DOL Revises Salary Threshold for Overtime Eligibility

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On Tuesday, April 23, 2024, the United States Department of Labor (DOL) released a final rule raising the salary thresholds to qualify for overtime exemptions under the Fair Labor Standards Act (FLSA). The rule will become effective on July 1, 2024.

The rule will increase the standard salary level, increase the highly compensated employee exemption salary level, and will provide for future updates to these salary levels to take place every three years.  The DOL estimates that an additional 1.8 million employees will be covered as a result of the initial salary increases.

Fair Labor Standards Act

The FLSA provides that covered employers must pay employees time-and-a-half of the employee’s regular rate for hours worked over 40 hours 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”).

The Previous Rule: The previous overtime rule, which had been revised in 2019, set forth three tests, all of which were required to be met in order for a white-collar employee to be deemed exempt from overtime requirements: (1) the employee must be paid on a salary basis; (2) the employee’s salary must have been at least $684 per week (equaling $35,568 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 was required to earn at least $107,432 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.

As discussed in Fiona Ong’s August 2023 E-Lert analyzing the now-final rule, she pointed out that the DOL, under the Trump administration, issued 2019 regulations with a modest increase to the then current white-collar and HCE exemption thresholds.  Those regulations did not commit the DOL to any timetable for increasing the salary level in the future, although the DOL stated that it intended to update these levels, which had not been updated since 2004, more regularly in the future.

The New Rule: As expected, the DOL revised its regulations to (1) increase the standard salary level to qualify for the “white collar” exemption, (2) increase the HCE threshold, and (3) add mechanisms to the regulations that will allow for the “timely and efficient updating of the salary compensation thresholds, including an initial update on July 1, 2024, to reflect earnings growth.”

Here are three things employers need to know:

  • Increased Standard Salary Level

The initial update to the standard salary level will take effect on July 1, 2024, and will use the 2019 rule methodology to revise the standard salary level to $844 per week (or $43,888 annually).  The next update will occur January 1, 2025, increasing the salary level to $1,128 per week (or $58,656 annually) using the new rule’s methodology, discussed below. Thus, the salary level threshold will increase nearly 65% by January 2025.  The new rule provides for automatic updates every three years using the new methodology.

  • Increased Highly Compensated Employee Total Annual Compensation Threshold

The initial update to the HCE salary level will also take place on July 1, 2024, when it will increase more than $25,000 to $132,964 per year.  The next update is set to occur six months later on January 1, 2025, increasing the HCE salary threshold to $151,164 per year. Thus, in less than nine months from now the HCE exemption threshold will be increased by nearly $44,000.

  • New Mechanisms to Update Salary Levels

Finally, the DOL revised the methodology that had been used to calculate the EAP salary level in 2004 – increasing it from the 20th to the 35th percentile of earnings for full-time salaried workers in the lowest income U.S. Census region (currently the South).  Similarly, the DOL revised the methodology used to determine the required annual salary for the HCE exemption that had been in place since 2019, increasing it from the 80th percentile to the 85th percentile of full-time salaried workers nationwide rather than utilizing regional data used for the “white-collar” exemption.  The DOL’s new rule provides that the “white-collar” exemption salary threshold and the HCE salary exemption threshold will be updated every three years following the July 1, 2024 increase using then-current wage data.

What’s Next:

While the new rule is likely to be challenged in the courts, employers should  prepare for the rule to become effective on July 1, 2024.  Our firm will hold a webinar in the coming weeks to summarize the new rule and provide practical advice on how to begin preparing, so be on the lookout.