On April 23, 2024, the U.S. Department of Labor (DOL) issued a Final Rule, increasing the minimum salary and compensation thresholds for certain overtime exemptions (the Final Rule) under the Fair Labor Standards Act (FLSA). The Final Rule will take effect on July 1, 2024. The FLSA mandates that employers pay nonexempt employees one-and-a-half times their regular rate for hours worked beyond 40 in a week. However, employees may qualify for an overtime exemption if they receive a fixed salary not subject to reduction based on the quantity or quality of work, earn a specified minimum amount, and primarily perform executive, administrative, or professional duties, as defined by the FLSA.

What are the changes to the salary thresholds, and when will they go into effect?

Executive, Administrative and Professional Exemption

Beginning July 1, 2024, the minimum salary threshold for qualifying for the executive, administrative or professional exemption is set to increase 23.4 percent, from $684 per week ($35,568 per year) to $844 per week ($43,888 per year). On January 1, 2025, the threshold will further increase to $1,128 per week ($58,656 per year), representing a 26.2 percent additional increase. In total, that amounts to a 39.4 percent increase from present levels. This sets the standard salary level at the 35^th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region.

Highly Compensated Employee Exemption

Employees may also receive a “highly compensated employee” overtime exemption if they earn total annual compensation above a certain amount, primarily perform office or nonmanual work, and regularly engage in at least one of the exempt duties of an executive, administrative, or professional employee. Under the Final Rule, starting July 1, 2024, the minimum total annual compensation for the highly compensated employee exemption will increase 23.8 percent, from $107,432 to $132,964. On January 1, 2025, it will further increase to $151,164, again representing an additional 23.1 percent increase in only five (5) months. This sets the total annual compensation threshold at the annualized weekly earnings of the 85^th percentile of full-time salaried workers nationally.

The DOL will adjust these thresholds every three years—beginning in 2028 and every three years thereafter—using salary and compensation data from the U.S. Census Bureau. This calculation methodology is a significant departure from prior rules, which allowed threshold increases only through formal rulemaking. As such, employers must begin preparing now to optimize their workforce and employment structure in order to avoid the many potential pitfalls and secondary effects of the Final Rule.

Takeaways

• Employers are advised to review their employee classification policies to ensure compliance before the Final Rule takes effect.
• If an exempt employee’s compensation falls below the new minimum salary and compensation thresholds, they will lose their exempt status, making them eligible for overtime and subject to the FLSA’s recordkeeping requirements.
• As such, employers should analyze the compensation of their workforce and consider whether they need to increase exempt employees’ salaries, so they do not forfeit their exempt status when the Final Rule takes effect, or alternatively, convert them to nonexempt employees.
• Also, the Final Rule is subject to legal challenges, which employers should monitor to be aware of any developments that may impact the Final Rule’s effective dates or terms.