On April 23, 2024, the U.S. Department of Labor (DOL) released a Final Rule increasing the minimum salary an employee must receive to be excluded from overtime payments. This will result in millions more employees either being entitled to overtime or receiving higher salaries. Previously, updates to salary levels for exemptions could remain stagnant for years or decades and, according to some, were out of touch with current income data.
Background
The federal Fair Labor Standards Act (FLSA) requires all employees receive overtime premium payments for hours worked over 40 in a workweek unless an employee qualifies for an exemption. The so-called “white collar” exemptions for executive, administrative, and professional employees require a minimum weekly salary, along with specific primary job duties. The computer employee exemption allows for the payment of a salary as well, provided it meets the required minimum threshold. The current white collar and computer employee exemptions’ minimum salary is $684 per week, or $33,568 per year. Another exemption, the “highly compensated employee exemption,” requires a minimum annual salary of $107,432 (along with having certain duties).
The New Salary Levels
The new exemption salary levels will increase incrementally under the Final Rule, allowing employers time to assess their employee classifications and adjust pay practices.
On July 1, 2024, the minimum salary for the white collar and computer employee exemptions will increase to $844 per week, or $43,888 per year. This number reflects the 20th percentile of weekly earnings of full-time, non-hourly employees in the lowest wage U.S. Census region, as well as the retail industry nationally where misclassification of employees as exempt managers is prevalent. The highly compensated employee salary minimum will increase to $132,964 per year, which is the 80th percentile of full-time, non-hourly workers nationally.
On January 1, 2025, the minimum salary for the white collar and computer employee exemptions will increase again to $1,128 per week, or $58,656 per year. This number reflects the 35th percentile of weekly earnings of full-time, non-hourly employees in the lowest wage U.S. Census region. Employees in certain U.S. territories will be subject to a lower salary level of $455 per week. The highly compensated employee salary minimum will increase to $151,164 per year, which is the 85th percentile of full-time, non-hourly workers nationally.
Future Increases
On January 1, 2027, the DOL will implement updated salary minimums based on then-current earnings data. These future salary updates will be published at least 150 days before the update takes effect—so around late July or early August the year prior—and will use methodology based on Bureau of Labor Statistics household survey data.
What’s Next
If the past is truly prologue, we are likely to see legal challenges to the enforceability of the DOL’s Final Rule before the July 1, 2024, effective date. If that occurs, there may be a stay of enforcement and ultimately a modified version of the Final Rule. Employers may want to wait until closer to July 1, 2024, before making any pay changes required by the Final Rule to see what unfolds in the courts, as pay increases can be difficult to undo.
If the Final Rule holds, employers will need to assess their exempt positions and decide whether to convert them to non-exempt, hourly positions or pay more to meet the new salary requirements. Employers will also need to remember that simply increasing the salary of a position to meet the new requirements does not necessarily mean the position is properly classified as exempt—an assessment of the position’s duties is always necessary. A major change in law like this Final Rule can be an ideal time to assess pay practices and correct any misclassifications. Jackson Walker helps employers make those assessments and can help with classification concerns.
