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Are Your Employees Exempt Under Federal Law? Not If Their Salaries Are Below the New Minimum

Effective July 1, 2024, new regulations from the United States Department of Labor (the “DOL”) (the “2024 Rule”) increase the minimum salary level employees must be paid in order to be exempt from the Fair Labor Standards Act’s (the “FLSA”) overtime mandate, as we previously discussed. All employers must ensure that their exempt employees are either being paid at least the new minimum annual salary or change their status to non-exempt to comply with the 2024 Rule. Legal challenges to the 2024 Rule have not halted the July 1, 2024 effective date for all employers (other than the State of Texas in its capacity as employer) to increase the minimum salary levels. Failure to comply can lead to very costly litigation, including liquidated damages (typically double damages) and payment of employees’ attorneys’ fees and costs.

Exemption Overview

Under the FLSA, employers must pay employees overtime pay unless the employer can establish that the employees are exempt. Employees who work in executive, administrative, and professional (“EAP”) capacities may qualify as exempt if: (i) the employee is paid on a salary basis; (ii) the salary meets the minimum annual salary level; and (iii) the employee satisfies a duties test. An alternative exemption for highly compensated employees (“HCE”) effectively presumes exemption based on the high compensation and therefore has a less stringent duties test.

The 2024 Rule neither alters any aspect of the duties test nor changes the salary requirement; rather, the only changes are to the minimum annual salary level.

The Increased Salary Levels

Prior to July 1, 2024, the EAP exemption minimum salary level was $35,568 per year ($684 per week) and the minimum level for the HCE exemption was $107,432 ($684 per week). The 2024 Rule increases these levels in two stages, set forth below:

Deadline

Minimum Annual Salary Level – EAP Employees

Total Annual Compensation - HCEs

July 1, 2024

$43,888 ($844 per week)

$132,964 (including at least $844 per week)

January 1, 2025

$58,656 ($1,128 per week)

$151,164 (including at least $1,128 per week)

Beginning July 1, 2027, the minimum salary level will be updated every three years.

Nondiscretionary Payments and The Minimum Salary Level

Consistent with current FLSA regulations, up to 10 percent of the increased minimum annual salary levels can be satisfied by nondiscretionary bonuses, incentives, and commissions. Discretionary bonuses, (e.g., company and/or personal performance), however, cannot be used.

However, several states, including New York, do not permit the use of nondiscretionary payments as a means to meet the minimum annual salary level. Likewise, some states, again including New York, have their own minimum annual salary levels, which exceed the FLSA’s minimum. Employers must comply with both the FLSA and applicable state law.

Legal Challenges

Recent legal challenges to the 2024 Rule have met with limited success so far. However, a forthcoming final ruling is expected prior to the January 1, 2025 effective date in at least one of two cases pending in federal district courts in Texas. The two cases are briefly discussed below.

On June 28, 2024, the United States District Court of the Eastern District of Texas granted the State of Texas’s motion for a preliminary injunction to block the enforcement of the 2024 Rule. State of Texas v. U.S. Dep’t of Lab., No. 4:24-CV-00499 (SDJ) (E.D. Tex. 2024). Although Texas sought a nationwide injunction, the Court issued a preliminary injunction solely for the State of Texas, the plaintiff. The Court noted, however, that the 2024 Rule’s changes to the minimum annual salary level were “likely in excess of statutory jurisdiction.” Both parties will move for summary judgment in July. All moving papers are due by September 19, 2024, after which a final decision on whether to issue a permanent nationwide injunction will be made.

In Flint Ave., LLC v. U.S. Dep’t of Lab., et al., No. 5:24-CV-00130 (SRC) (N.D. Tex. 2024), on July 1, 2024, the Court denied Plaintiff’s request for a stay or nationwide preliminary injunction. Plaintiff, a software development company with seven employees, failed to establish irreparable harm simply because one of their employees’ salaries would need to be increased and failed to show how tracking his hours and vacation time would be a costly burden.

Notably, the Flint Avenue Court left open the possibility of a permanent injunction in advance of the January 1, 2025 salary increase, finding that the 2024 Rule will likely impact at least four of Plaintiff’s other employees and that it had “sufficient time” to address the merits of the plaintiff’s claims that the DOL lacked authority to promulgate the 2024 Rule. A final decision on the permanent injunction will be issued after October 9, 2024 (when all moving papers are due).

These cases coincide with the Mayfield appeal pending in the Fifth Circuit, which will determine whether the DOL’s 2019 minimum annual salary increase for exemptions from overtime pay is authorized by federal law. Mayfield v. U.S. Dep’t of Lab., 693 F. Supp. 3d 712 (W.D. Tex. 2023), appeal filed, Mayfield v. U.S. Dep’t of Lab., No. 23-50724 (5th Cir. Oct. 11, 2023). The Mayfield decision may have an impact on the cases challenging the 2024 Rule.

Additionally, the Supreme Court’s very recent Loper Bright decision may impact each of the above courts’ holdings on whether the DOL has the authority to issue the 2024 Rule. See Loper Bright Enters., et al. v. Raimondo, et al., No. 22-451 (June 28, 2024). More specifically, Loper Bright overruled the Chevron deference standard, effectively eliminating the requirement that courts defer to federal agencies’ interpretations of ambiguous statutes.

Next Steps for Employers

Given that the 2024 Rule is currently in effect, employers must either ensure that employees classified as exempt are being paid the required minimum salary level or change their classifications to non-exempt. Employers should also consider how the upcoming January 1, 2025 increase may affect their decision to increase salaries or change exemptions. Please note that as mentioned above, these changes will need to be made solely based on the increased minimum salary level with no analysis regarding their duties because the 2024 Rule did not alter the current duties test.

Additionally, employers would be well-served by seizing the opportunity that this regulatory change presents. Employers are often reluctant to review and change their employees’ statuses due to fear of negative repercussions, including the possibility of litigation for back overtime pay. However, employers now have the rare chance to tell employees that their classifications are being changed because of an amendment to federal law (as we recently discussed here).

For more information on the topic discussed, contact:

Employment Notes, a newsletter produced by Tannenbaum Helpern Syracuse & Hirschtritt LLP’s Employment Law practice, provides insights on recent employment caselaw, legislation and other legal developments impacting employer policies, human resource strategies and related best practices. To subscribe to the newsletter, email marketing@thsh.com.

07.22.2024  |  PUBLICATION: Employment Notes  |  TOPICS: Employment

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