Exempt Workers Get a Pay Bump
On July 1, 2024, the U.S. Department of Labor’s (DOL) overtime final rule takes effect. The rule raises the minimum annual salary that employers must pay to certain exempt employees for the employees to be exempt from certain wage laws under the Fair Labor Standards Act (FLSA).
Specifically, here’s what the FLSA, the DOL’s regulations, and the DOL’s overtime final rule do:
The FLSA establishes certain rules that employers must comply with with regard to most employees, including overtime and minimum wage rules. However, these FLSA protections do not apply to all employees. The DOL maintains regulations issued under the FLSA and the regulations exempt certain employees—including bona fide executive, administrative, & professional (“EAP”) employees—from the protections of the FLSA’s minimum wage and overtime laws.
For employees to be deemed exempt EAP employees under federal law, they generally must meet both (1) a job duties test and (2) a minimum salary test. (Doctors, lawyers, teachers, and outside sales employees do not need to meet the minimum salary test and can fall within the federal EAP exemption regardless of how and what they are paid; note, however, that this is not necessarily the case under certain states’ laws.)
The DOL’s overtime final rule revises the minimum salary requirement only, implementing regular increases. The job duties requirements (or lack thereof for certain professions) remain the same. The increases are as follows:
Before July 1, 2024, the federal EAP salary minimum was $35,568 per year.
Effective July 1, 2024, the EAP salary minimum increases to $43,888.
On January 1, 2025, the EAP salary minimum increases to $58,656.
And, beginning on July 1, 2027 and every three years after that, further increases to the minimum salary threshold will be implemented. The DOL does not set a specific formula for these increases from 2027 and beyond; however, this is a change from past rulemaking where future, regular increases were not accounted for.
In addition to the EAP exemption, the DOL’s regulations also provide an FLSA exemption for certain “highly compensated employees” who are paid a higher minimum salary (and satisfy a lesser duties test) than their EAP counterparts. The DOL’s overtime final rule also increases the "highly compensated employee" exemption annual salary threshold from its previous $107,432 to $132,964 effective July 1, 2024; and to $151,164 effective January 1, 2025. The DOL again notes that there will be regular increases on July 1, 2027 and every three years thereafter for this exemption.
As this rule takes effect, there are lawsuits currently pending that challenge the DOL’s authority to implement such regulatory changes. In 2016, a similar increase (to $47,476) was proposed by the DOL but ultimately failed after a federal judge enjoined it and the DOL subsequently abandoned the rule. However, as of the time of this writing, it is unclear how the current litigations will fare or impact private employers, if at all.
As we wait to see whether the courts may halt or strike down this latest DOL overtime final rule, employers should take steps to ensure continued compliance with federal and state laws:
Review your exempt employees’ salaries to ensure that they meet the required salary minimum to remain exempt. If not, consider increasing them to be paid at or above the new threshold effective July 1, 2024, or convert those previously-exempt employees to non-exempt if salary increases are not feasible.
Perform this salary review under both federal and applicable state law (i.e. the state where the employee works). The DOL’s rule impacts only federal law, but state laws can and often do set additional and more stringent requirements for exempt status. Employers must comply with both. For example, California’s comparable EAP exemptions require a salary of at least two times the state’s minimum wage for full-time (i.e. 40 hours per week) employment. As of January 1, 2024, the minimum wage in California is $16 per hour, and therefore California’s EAP exempt employees must receive a minimum salary of at least $66,560 per year—over $20,000 higher than the newly-set minimum under the DOL’s rule. California-based exempt employees therefore must maintain a salary that meets the higher of the two salary thresholds, i.e. in this case the state-set minimum. Therefore, review all exempt employee salaries under all applicable laws—federal and state.
Plan ahead. We know that the July 1, 2024 salary increase is just the first of many to come. Review and strategize for the long-term by planning for these future increases in your annual budgets.
Additional Resources: The DOL has published a short overview of its rule here and you can read the DOL’s Frequently Asked Questions on the overtime final rule here.