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The U.S. Department of Labor Raised the Minimum Salary Level for Most Exemptions: Your Exempt Employees May Need to Be Paid Overtime

The United States Department of Labor (the “DOL”) issued its final rule on April 23, 2024, increasing the minimum salary level for the so called “white collar” employees to be exempt from overtime pay under the Fair Labor Standards Act (“FLSA”). Likewise, the rule increased the FLSA’s minimum total annual compensation level for employees to be exempt under the highly compensated employee exemption (“HCE’s”). The DOL estimates that more than 3.4 million employees will be non-exempt (and, thus, entitled to overtime pay) based on the increased salary and total annual compensation levels. Accordingly, employers in certain jurisdictions will either need to increase salaries and/or compensation levels or be prepared to reclassify certain employees as nonexempt. It is critical, however, to check the state and local laws as well because some, like New York, have their own minimum salary levels for exemptions. Specifically, in New York City, Westchester, and Long Island, the minimum salary increased to $62,400 as of January 1, 2024 for most exemptions (up from $58,500 in 2023) as previously discussed.

The FLSA’s Overtime Pay Requirements

The FLSA requires employers to pay employees overtime pay of at least one and one-half times their regular rate of pay for hours worked in excess of 40 in any given workweek. Overtime pay is the presumption. However, employers are not required to pay overtime to employees who are “exempt”, which is the employer’s burden of proof. Exempt employees under the FLSA include those working in an executive, administrative, and professional (“EAP’s”) capacity, as well as HCE’s (among others, which are not discussed in this Note). In order to be exempt from overtime pay requirements, EAP’s must generally be paid on a salary basis and satisfy a duties test. HCE’s are more highly compensated and therefore, must satisfy a less stringent duties test to be exempt. The final rule did not change any aspect of the duties test; rather, it has only increased the minimum salary levels for certain exemptions and the annual total compensation minimum for HCE’s.

The Minimum Salary Level and Total Annual Compensation Increases

Currently, the minimum annual salary level for the EAP exemption is $35,568 (or $684 per week), and minimum total annual compensation for HCE’s is $107,432 per year (including at least $684 per week paid on a salary or fee basis). The final rule has raised each of these levels quite substantially.

The salary increases are being raised in two steps. First, effective July 1, 2024, the minimum salary level, and the total annual compensation minimum for HCE’s will increase as follows:

MINIMUM SALARY

HCE MINIMUM

$43,888 per year ($844 per week)

$132,964 per year (including at least $844 per week paid on a salary or fee basis)

Second, effective January 1, 2025, the minimum salary level, and the total annual compensation minimum for HCE’s will increase as follows:

MINIMUM SALARY LEVEL

HCE MINIMUM

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

$151,164 per year (including at least $1,128 per week paid on a salary or fee basis)

Going forward, on July 1, 2027, and every three years thereafter, the minimum salary levels will be updated to reflect current earnings data.

Nondiscretionary Payments

Consistent with the current regulations, the final rule allows for employers to satisfy up to ten percent of the new minimum salary levels for the EAP exemptions through the payment of non-discretionary bonuses (e.g., commissions). However, discretionary bonuses (e.g., company and/or personal performance) cannot be counted for this purpose.

Legal Challenges

Although the final rule has an initial compliance date of July 1, 2024, it is expected to face legal challenges similar to those in connection with the DOL’s previous rules increasing salary thresholds. In November 2016, at the 11th hour of the 2016 final rule’s effective date, a federal district court in Texas enjoined the rule. See Nevada v. United States Dep’t of Lab., 218 F. Supp. 3d 520 (E.D. Tex. 2016). The DOL then issued another final rule in 2019 which once again raised the minimum salary levels, although not by as much as the 2016 rule. Nonetheless, the 2019 final rule was also challenged in a federal district court in Texas. See Mayfield v. U.S. Dep’t of Lab., No. 1:22-CV-792-RP, 2023 WL 6168251 (W.D. Tex. Sept. 20, 2023) and is currently on appeal in the U.S. Court of Appeals for the Fifth Circuit. Additionally, the U.S. Supreme Court will be deciding this term whether to limit or overturn Chevron deference to administrative agencies, which could substantially diminish the DOL’s rule-making authority. See Loper Bright Enterprises v. Raimondo, No. 22-451; Relentless, Inc. v. Dep’t of Com., No. 22-1219.

Going Forward

Employers ought to undertake a prompt review of the classifications of their workforce, and if necessary, raise certain employees’ salaries in order to maintain the exemption or reclassify employees earning less than the required minimum levels as nonexempt. In either case, budgets and other factors, such as employee morale, permission to work overtime, training managers of nonexempt employees (among others) need to be considered. Moreover, applicable state and local law must be analyzed.

As we previously wrote, a change in the law is always a great time to review and possibly change classifications with diminished risk of inquiry by employees about their prior entitlement to overtime pay.

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.

04.26.2024  |  PUBLICATION: Employment Notes  |  TOPICS: Employment

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