Employers – Remember that the Required Salary Level for FLSA-Exempt Status Will Increase on January 1!

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Based on a few conversations with clients, we thought it would be helpful to remind employers that, following the July 1, 2024 increase in the salary threshold to qualify for overtime exemptions under the Fair Labor Standards Act, the required minimum salary will increase again on January 1, 2025 – and employers need to be prepared to comply!

The Fair Labor Standards Act’s Overtime Rule. The FLSA provides that covered employers must pay employees an overtime premium of time-and-a-half of the employee’s regular rate for hours worked over 40 in a week.  Section 13(a)(1) of the FLSA provides that bona fide executive, administrative, or professional employees are exempt from minimum wage and overtime provisions of the FLSA. This exemption is commonly referred to as the “white-collar” exemption.  The FLSA also provides a separate exemption for highly-compensated employees (“HCE”).

Under the FLSA’s overtime rule, three tests must all be met in order for a white-collar employee to be deemed exempt from overtime pay requirements: (1) the employee must be paid on a salary basis; (2) the employee’s salary must be at least $844 per week (equaling $43,888 per year); and (3) the employee’s primary duties must meet requirements specific to the exemption in question – whether it be executive, administrative or professional (EAP).  Under the HCE exemption, an employee is required to earn at least $132,964 per year (in addition to being paid at least the standard salary level per week on a salary or fee basis) and perform at least one exempt duty.

The Last Increase. As we discussed in our April 24, 2024 E-lert, the U.S. Department of Labor released a revised overtime rule that, effective July 1, 2024, increased the standard salary level for the EAP or white-collar exemptions by a significant amount – from $684 per week/$35,568 annually, and the HCE salary level from $107,432, to the levels set forth in the prior paragraph. Although there were lawsuits challenging the rule, thus far they have been mostly unsuccessful and the rule is fully in effect, with the exception only of the State of Texas as an employer.

The Imminent Increase. In addition to the initial increase, the DOL’s rule provides for another significant increase on January 1, 2025, when the EAP salary level jumps to $1,128 per week (or $58,656 annually) and the HCE salary level moves to $151,164 per year.

Moreover, the levels will increase again every three years – for the EAP exemptions, the increase will be tied to the 35th percentile of earnings for full-time salaried workers in the lowest income U.S. Census region (currently the South), and for the HCE exemption, the increase will be tied to the 85th percentile of full-time salaried workers nationwide.

What Next? While most salaried exempt employees will remain exempt, this next increase will have some impact, especially on assistant managers in retail, restaurants, non-profit and service industries, especially in rural areas and especially following the recent increase. Employees paid less than the salary requirement must either be paid overtime or have their salaries raised to the required level. Raising wages may, of course, have a ripple effect to avoid wage compression. Employers should begin preparing now to deal with the effects of this impending wage increase.