On April 26, 2024, the Department of Labor’s final overtime rule was published in the Federal Register. The rule revises the regulations implementing the exemptions from minimum wage and overtime requirements for Executive, Administrative, Professional, Outside Sales, and Computer (EAP) employees under the Fair Labor Standards Act (FLSA).
1. The final rule entitled Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, increases the salary threshold requirement for employees to be considered exempt from federal overtime pay requirements under the FLSA, from $684.00 per week ($35,568.00 annually) to $1,128.00 per week ($58,656.00 annually) effective January 1, 2025. An initial update to the salary threshold to $844.00 per week will become effective on July 1, 2024.
2. The rule increases the total annual compensation requirement for highly compensated employees (HCE) from $107,432.00 to $151,164.00, effective January 1, 2025 (including at least $1,128 per week paid on a salary or fee basis). Similar to the above, an interim increase to $132,964.00 for HCE will become effective July 1, 2024 (including at least $844 per week paid on a salary or fee basis).
3. Finally, the rule also incorporates a mechanism to effectuate a triennial update to the salary threshold to keep pace with economic growth and reflect current earnings data. The first update will become effective on July 1, 2027, and continue every three years thereafter (absent an exception for pausing future updates under certain conditions, which is provided for under the rule). The triennial update will reflect current earnings data using the most recent available 4 quarters of data (published by Bureau of Labor Statistics) and using the methodologies in effect at the time of each update.
Importantly, the “duties” test provided for in the FLSA regulations governing the exemptions described above remains unchanged under the final rule. Accordingly, employers must still generally demonstrate that an employee meets both the duties requirement and earnings requirement in order to classify an employee as exempt under the rule.
Employers will notice that the salary level of the final rule differs from that proposed in August 2023, and is actually $12.00 to $30.00 less than the Department estimated in the NPRM, based on the most recent full-year data available for calendar year 2023.
While the final rule is effective July 1, 2024, the DOL has delayed the applicability date of the new standard salary threshold until January 1, 2025, in part due to employer requests for time to accommodate a nearly 65% increase from the existing threshold. Regarding HCE, the new total compensation amount represents a nearly 41% increase from the existing total compensation amount. The DOL estimates that “4.0 million workers exempt under the current regulations who earn at least the current weekly salary level of $684 but less than $1,128 will, without some intervening action by their employers, become newly entitled to overtime protection under the FLSA”.
Notably, the July 1, 2024 increase reflects the 2019 methodology under the Trump administration which set the standard salary level at the equivalent of the 20th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South) and/or in the retail industry nationally. The January 1, 2025 increase will be implemented according to the new methodology under the rule reflecting the equivalent of the 35th percentile of weekly non-hourly earnings in the lowest-wage Census Region.
While a two-phase approach may have been done in part due to employer readiness and compliance concerns, use of the current 2019 standard for the interim update on July 1, 2024 may be strategic as well in surviving anticipated legal challenges. Some pundits have opined that a two-phase approach with two methodologies by the DOL is an attempt to have some provisions stick even if others are eventually struck down. Considering the failure of the attempted 2016 Obama-era increase to $913.00 per week ($47,476.00 annually) and which included automatic earnings updates every three years, there is an increased possibility that a potential legal challenge to the rule as a whole or portions thereof may be successful. The Trump era salary threshold enacted in 2019 which increased the salary threshold from $455.00 to the current $684.00 per week was unsuccessfully challenged by a fast food operator in Austin, Texas. This case is currently on appeal in the U.S. Court of Appeals for the Fifth Circuit.
Next Steps:
Employers must review their current employee classifications and pay structures to determine those employees potentially affected by the new rule. For any employees classified as exempt from overtime requirements under the FLSA and earning less than the salary and annual compensation increases under the new rule, the employer must decide whether to increase their earnings to preserve the exemption or to reclassify them as nonexempt employees, making them eligible for overtime. Employers will have to decide whether to conduct this process twice in two phases, or to proceed directly towards compliance for the January 1, 2025 deadline. Employers are advised to work closely with counsel in determining the scope and timing of their obligations, and to monitor the rule’s progress as significant uncertainty still looms on the horizon.
Resources published by the DOL include: a Press Release summarizing the rule, FAQs, and a Small Entity Compliance Guide.