Employers Should Audit Exempt Classifications in Response to USDOL’s Increased Salary Requirements to Qualify For Overtime Exemption

On April 24, 2024, the U.S. Department of Labor (DOL) announced a long anticipated final rule increasing the minimum salary requirements that “white collar” and highly compensated employees must meet to qualify for exemption from the overtime requirements of the Fair Labor Standards Act (FLSA).  It is estimated that the rule could impact up to 4 million employees who may now be eligible for overtime pay unless employers increase their salaries to meet the new requirements.

Two-Phased Increase for White Collar Exceptions

The DOL’s rule announced a phased-in increase in the salary basis test applicable to the white collar exemptions for executive, administrative and learned professional employees.

  • Effective July 1, 2024, the salary basis to qualify for the three white collar exemptions will be raised from $684 per week / $35,568 per year, to $844 per week / $43,888 per year.
  • On January 1, 2025, the salary basis will be significantly increased to $1,128 per week / $58,565 per year.

In addition, these thresholds will be reexamined by the USDOL every three years (with the first review on July 1, 2027) to account for current earnings data, and employers can expect additional increases going forward.

The new rule does not affect the existing regulations that allow for 10% of the required salary to be satisfied by the payment of nondiscretionary bonuses, incentives and commissions.

Two-Phased Increase for the HCE Requirements

The salary basis test for highly compensated employee (HCE) exception will likewise be subject to increases.

  • Effective July 1, 2024, the salary basis for HCE employees will be raised from $107,432 per year, including at least $684 per week on a salary or fee basis, to $132,964 per year, including at least $844 per week on a salary or fee basis.
  • On January 1, 2025, the salary basis for HCEs will significantly increase to $151,164 per year, including at least $1,128 per week on a salary or fee basis.

As with the white collar exemptions, these salary requirements will be subject to review every three years.

The Duties Test for Exemptions Undisturbed

Employers must be mindful that the salary basis test works in tandem with a “primary duties” test that also must be met to qualify for the white collar and HCE exemptions.  The DOL’s regulations have separate duties tests for each of these exemptions that must be taken into account before claiming exempt status for the position in question.

Employers Must Prepare

Employers should immediately review all exempt white collar and HCE employees to ensure that their current compensation meets the new salary basis tests that go into effect on July 1, 2024.  If not, employers have several choices: i) increase the salary to the new minimums to preserve the exemption, ii) reclassify the employee as non-exempt and eligible for overtime pay, while continuing to pay on a salaried basis, or iii) transition the employee to an hourly employee.  This final option may have a demoralizing effect because employees transitioning to an hourly basis, may view their reclassification as a demotion to a rank and file employee now subject to tedious time-keeping requirements.  Regardless of the mode of payment, if the exemption is lost the employer must now ensure that these reclassified salaried or hourly employees are accurately tracking all time worked.

For those salaried employees who rarely if ever work overtime, opting for the salary increase to retain the exemption may not make economic sense, as the overtime liability will likely not occur.  Conversely, for those who work overtime, the employer must assess whether increasing the salary to preserve the exemption is more cost effective than transitioning the employee to non-exempt and paying overtime.

The salary review is also a perfect opportunity for employers to verify whether employees presently classified as exempt actually meet the applicable duties test, thereby ensuring that a claim of misclassification can withstand DOL review.

Although employers must make these same assessments in preparation for the January 2025 increases, many commentators question whether these aggressive increases will survive the anticipated challenge in the courts.

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