Summary of Final Rule
On April 24, 2024, the DOL announced its Final Rule raising the current minimum annual salary threshold ($35,568) to qualify as an exempt executive, administrative, professional (i.e., “white-collar”) employee under the FLSA. The DOL also raised the current salary threshold ($107,432) to qualify under the highly compensated employee (“HCE”) exemption. Specifically:
- On July 1, 2024, the minimum salary threshold for white-collar workers will increase to $844 per week ($43,888 per year). For HCEs, the minimum annual compensation level will increase to $132,964.
- On January 1, 2025, the DOL will implement a new salary methodology, setting the standard salary level for white-collar workers at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, resulting in a salary level of $1,128 per week (equivalent to $58,656 per year). For HCEs, the compensation level will be set at the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally, resulting in a compensation level of $151,164.
- Future updates to the salary and compensation levels will occur every 3 years and will apply up-to-date wage data to determine new salary levels. The 3-year update will take place on July 1, 2027.
What this Means
If employees who are currently classified as executive, administrative or professional exempt earn less than this new threshold, they will need to be paid an OT premium for any hours worked beyond 40 in a workweek. Even if an employee meets the new salary threshold, to qualify as exempt, an employee must also satisfy the “duties” test that applies to the applicable exemption. The final rule does not change the existing “duties” tests.
Higher State/Local Pay Requirements Control
The FLSA sets a national floor on wages and a premium for excess work. Some states and cities have stronger wage and hour protections, e.g., CA currently has a $66,560 salary threshold. In that case, the more protective standard applies to workers who reside in that state or city.
Next Steps
Absent a successful legal challenge, your business must be prepared to adjust its pay practices to comply with the Final Rule. Here are recommended next steps:
- Identify all employees currently classified as exempt executive, administrative and professional employees. Confirm they meet the applicable “duties test.” If they don’t, they fail the exemption and they need to be reclassified.
- If they do pass the duties test, identify those on the list who are earning below the new salary threshold.
- For those employees, assess the cost of increasing their salaries to the new minimum and compare that to the cost of converting them to hourly and paying them OT at the 1.5x OT (or keeping them salaried at the same or reduced salary level and paying OT at the .5x OT rate).
- If you decide to reclassify employees to OT-eligible (either hourly or salaried), implement training and update policies to clarify the rules for properly counting and tracking OT.
- Avoid the common pitfalls of trying to skirt compliance by misclassifying current W-2 employees as 1099 contractors or offering “comp time” in lieu of paying OT.