the Final Rule sets higher salary thresholds than the proposed rule.
- Regarding the EAP exemption, the Final Rule will raise the salary threshold to $844 per week ($43,888 per year) on July 1, 2024, then $1,128 per week ($58,656) on January 1, 2025.
- Regarding the HCE exemption, the Final Rule will raise the salary threshold to $132,964 on July 1, 2024, then $151,164 on January 1, 2025.
- Beginning on July 1, 2027, the salary thresholds for the EAP and HCE exemptions will be automatically updated every three years.
Notably, although the proposed rule also included changes to the salary thresholds for employees in U.S. territories and to the special base rate for employees in the motion picture industry, the Final Rule does not include those changes.
The Final Rule is scheduled to take effect on July 1, 2024. However, as we previously mentioned in Calfee's September 2023 First Alert, the Final Rule is similar to the Obama Administration’s 2016 rule, which was invalidated by the U.S. District Court for the Eastern District of Texas. See Nevada v. U.S. Department of Labor, 275 F.Supp.3d 795 (E.D. Tex. 2017). Therefore, it is likely that the Final Rule will be subject to legal challenges.
Calfee’s Labor and Employment attorneys are available to provide guidance regarding the Final Rule’s impact on the exempt workforce, as well as with any reclassification questions.
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