The U.S. Department of Labor (DOL) has issued its Final Rule to
increase the minimum salary requirements for the “white
collar” exemptions (executive, administrative, and
professional) from minimum wage and overtime pay requirements under
the Fair Labor Standards Act (FLSA). The Final Rule sharply
increases the minimum salary level for the white-collar exemption
to apply. The increase will take effect in two stages over six
months.
The standard salary level will increase in two phases from the
current $684 per week ($35,568 per year) to:
- July 1, 2024: $844 per week ($43,888 annually)
- Jan. 1, 2025: $1,128 per week ($58,656 annually)
The highly compensated exemption (HCE) total annual compensation
level will increase from its current $107,432 per year to:
- July 1, 2024: $132,964 per year
- Jan. 1, 2025: $151,164 per year
The salary thresholds will be updated every three years to
reflect current earnings data, beginning July 1, 2027.
The Final Rule, announced on April 23, is slated to take effect
July 1, 2024. Formal publication in the Federal Register is
pending.
Changes From Proposed Rule
In its proposed rule, the DOL announced a new methodology for
determining the standard salary level: 35th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census
Region (currently, the South) and 85th percentile of full-time
salaried workers nationally for the HCE. At the time the proposed
rule was issued, those figures amounted to a salary level of $1,059
per week ($55,068 per year) for the standard exemption and $143,988
per year for the HCE exemption. DOL warned the figures could be
higher when it releases the Final Rule based on current data.
The proposed rule issued in September 2023 did not propose
implementing changes in phases. But in the Final Rule, the DOL
decided to implement the changes in two phases. The first phase,
effective July 1, 2024, will use the existing methodology: 20th
percentile of the lowest-wage Census Region (the South) for the
standard exemption and the 80th percentile full-time salaried
workers nationally for the HCE. The second phase, effective Jan. 1,
2025, will use the 35th and 85th percentiles, as DOL initially
proposed. That is what accounts for the significant increases in
the rates from July 1, 2024, to Jan. 1, 2025.
Another significant change from the proposed rule relates to
application of the new salary levels to workers in the Commonwealth
of the Northern Mariana Islands, Guam, Puerto Rico, and the U.S.
Virgin Islands. The proposed rule expanded the application of the
salary levels to these territories, but the Final Rule dropped
these changes and leaves the current salary levels for these
territories the same: $455 for these territories and $380 for
American Samoa.
Automatic Updates
The Final Rule also implements automatic updates to the salary
thresholds every three years. The DOL will determine the new salary
threshold by applying then-current earnings data using the same
methodology it used in setting the current increases.
That means the minimum salary requirements could increase on a
routine basis without DOL undertaking notice-and-comment
rulemaking. However, the rule provides that a scheduled automatic
update could be delayed temporarily if warranted by unforeseen
economic or other conditions.
Impact of Final Rule
According to DOL estimates, in the first year of the Final Rule
taking effect, approximately four million workers will be impacted.
(One million employees will be affected by the July update; the
remaining three million workers will be impacted by the higher Jan.
1, 2025, salary floor.) The DOL estimates that 292,900 employees
will be affected by the adjustment to the HCE salary threshold.
The DOL also projects an annualized income transfer from
employers to employees of $1.5 billion.
DOL anticipates that the industry with the highest number of
affected workers will be professional and business services
(827,000), while the industry with the highest percentage
of executive, administrative, and professional workers affected
will be leisure and hospitality (about 24 percent). Private-sector
nonprofit employees are more likely to be impacted (18.9 percent)
than employees in private-sector for-profit entities (13.6
percent), according to DOL.
Prospects for Implementation; Severability
Whether the Final Rule will take effect July 1 remains to be
seen. As with the white-collar rules issued under the Obama and
Trump Administrations, legal challenges to the Biden white-collar
rule are anticipated. Currently, in connection with the current
salary threshold set under the Trump Administration, the DOL is
defending the agency’s statutory authority to impose
any salary requirement in defining the criteria for the
white-collar exemption. In a Sept. 28, 2023, decision, a federal court in
Texas held that the DOL permissibly adopted a salary minimum when
it issued its 2019 rule, which set the $684 weekly salary level now
in effect. That ruling is on appeal in the U.S. Court of Appeals
for the Fifth Circuit. Mayfield v. U.S. Department of
Labor, No. 23-50724.
Opponents of the latest Final Rule also may challenge the
DOL’s authority to implement automatic updates to the minimum
salary thresholds.
The latest Final Rule may be even more vulnerable to suit. The
U.S. Supreme Court this term is deciding whether to limit or
overturn the “Chevron” standard of deference to
administrative agency rulemaking. Depending on the outcome of the
pending decision in Loper Bright Enters. v. Raimondo and a
related case, Relentless, Inc. v. Department of Commerce,
the DOL’s Final Rule may be subjected to heightened judicial
scrutiny. The significant impact on the economy may also trigger
the “major questions” doctrine, with opponents of the
rule arguing only Congress has the authority to implement such a
significant change.
In the Final Rule, DOL expressly states each part of the rule is
“severable,” which is a hedge in case a court finds one
aspect of the Final Rule invalid. A court might, for example, find
the Jan. 1, 2025, increase too high to withstand scrutiny, but find
the July 1, 2024, increase reasonable, thus leaving the phase-one
increase intact, even if the later increase is invalid. Similarly,
if a court were to determine DOL has no authority to implement
automatic increases every three years, the court could invalidate
that portion of the Final Rule but keep the remainder intact.
What Should Employers Do?
It is possible a federal court will enjoin the DOL from
enforcing the Final Rule while the legal challenges are pending.
That leaves employers in a difficult position of preparing to
comply while the rule’s prospects are unclear. Adding to the
complexity is a looming presidential election. A turnover in
administrations could bring a change of course by the DOL.
Nevertheless, employers should put a strategy in place to
effectuate changes by the July and January deadlines in the event
the rule does go into effect.
For now, employers need to identify currently exempt employees
who do not satisfy the new minimum salary threshold and devise a
strategy for compliance. Employers that have exempt workers who
earn more than $684 per week, but less than the new salary
thresholds of the Final Rule (and who satisfy the duties
requirements), can comply by increasing affected employees’
salaries to the minimum salary level so they maintain their exempt
status. When adjusting salary levels, employers must consider the
impact on other exempt employees who also may request an increase,
as the gap between their salary and other salaried workers
diminishes. Alternatively, employers can retain the employees’
current pay levels and reclassify the affected employees as
nonexempt.
Employers have options to minimize the financial impact of
reclassifying employees as nonexempt. These include reducing their
rate of pay so that the outcome of any overtime hours worked will
be cost-neutral, or adopting a fluctuating workweek method in
states where its use is permitted. Employers also can limit newly
nonexempt employees’ overtime hours.
Employers also must consider how the proposed rule interacts
with the corresponding exemptions under the myriad of state laws.
Some states do not have overtime laws; others incorporate the FLSA
as it stands; others incorporate the FLSA’s overtime provisions
with higher salary requirements; and others have their own
exemptions and salary levels without reference to the FLSA.
Whether the Final Rule ultimately takes effect, it presents an
opportunity for employers to review the exempt status of their
workforce. Consider an audit of wage and hour practices to ensure
compliance with the FLSA and the state laws of the jurisdictions
where your business has operations.
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.
#DOL #Releases #Final #WhiteCollar #Exemption #Rule #Sets #Minimum #Salary #Increase #Phases #Beginning #July #Employee #Benefits #Compensation
