On April 23, 2024, the Department of Labor (“DOL”)
announced a final rule (the “Rule”) increasing the
salary threshold employers must pay to most exempt workers. Given
the anticipated litigation over the Rule and the potential that the
Rule is struck down, employers may be tempted to ignore this news.
However, this approach is blind to the practical mechanisms of how
wage and hour enforcement works and how such claims arise.
Employers are well advised to get up to speed on the development to
avoid unnecessary risk to their organizations.
What the Rule States
As most employers know, in order for an employee to be
considered exempt from federal overtime requirements, the employee
must pass a duties test (performing specific duties to fit into one
of the existing exemptions). In addition, for most of the
exemptions, the employee must also be paid a minimum salary.
The Rule sets an increase to the salary minimum of employees in
the three major exemptions (the executive, administrative and
professional exemptions). The Rule increases the salary minimum
from the current $684 per week ($35,568 annualized) to $844 per
week ($43,888 annualized) on July 1, 2024 and $1,128 per week
($58,656 annualized) on January 1, 2025. The Rule sets forth
automatic increases starting July 1, 2027 and every 3 years
thereafter. The increases would be announced by the DOL 150 days in
advance and would be set at the 35th percentile of
full-time salaried employees in lowest-earning census region at the
time of the increase.
Under the Rule, in order to be considered “highly
compensated” and thus qualifying for less scrutiny on the
duties part of the three major exemptions, employees would have to
be paid $132,964 per year by July 1, 2024 and $151,164 per year by
January 1, 2025. This threshold would also be subject to the
three-year increases based upon the same metric at the
85th percentile.
The duties tests are unaffected by the new Rule and the Rule
does not provide increases for other exemptions such as attorneys,
computer employees, outside salespeople, doctors and teachers. The
Rule also does not preempt the ever-increasing state laws which
require a higher salary to be exempt from state wage and hour laws,
such as California, Colorado, New York and Washington.
The Rule will Be Challenged
It is inevitable litigation will ensue as soon as the final
version of the Rule is published. In 2016, the DOL attempted to
raise the salary threshold to $913 per week but a federal court
issued a nationwide injunction stopping the 2016 rule
implementation. Thereafter, the DOL rescinded the rule to replace
it with the current 2019 rule. The current 2019 rule was also
challenged but so far has been upheld (the case is still on
appeal). There is no reason to believe similar challenges will not
be brought, which could delay the implementation and could strike
the Rule down altogether.
The Rule is Still Significant
In addition to the risk of being unprepared should the Rule not
be enjoined during the litigation or ultimately upheld, there are
other risks to turning a blind eye to the development. First and
foremost, the DOL will remain the agency that will audit employers
and make determinations if someone fits within an exemption. If the
rule is struck down, this means the salary alone cannot be the
basis for a determination of misclassification by the DOL. However,
it also signals that the DOL will not look extremely carefully at
the duties of employees below the Rule’s salary threshold. The
DOL has made abundantly clear in the 374-page preamble that it
feels the new thresholds would be more than fair as a bright line
rule for exempt status. In fact, the preamble specifically notes
that the revised salary level will strengthen the protection of
workers who do not meet the duties test currently but are over the
current threshold, as their misclassification will be obvious to
both the employee and employer. Thus, if the Rule is struck down
the employer who pays less will not be defenseless, but better be
confident that the duties of those employees below the new
threshold are truly exempt.
Secondly, the news of the Rule is anticipated to be widespread.
The day after the Rule was published, the CNN headline read
“[m]illions more salaried workers will be eligible for
overtime pay under final Biden rule.” The DOL has also
released headline grabbing estimates that the Rule will result in a
$1.5 billion dollars of increased payments in the first year from
employers to employees to comply with the rule due to increased
overtime paid to employees who are now classified as nonexempt and
salary increases.
Due to the press, employees under the threshold will expect to
be affected and will be more likely to talk to attorneys or the DOL
if they are not (even if the reason they are not is subsequent
legal challenges), resulting in more scrutiny as to whether their
duties are truly exempt.
Employer Next Steps
Contrary to what employers often conclude, employers are also
not advised to simply raise the salary of exempt workers to the new
threshold. Handing out unwarranted raises for the same work is a
bad business model and not legally required.
The immediate step employers should take is to look carefully at
the employees they now classify as being administrative, executive
or professional making between $684 a week and $1,128 a week and
scrutinize their duties, with a more careful eye to those below the
more immediate $844 threshold. The administrative exemption, in
particular, lends itself to challenges on the duties part of the
test given that part of that test is that an employee must have
independent judgment on matters of significance, a low salary does
beg the question as to how significant the decision making really
is. Employers who are not in the South and instead are in a higher
earning Census region should be mindful that is even more of an
issue.
For those employees identified who do not clearly fit within the
duties test, employers should consult with legal counsel to obtain
more guidance and if a gray area remains, consider whether (and
when) it makes sense to make a change and understand all of their
options. These options include:
(A) Converting gray area employees in the risky salary range to
hourly employees. While an employee must fit a duties and salary
test to be exempt, anyone can be paid as an hourly employee. This
option is easy and straightforward to do for employees who do not
frequently work much overtime. An employer simply has to have a
handle on how much time the employee works and choose an hourly
rate that (even with occasional overtime) does not result in the
employee netting more money than they previously made. For example,
an employee who regularly works 42 hours a week could easily be
paid the $15 minimum wage in Massachusetts and still only bring
home $684 or less as long as the employee did not work over 3.73
hours of overtime in a week. Many employers may save money paying
workers hourly given that nonexempt workers do not have to be paid
for non-working time. With the trend of workers putting in less
hours, getting more PTO and focusing on work life balance,
employers may be surprised to learn their full-time salaried
employees are actually working far less than 40 hours per week.
Further, if these employees start making money on an hourly basis,
they may be more inclined to work more hours. The downside of this
option is that employers will still have to carefully track hours
worked and abide by non-exempt obligations such as meal breaks (and
in Rhode Island, overtime on Sunday and holidays). In addition,
employees may be disgruntled to see their earnings set out on an
hourly, lower rate basis.
(B) Similar, to option (A), employers can convert employees to
be hourly as set forth above, but also guarantee them a minimum
salary (as long as they still pay overtime at the hourly rate).
This will help with the workers being less disgruntled and
potentially allows for some mitigation of damages if time tracking
fails to capture all hours. However, this method does not have the
potential cost savings and still requires the burden of meticulous
time tracking and lunch breaks.
(C) Employers can also convert employees to hourly but use the
fluctuating workweek calculation to compensate the workers. Under
the fluctuating workweek calculation, the employer sets a salary
for all hours per week and then divides the weekly salary by the
number of hours worked that week, paying only half the rate for
overtime. For example, if a previously exempt employee making $700
per week in Rhode Island is converted to a nonexempt employee
guaranteed $700 for all hours worked, the salary would cover up to
50 hours and still be within the $14 minimum wage. Further, the
overtime is calculated at ½ the rate, so if 50 hours were
worked, would be an additional $70 dollars (700/50 x ½ x 10
=70), for a total of $770 being owed. The upside of this method is
that it is more acceptable to employees because they are still
guaranteed a salary and results in less overtime costs for those
who frequently work overtime. The downside of this method is that
nonexempt time tracking and lunch breaks still apply, there is no
cost savings when an employee works less hours, the fluctuating
workweek method requires very clear communication regarding how
someone is compensated and some state wage and hour laws do not
allow it.
(D) Employers of course can increase the employee’s salary
if the employee fits clearly within the duties test. This might be
the easiest option to avoid the headaches of other nonexempt
employee compliance rules and may make sense if the salary is close
to the new threshold. In such a case, employers can wait to see if
the litigation impacts the Rule and then be ready to increase the
wage when the time comes. In addition, even if the salary is not
particularly close to the new threshold but the employer is
confident about the duties portion of the exemption test, the
employer could assign the employee additional responsibilities and
work to avoid simply paying more and getting nothing
additional.
The above options are not exhaustive and employers will also
need to review the status of anyone who was classified as exempt
due to the highly compensated employee rules but is now below the
new thresholds. Employers are encouraged to review their records
now to identify potential employees that could be impacted by the
Rule and consult with their legal counsel to be fully informed as
to their options.
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.
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