On April 22, 2024, the Department of Labor (DOL) released the
final version of a new rule to raise the minimum salary threshold
for most employees covered by the so-called white-collar exemptions
under the Fair Labor Standard Act (FLSA) and adopt an automatic
mechanism that will update the earnings thresholds every three
years (the 2024 Rule). The DOL estimates these changes will impact
approximately 4 million workers.
The 2024 Rule is scheduled to go into effect on July 1, 2024. It
is expected that, like previous rulemaking concerning the minimum
salary threshold, the 2024 Rule will face legal challenges, which
may result in an injunction barring enforcement of the 2024 Rule
before its scheduled effective date.
Background
In the absence of an exemption, the FLSA provides that an
employee is entitled to receive pay at the rate of time and
one-half for all hours worked over 40 in a week. The most commonly
relied-upon exemptions are the white-collar exemptions, i.e., the
exemptions for executive, administrative, professional, computer,
and outside sales employees. For an exemption to apply to an
employee, the employee must have job duties that qualify for one of
those exemptions, known as the “duties tests.” Most
categories of employees under the white-collar exemptions must also
receive a minimum salary, which is currently $684 per week ($35,568
per year). The employees who meet the duties tests and must receive
a minimum salary to qualify as exempt are referred to below as
“covered employees.”
New Minimum Salary Threshold
The 2024 Rule raises the minimum salary threshold for covered
employees to $844 per week ($43,888 per year) on July 1, 2024, and
then to $1,128 per week ($58,656 per year) on January 1, 2025. The
July 1 increase updates the current annual salary threshold based
on the methodology used by the DOL under the current rule. The 2024
Rule’s new methodology, which is based on the 35th percentile
of weekly earnings for full-time salaried workers in the
lowest-wage Census Region (currently, the South), takes effect on
January 1, 2025, resulting in the swift additional increase.
The 2024 Rule also raises the total annual income threshold for
“highly compensated employees,” who face more relaxed
requirements for being exempt from overtime, from $107,432 to
$132,964 on July 1, 2024, and $151,164 on January 1, 2025. The
January increase is based on the annualized weekly earnings of the
85th percentile of full-time salaried workers nationally.
The 2024 Rule further adopts an automatic updating mechanism.
Beginning July 1, 2027, the salary thresholds will update every
three years using the methodologies in place at the time of each
respective update.
The 2024 Rule includes an option for paying up to 10% of the
required salary amount through annual or more frequent
nondiscretionary bonuses, incentives and/or commissions. If, by the
end of a one-year period, the supplemental pay is not sufficient to
satisfy the threshold, the employer may make a final payment by the
next payroll period to meet or exceed the threshold.
The 2024 Rule makes no changes to the duties tests or an
employer’s ability to include the payment of nondiscretionary
bonuses and commissions as a portion of an employee’s minimum
salary.
Legal Challenges to Past DOL Overtime Rules
The 2024 Rule is the latest in a series of regulatory
initiatives to increase the minimum salary level for covered
employees. In 2016, the DOL under President Obama issued a rule
increasing the minimum salary levels (the 2016 Rule). In August
2017, a Texas federal district court invalidated the 2016 Rule,
holding that the DOL exceeded its rulemaking authority when it
updated salary levels and established the automatic updating
mechanism in the 2016 Rule. The court also held that the 2016 Rule
was inconsistent with congressional intent by causing an estimated
4.2 million workers to become eligible for overtime based on salary
alone.
Following the 2017 federal district court ruling, the DOL under
President Trump issued a new minimum salary rule (the 2019 Rule),
which returned to the methodology that was applied when the DOL
updated the minimum salary levels as part of a comprehensive
revision of the white-collar exemption regulations in 2004. Under
that methodology, the salary threshold was increased based on the
20th percentile of weekly earnings of full-time salaried workers in
the lowest-wage Census Region (the South) and/or in the retail
industry nationally. The 2019 Rule omitted the previously proposed
automatic updating mechanism.
The 2019 Rule is currently in effect. It is also facing a legal
challenge. That legal challenge was unsuccessful at the federal
district court level. An appeal is currently pending before the US
Court of Appeals for the Fifth Circuit.
Anticipated Legal Challenges to the 2024 Rule
The 2024 Rule will undoubtedly face legal challenges. The 2024
Rule is similar in many respects to the 2016 Rule. However, in its
commentary accompanying the 2024 Rule, the DOL sought to
distinguish the 2024 Rule from the 2016 Rule. It stated that the
new salary levels are compatible with the 2017 federal district
court decision’s emphasis on the salary level test’s
historic screening function and that the estimated 4 million
workers impacted by the combination of the initial update and the
subsequent application of the new standard salary level make up
approximately 8% of all currently exempt, salaried white-collar
workers, and less than 5% of all salaried white-collar workers.
The DOL also explained that unlike the 2016 Rule, the 2024 Rule
includes a severability provision. Under that section of the 2024
Rule, if any provision of the 2024 Rule is stayed, enjoyed, or
invalidated, the provision is to be construed to continue to give
the maximum effect to the provision permitted by law. Thus, for
instance, the DOL’s position is that the invalidation of the
automatic updating mechanism should not affect the new minimum
salary levels.
Moving Forward
Unless the likely legal challenges result in delay or
invalidation of the 2024 Rule, employers will need to comply with
the 2024 Rule by July 1, 2024. To do so, employers with covered
employees who are not currently paid at a level at least equal to
the minimum salary levels will need to either provide pay increases
to meet the new salary thresholds or reclassify the employees as
nonexempt., i.e., eligible for overtime. The pay increases could be
made through salary adjustments and/or utilization of the provision
permitting up to 10% of the required salary to be satisfied by the
payment of nondiscretionary bonuses, incentives and/or commissions.
Employers will also need to make sure that they maintain
appropriate time records for any reclassified employees (as well as
all other nonexempt employees), to satisfy their obligation to
track and count all time worked by nonexempt employees.
Regardless of whether employees who are reclassified as
nonexempt remain salaried or are converted to hourly pay status,
employers will need to consider what base rate to use, including
whether to take anticipated overtime into account in calculating
the applicable base rate. Employers may also want to consider
measures to limit overtime work to control overtime pay
requirements.
Finally, employers should recognize that the laws of the states
in which they have employees may establish higher standards for
salary thresholds. For example, California’s minimum salary
threshold for exempt individuals exceeds the FLSA standard, with a
current rate of $1,280 per week ($66,560 per year).
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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