Department of Labor Issues Final Rule Raising Salary Level for FLSA ‘White Collar’ Exemptions

On April 24, 2024, the US Department of Labor (DOL) announced the highly anticipated revisions to the salary thresholds for the Fair Labor Standards Act’s (FLSA’s) “white collar” overtime exemptions. The update significantly increases the salary level needed to qualify as exempt under the FLSA’s white collar and highly compensated exemptions and calls for periodic increases to the required salary levels into the future.

As shown in the chart below, the Final Rule and the first increase will take effect on July 1, 2024, with a second increase to the salary level slated for January 1, 2025. The Final Rule also calls for further updates to the required salary level on July 1, 2027 and every three years thereafter.  

BACKGROUND

The FLSA’s “white collar” exemptions exclude certain executive, administrative, and professional employees from federal minimum wage and overtime requirements.

To qualify for one of these exemptions, an employee generally must

• be paid on a salary basis, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test);
• be paid more than a specified salary threshold (the salary level test); and
• primarily perform executive, administrative, or professional duties as provided in the DOL’s regulations (and as interpreted by applicable caselaw) (the duties test).

 Additionally, under the “highly compensated test,” certain employees are exempt from the FLSA’s overtime pay requirements if they (1) are paid a specified amount in total annual compensation, (2) receive a specified amount per week, paid on a salary or fee basis, (3) perform office or nonmanual work, and (4) customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employees. 

The DOL previously sought to modify the salary level test in 2016, but that effort was ultimately enjoined by the federal courts. The DOL subsequently updated the white collar regulations in 2019. That update set the salary level test at its current thresholds.  

THE FINAL RULE

The Final Rule significantly increases the minimum salary needed to qualify for the white collar exemptions as follows:

The Final Rule also provides for automatic adjustments to the salary thresholds beginning on July 1, 2027 and every three years thereafter. These automatic adjustments will be tied to current earnings data:

• White Collar Exemptions: Salary level to be adjusted to remain at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South)
• Highly Compensated Exemption: Compensation level to be adjusted to remain at the annualized equivalent of the 85th percentile of weekly earnings of full-time salaried workers nationally

The Final Rule does, however, permit the DOL to “pause” future updates to the earnings thresholds if the DOL separately publishes a notice of proposed rulemaking in the Federal Register proposing changes to the earnings threshold and/or revising the updating mechanism “due to unforeseen economic or other conditions.” 

The Final Rule does not modify the salary basis or duties tests applicable to the white collar exemptions. 

The Final Rule also does not include its prior proposal to apply the standard salary threshold for employees based in US territories that follow the federal minimum wage, including Puerto Rico, Guam, the US Virgin Islands, and the Northern Mariana Islands. 

KEY TAKEAWAYS

The significant increase in the salary level test for the white collar exemptions will require employers to quickly identify and evaluate positions compensated below (or near) the new thresholds and decide whether to reclassify employees or raise their salaries. In making this determination, employers should look at the hours worked for those employees under the salary threshold to estimate the potential cost of paying overtime. 

For those employees who will be reclassified, employers should prepare talking points for managers and employees about the change, the reason for the change, and how the change will impact their compensation, benefits, and opportunities for advancement. Additionally, employers should develop training and robust time-reporting policies for reclassified workers who will not be accustomed to recording their hours worked.

To the extent that reclassified employees were receiving bonuses, commissions, or other incentive compensation, employers will need to carefully examine those methods of compensation to determine if they should continue to be paid and, if so, whether they must be factored into the regular rate for now-hourly workers. Employers should also be prepared to follow up and audit timekeeping practices for newly reclassified employees to ensure they are following proper processes and procedures.

Needless to say, employers must also continue complying with applicable state wage and hour laws for the newly reclassified employees.

NEXT STEPS

As with the DOL’s prior attempts to modify the regulations governing the white collar exemptions, we anticipate that various entities and trade groups will challenge the Final Rule. While it remains unclear if any of these challenges will be successful, given the fast-approaching compliance deadline, employers should act now to evaluate their compensation practices and, if necessary, make appropriate changes.