UPDATE: The DOL’s final rule was published in the Federal Register on April 26, 2024. The full text can be found HERE. The effective date for the first set of increases remains July 1, 2024.
On April 23, 2024, the U.S. Department of Labor (“DOL”) announced its long-awaited final rule updating and revising the regulations governing the Executive, Administrative and Professional (“white-collar” or “EAP”) exemptions from minimum wage and overtime rules under section 13(a)(1) of the Fair Labor Standards Act. As we previously reported HERE following the DOL’s announcement of its proposed changes in August of last year, the new rule significantly increases the salary threshold for workers to qualify for an EAP exemption. As a reminder, in order to qualify, an employee must (1) be paid on a salary basis, (2) at a threshold level, and (3) primarily perform EAP duties as defined in DOL regulations; the new rule does not impose any changes on the salary basis or job duties elements of the exemption tests.
The final rule differs in some respects from the proposed rule, reflecting the DOL’s consideration of the approximately 33,000 comments it received and the application of more recent earnings data. In contrast to the proposed rule, which provided for a single increase of the salary required to qualify for an exemption (from the current rate of $684 per week or $35,568 per year set in 2019 to $1,059 per week or $55,068 annually), the final rule phases in the new salary thresholds as follows:
- As of July 1, 2024: $844 per week/$43,888 annually; and
- As of January 1, 2025: $1,128 per week/$58,656 annually.
Additionally, the rule increases the salary required for the “highly compensated” employee exemption – which applies when an employee meets the greater salary threshold, their primary duty includes performing office or non-manual work, and they customarily and regularly perform at least one of the duties or responsibilities of the EAP exemption – as follows:
- As of July 1, 2024: $132,964 annually, including at least $844 per week paid on a salary or fee basis; and
- As of January 1, 2025: $151,164 annually, including at least $1,128 per week on a salary or fee basis.
The 2025 increase is higher than that originally proposed based on updated data
and a new methodology of setting the standard salary level at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South). Like the proposed rule, the final rule adds an escalator clause: Commencing July 1, 2027, salary thresholds will be updated every three years using the new methodology and then-current earnings data.
Despite the title of the new rule – “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees” – only the EAP exemptions are impacted by the changed thresholds. The Outside Sales exemption is not impacted as it does not have a salary basis or level test (as is also true for certain other positions such as doctors, lawyers, and teachers), and the new rule does not change the $27.63 minimum hourly rate required for the Computer Employees exemption. In addition, the rule as finalized does not change the special salary levels or base rates for employees in certain U.S. territories subject to federal minimum wage, American Samoa, or the motion picture industry as initially proposed; the DOL intends to address these groups in a future rule.
What Should Employers Do Now?
The DOL estimates that, under the final rule, four million workers exempt under the current regulations will become newly entitled to overtime protection by 2025 and that the final rule will result in an income transfer of approximately $1.5 billion from employers to workers in the first year in the form of new overtime premiums and pay raises to maintain exempt status. Although the new rule has not yet been published in the Federal Register and likely will be subject to legal challenge (a similar 2016 attempt by the Obama administration to raise the salary levels was blocked by a Texas judge shortly before its effective date), employers should consider proceeding on the assumption that the threshold increases will go into effect on July 1. Thus, unless subject to state salary minimums that exceed the new federal levels, employers should:
- Identify those positions below or close to the new salary levels;
- Consider whether to increase salaries to meet the new salary thresholds and maintain exempt status or convert these positions to non-exempt (and, therefore, overtime eligible) roles, including the potential impact on benefits and other company policies as well as employee morale;
- Evaluate how to manage potential additional costs for those employees losing exempt status, including whether and how to reduce or eliminate overtime hours and/or reallocate pay from base salary to offset overtime pay (provided the salary still meets minimum wage requirements);
- Establish a communications plan to inform workers of new compensation or exemption status, including how to track hours worked and manage overtime for newly non-exempt employees and compliance with any state-mandated notice of wage changes; and
- Schedule training for managers and supervisors of employees whose exempt status is changing to ensure understanding of wage and hour rules and record keeping.
If you need assistance to ensure compliance with federal or local minimum wage and overtime requirements, including reclassifying workers based on the new salary thresholds or otherwise evaluating whether you are properly classifying members of your workforce as exempt from wage and hour laws, please reach out to the NFC Attorney with whom you typically work or call us at 973.665.9100.