The Fair Labor Standards Act (FLSA) requires covered employers to pay employees overtime for all hours worked over 40 in a workweek unless the employee meets certain exemptions. Under the FLSA’s “white collar” exemptions, executive, administrative, or professional employees are exempt from the FLSA’s overtime requirements if they perform certain job duties and are paid a guaranteed base salary of at least a certain set amount. There is also a “highly compensated employee” exemption that applies to employees who earn at least a certain higher amount, even if they do not otherwise perform all of the job duties of a white collar exempt employee.
Recently, the U.S. Department of Labor (DOL) issued a final rule which will increase the minimum salary thresholds for the white collar and highly compensated exemptions over the next two years.
2024 Final Rule
The 2024 final rule raises the salary threshold for the white collar and highly compensated exemptions in two phases.
Up to 10% of the required salary amounts may be satisfied by nondiscretionary bonuses, incentive payments and/or commissions, if these payments are made at least annually.
In addition to setting these initial increases, the final rule provides a schedule for automatic increases to the exempt salary thresholds every three years.
The final rule does not affect other exemptions, such as the outside sales or inside retail sales exemptions, nor does it affect the existing duties test used to determine an employee’s qualification for the white collar exemption.
Challenges to the Final Rule
The final rule is slated to take effect on July 1, 2024, but it will likely face legal challenges. Although the Trump-era administration most recently raised the salary threshold in 2019 from $455 per week to the current $684 per week, the Obama administration was met with legal challenges when it previously sought to increase the salary threshold from $455 to $913 per week in 2016. There have also been congressional efforts to prevent the DOL from implementing a salary threshold rule. It is unclear whether the implementation of the final rule will withstand these legal and congressional challenges.
What Employers Should Do Now
While the implementation of the final rule remains uncertain, employers should consider taking the following actions:
- Review Classifications of Current Workforce. Employers should use this as an opportunity to take inventory of their current workforce and determine whether any employees are potentially misclassified under the FLSA or applicable state law, including by reviewing their exempt employees’ salaries and job duties to ensure applicable exemptions are met.
- Determine Whether to Increase Salaries of Exempt Employees. For employees who are currently classified as exempt but do not meet the new salary thresholds under the final rule, employers should consider whether to increase their salaries to meet the new thresholds. Even if the final rule does not pass, as we saw with the 2016 attempted salary threshold increase, many employers raised their exempt employees’ salaries in anticipation of the rule. Accordingly, there may be a similar market shift towards increasing salaries to meet employee expectations with respect to the final rule.
- Determine Whether to Reclassify Exempt Employees as Nonexempt. Employers who do not wish to raise their exempt employees’ salaries to comply with the final rule may need to reconsider reclassifying them as non-exempt, understanding that this could create morale issues and result in increased overtime costs. Employers who decide to reclassify employees from exempt to nonexempt, whether to comply with the final rule or otherwise, should review their existing timekeeping policies to ensure they are compliant and to make sure reclassified employees are aware of such policies.
The MMM Employment Team is continuing to monitor developments related to the final rule. For questions about the final rule or employment classifications under the FLSA in general, please contact a member of our team.
