On April 23, 2024, the U.S. Department of Labor (“DOL”) announced a final rule (“Final Rule”) scheduled to take effect on July 1, 2024. The Final Rule updates regulations concerning the exemption from minimum wage and overtime pay requirements for executive, administrative and professional employees (“E/A/P”) authorized under Section 13(a)(1) of the Fair Labor Standards Act (“FLSA”). In particular, the Final Rule increases the standard salary level and the highly compensated employee total compensation thresholds for E/A/P employees to be exempt from the minimum wage and overtime pay requirements of the FLSA.
Impact of Final Rule on E/A/P Wages
The FLSA exempts individuals from its minimum wage and overtime requirements if the employee meets all three of the following criteria:
- They are paid a salary, meaning they are paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed (i.e., they are not paid hourly);
- They are paid at least a specified weekly salary level; and
- They primarily perform executive, administrative or professional duties, as provided in the DOL’s regulations (the Final Rule does not change the E/A/P duties test).
An employee who meets the three conditions is exempt from minimum wage and overtime requirements under the FLSA. An employee who does not meet all three conditions is subject to the minimum wage and overtime requirements. Note that there are some exceptions to the FLSA, and different salary thresholds, in limited circumstances, e.g., for physicians, computer professionals and outside sales.
The DOL sets the weekly salary levels required for exemption. Currently, that requirement is $684 per week ($35,568 annually) and $107,432 per year to be considered a highly compensated employee (“HCE”). The Final Rule provides for increases in these requirements effective on July 1, 2024, and establishes additional increases to be effective periodically thereafter:
- July 1, 2024: standard salary level of $844* per week for exemption ($43,888 annually); threshold of $132,964 per year to be considered an HCE. *Updated on 5/30/2024.
- January 1, 2025: standard salary level of $1,128 per week for exemption ($58,656 annually); threshold of $151,164 per year for HCEs.
- July 1, 2027, and every three years thereafter: automatic updates to be determined by applying to available data the methodology used to set the salary level in effect at the time of the update.
Will the Final Rule Really Be Effective on July 1, 2024?
Many readers will recall that the DOL attempted to raise the salary threshold from $455 to $913 per week in 2016. At that time, a district court stopped the rule from going into effect, finding that the DOL lacked statutory authority to set a salary threshold. Since that time, U.S. Supreme Court justices have suggested that the FLSA does not even authorize a salary basis test. Therefore, it will be surprising if the Final Rule does not face a legal challenge that, at least, delays the effective date. That said, employers still need to be prepared in the event that there is no delay.
Practical Takeaways
- Even if there would be a legal challenge that delays or suspends the July 1, 2024 effective date, this is a good time for an exemption audit – one that incorporates both current duties and a compensation evaluation;
- Employers should assess if employees treated as exempt would be making at least $43,888 per year (HCE at $132,964) as of July 1, 2024;
- For those employees who would not be earning the threshold amount of compensation, an employer can be compliant with the Final Rule by providing a compensation increase or treating the employee as non-exempt (meaning paid for overtime when working more than 40 hours per week, meeting record-keeping requirements, etc.);
- Employers should also consider any state law requirements that impact exemption or exempt compensation; and
- Employers should monitor news sources to be aware of any legal challenges to the Final Rule impacting the effective date.
If you have any questions regarding the Final Rule or would like assistance navigating through the operational and financial consequences of the Final Rule, please contact:
- Robin Sheridan at (414) 721-0469 or rsheridan@hallrender.com;
- Zeke Shen at (414) 721-0912 or zshen@hallrender.com; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot give legal advice outside of an attorney-client relationship.
