DOL Increases Salary Threshold in FLSA Overtime Rule

On April 23, 2024, the U.S. Department of Labor issued a Final Rule, “Defining and Delimiting the Exemptions for Executive, Professional, Outside Sales, and Computer Employees” (the “Final Rule”), that raises the salary thresholds for certain overtime exemptions under the Fair Labor Standards Act (“FLSA”). The Final Rule is scheduled to go into effect on July 1, 2024, and would then convert a significant number of employees who are currently exempt from the FLSA’s overtime requirements into non-exempt employees who then would be entitled to overtime pay for all hours worked over 40 in a calendar week (and also would then require employers to accurately track the hours worked by these employees). As with prior efforts to increase the salary basis threshold, we expect that the Final Rule will be challenged in court by the U.S. Chamber of Commerce, other trade associations, and even certain employers. Those challenges will include requests to enjoin the Final Rule from going into effect. Accordingly, employers need to both monitor legal developments closely and make plans to comply with the Final Rule if it goes into effect, as planned, on July 1, 2024.

The Current Salary Threshold for Exempt Employees

The FLSA requires employers to pay employees overtime pay at least 1.5 times an employee’s regular rate of pay when working over 40 hours per week. This requirement does not apply, however, if an employee meets one of the specific “exemptions” under the FLSA, including the executive, administrative, professional, and “highly compensated” employee exemptions. In addition to meeting varying duty requirements to satisfy each of these exemptions, properly exempt employees also must be paid a certain minimum amount to qualify for the applicable exemption. At present, the salary threshold for executive, administrative, and professional employees is $684 per week, which amounts to $35,568 per year. The salary threshold for highly compensated employees is currently $107,432 per year.

Summary of Changes to the Rule

The Final Rule contains three important changes to these salary thresholds:

1. Effective July 1, 2024, the threshold for executive, administrative, and professional employees will increase to $844 per week, which amounts to $43,888 per year. That salary threshold will then increase on January 1, 2025, to $1,128 per week, which amounts to $58,656 per year.
2. Effective July 1, 2024, the annual compensation threshold for highly compensated employees will increase to $132,964 per year.
3. Beginning July 1, 2027, and every three years thereafter, the salary thresholds for executive, administrative, and professional employees, as well as highly compensated employees, will automatically update (meaning increase) based on up-to-date wage data.

Implications for Employers

As noted above, and as just occurred with the Federal Trade Commission’s Final Rule regarding non-compete agreements, we expect that legal challenges to the Final Rule will be filed imminently, including requests for immediate injunctive relief to prevent the Final Rule from going into effect. Historically, these legal challenges, including to a prior attempt by the Obama administration to increase the salary thresholds, are filed in favorable venues where judges are more receptive to arguments that agencies (like the DOL) are usurping the role of Congress and are, in effect, making law instead of facilitating the implementation of existing law. At least based on past success, we think that it is more likely than not that the Final Rule will be enjoined at the trial court level, and that ruling, in turn, will be appealed. If this occurs, implementation of the Final Rule will be delayed for months and may never actually occur.

If the Final Rule withstands efforts to enjoin its implementation, however, approximately 4 million employees who are currently exempt will lose their exemption status on July 1, 2024. Accordingly, employers should at least prepare for the possibility that these changes will take effect on July 1, 2024, by reviewing: (1) which of their exempt executive, administrative, and professional employees earn between $35,568 and $58,656 per year (factoring increases in 2024 and 2025); and (2) which of their highly compensated employees (who do not otherwise fall under the executive, administrative, and professional exemptions) earn between $107,432 and $132,964 per year. Once this inventory is complete, employers should consider: (1) are they capturing the time worked by these employees with precision; (2) if not, how to then do so on and after July 1, 2024; (3) how much overtime (hours in excess of 40 per calendar week) do each of these employees realistically work, understanding that overtime premiums will then need to be paid for all such hours as of July 1, 2024; and (4) alternative staffing models and policies to combat the near-future increase in overtime compensation. By engaging in these efforts, which we advise be done in consultation with an attorney to keep them privileged, employers can at least understand and proactively prepare for the ramifications of the Final Rule.

Ultimately, under the Final Rule, employers are left with four choices for employees who lose their exemptions: (1) pay them a higher salary; (2) convert them to hourly employees and follow the Final Rule without any other business modifications; (3) convert them to hourly employees and actually (really) limit their hours worked to avoid overtime pay; or (4) convert them to hourly employees and reduce their pay to offset expected overtime costs. And, also do not forgot that the conversion of employees from exempt to hourly status often is poorly received because of the perceived status reduction in being classified as hourly. While none of these options are facially attractive, understanding the specifics of your workforce will better allow you to strategically plan for the roles that are most affected by the Final Rule, assuming it goes into effect on July 1, 2024.

AGG will continue to monitor developments to the Final Rule. If you have any questions or concerns about this rule, please contact any member of the AGG Employment team.