DOL Issues New Rule Raising Minimum Salary Thresholds for Overtime Exemptions

In the absence of an exemption, the FLSA provides that an employee is entitled to receive pay at the rate of time and one-half for all hours worked over 40 in a week. The most commonly relied-upon exemptions are the white-collar exemptions, i.e., the exemptions for executive, administrative, professional, computer, and outside sales employees. For an exemption to apply to an employee, the employee must have job duties that qualify for one of those exemptions, known as the “duties tests.” Most categories of employees under the white-collar exemptions must also receive a minimum salary, which is currently $684 per week ($35,568 per year). The employees who meet the duties tests and must receive a minimum salary to qualify as exempt are referred to below as “covered employees.”

The 2024 Rule raises the minimum salary threshold for covered employees to $844 per week ($43,888 per year) on July 1, 2024, and then to $1,128 per week ($58,656 per year) on January 1, 2025. The July 1 increase updates the current annual salary threshold based on the methodology used by the DOL under the current rule. The 2024 Rule’s new methodology, which is based on the 35th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region (currently, the South), takes effect on January 1, 2025, resulting in the swift additional increase.

The 2024 Rule also raises the total annual income threshold for “highly compensated employees,” who face more relaxed requirements for being exempt from overtime, from $107,432 to $132,964 on July 1, 2024, and $151,164 on January 1, 2025. The January increase is based on the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally.

The 2024 Rule further adopts an automatic updating mechanism. Beginning July 1, 2027, the salary thresholds will update every three years using the methodologies in place at the time of each respective update.

The 2024 Rule includes an option for paying up to 10% of the required salary amount through annual or more frequent nondiscretionary bonuses, incentives and/or commissions. If, by the end of a one-year period, the supplemental pay is not sufficient to satisfy the threshold, the employer may make a final payment by the next payroll period to meet or exceed the threshold.

The 2024 Rule makes no changes to the duties tests or an employer’s ability to include the payment of nondiscretionary bonuses and commissions as a portion of an employee’s minimum salary.

The 2024 Rule is the latest in a series of regulatory initiatives to increase the minimum salary level for covered employees. In 2016, the DOL under President Obama issued a rule increasing the minimum salary levels (the 2016 Rule). In August 2017, a Texas federal district court invalidated the 2016 Rule, holding that the DOL exceeded its rulemaking authority when it updated salary levels and established the automatic updating mechanism in the 2016 Rule. The court also held that the 2016 Rule was inconsistent with congressional intent by causing an estimated 4.2 million workers to become eligible for overtime based on salary alone.

Following the 2017 federal district court ruling, the DOL under President Trump issued a new minimum salary rule (the 2019 Rule), which returned to the methodology that was applied when the DOL updated the minimum salary levels as part of a comprehensive revision of the white-collar exemption regulations in 2004. Under that methodology, the salary threshold was increased based on 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 2019 Rule omitted the previously proposed automatic updating mechanism.

The 2019 Rule is currently in effect. It is also facing a legal challenge. That legal challenge was unsuccessful at the federal district court level. An appeal is currently pending before the US Court of Appeals for the Fifth Circuit.

The 2024 Rule will undoubtedly face legal challenges. The 2024 Rule is similar in many respects to the 2016 Rule. However, in its commentary accompanying the 2024 Rule, the DOL sought to distinguish the 2024 Rule from the 2016 Rule. It stated that the new salary levels are compatible with the 2017 federal district court decision’s emphasis on the salary level test’s historic screening function and that the estimated 4 million workers impacted by the combination of the initial update and the subsequent application of the new standard salary level make up approximately 8% of all currently exempt, salaried white-collar workers, and less than 5% of all salaried white-collar workers.

The DOL also explained that unlike the 2016 Rule, the 2024 Rule includes a severability provision. Under that section of the 2024 Rule, if any provision of the 2024 Rule is stayed, enjoyed, or invalidated, the provision is to be construed to continue to give the maximum effect to the provision permitted by law. Thus, for instance, the DOL’s position is that the invalidation of the automatic updating mechanism should not affect the new minimum salary levels.

Unless the likely legal challenges result in delay or invalidation of the 2024 Rule, employers will need to comply with the 2024 Rule by July 1, 2024. To do so, employers with covered employees who are not currently paid at a level at least equal to the minimum salary levels will need to either provide pay increases to meet the new salary thresholds or reclassify the employees as nonexempt., i.e., eligible for overtime. The pay increases could be made through salary adjustments and/or utilization of the provision permitting up to 10% of the required salary to be satisfied by the payment of nondiscretionary bonuses, incentives and/or commissions. Employers will also need to make sure that they maintain appropriate time records for any reclassified employees (as well as all other nonexempt employees), to satisfy their obligation to track and count all time worked by nonexempt employees.

Regardless of whether employees who are reclassified as nonexempt remain salaried or are converted to hourly pay status, employers will need to consider what base rate to use, including whether to take anticipated overtime into account in calculating the applicable base rate. Employers may also want to consider measures to limit overtime work to control overtime pay requirements.

Finally, employers should recognize that the laws of the states in which they have employees may establish higher standards for salary thresholds. For example, California’s minimum salary threshold for exempt individuals exceeds the FLSA standard, with a current rate of $1,280 per week ($66,560 per year).

For any questions on the DOL’s 2024 Rule, please contact an attorney in Goodwin’s Employment practice.