U.S. Department Of Labor Unveils Final Overtime Rule That Raises Salary Limits

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On April 23, 2024, the U.S. Department of Labor (DOL) published its long-awaited final rule raising the salary thresholds for certain overtime exemptions...
United States Employment and HR
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Executive Summary: On April 23, 2024, the U.S. Department of Labor (DOL) published its long-awaited final rule raising the salary thresholds for certain overtime exemptions under the Fair Labor Standards Act (FLSA). The rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, solidifies the DOL's proposed rule from 2023. The effective date for this final rule is July 1, 2024.

Background: On August 30, 2023, the DOL proposed to increase the salary thresholds for workers who received a salary of at least $35,568 annually and worked in a “bona fide executive, administrative, or professional capacity” (often referred to as the “white collar” exemptions). Employees who meet the requirements of the “white collar” exemptions are exempt from the FLSA overtime requirements, i.e., employers need not pay overtime to those employees at a rate of one-and-one-half these employees' regular rate of pay for time worked beyond 40 hours in a week.

The DOL proposed to increase the salary basis test from $684 per week ($35,568 annually) to $1,059 per week ($55,068 annually). Similarly, the DOL proposed to increase the “highly compensated employee” exemption under the FLSA from $107,432 to $143,988 annually. The proposal was intended to extend overtime protections to lower-paid salaried workers. Numerous entities challenged the rule, with business groups warning that the policy change would significantly and immediately increase payroll costs for millions of workers. Other groups voiced support, noting that overtime standards had largely remained the same despite recent economic trends providing for higher wages and higher costs of living.

Final Rule: The final rule, effective July 1, 2024, significantly expands overtime eligibility under the FLSA. The rule provides for an “initial update” to the standard salary level to reflect earnings growth, in the amount of $844 per week ($43,888 annually). Effective January 1, 2025, the rule increases the standard salary level to $1,128 per week ($58,656 annually). That means that, with limited exception, an otherwise exempt employee — someone who meets the duties required of the exemption and is paid on a salaried basis — must be paid at least $43,888 (and, by January 1st, at least $58,656) in order to be considered an exempt employee. 

The final rule also increases the total annual compensation threshold for highly compensated employees to $151,164. This “highly compensated” exemption figure tracks the annualized weekly earnings amount of the 85th percentile of full-time salaried workers nationally. The DOL noted that this increase will avoid the unintended exemption of large numbers of employees in high-wage regions who would otherwise fall under the highly compensated employee exemption.

The final rule provides for automatic updates every three years based on the latest earnings data — the rule tracks the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage U.S. Census Region, the Southern U.S.

Notably, the final rule departs from the proposed rule by providing for higher threshold salary figures than originally anticipated — $1,128 per week instead of $1,059 per week as proposed, and $151,164 annually instead of $143,988. The DOL estimates that nearly 3 million workers will be affected by the 2025 salary threshold increases.

What Happens Now? Although it has now been finalized, it is likely that this rule will face immediate legal challenges. In 2016, the DOL, under the Obama administration, proposed a similar rule to almost double the salary threshold for white collar exemptions from $455 per week to $913 per week. That rule was challenged shortly after its publication, and a federal judge in Texas enjoined the rule from going into effect. The judge held that the drastic increase in salary level proposed by the DOL resulted in overtime status depending predominately on a minimum salary level, thereby supplanting an analysis of an employee's job duties. Because the DOL has once again nearly doubled the salary threshold, it's a good bet that there will be legal challenges to the final rule.

The Bottom Line

Employers should immediately evaluate how they treat any employees who are currently classified as exempt and earning between the current threshold ($35,568 annually) and the new threshold ($43,888 annually on July 1, 2024, and $58,656 on January 1, 2025). Now that the final rule has been published, employers face the decision of whether to raise the affected employees' salaries to meet the new threshold, if they want to maintain the exemption, or convert the employees to nonexempt status, which would require the tracking of hours and payment of overtime for those employees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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