US Department of Labor Substantially Expands Eligibility for Overtime Pay

On April 23, 2024, the US Department of Labor (“DOL”) announced a final rule on overtime pay, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees,” which will significantly increase the number of employees eligible for overtime pay under the Fair Labor Standards Act (“FLSA”). The final rule significantly increases the minimum threshold employees must earn to qualify for the FLSA’s administrative, executive, and/or professional employee exemptions (so-called “white collar” exemptions) and the FLSA’s “highly compensated employee” exemption.

The initial salary threshold increases take effect on July 1, 2024, and will increase again just six months later on January 1, 2025, after which automatic updates to the earnings thresholds will be implemented every three years, beginning July 1, 2027.

Exemption Basics

The FLSA mandates that an employer pay an employee an overtime premium of 1.5 times their regular rate of pay for all time worked in excess of 40 hours in a workweek, unless the employee falls within one or more exemptions. The FLSA and its accompanying regulations delineate certain exemptions, the most common of which are for employees who are employed in a bona fide administrative, executive, or professional capacity.

An employer seeking to invoke one or more of these white collar exemptions under the FLSA must be able to establish that the employee meets the following criteria:

• The employee is paid on a salary basis, i.e., a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed;
• The employee is paid at least a minimum weekly salary threshold amount, as set by the DOL; and
• The employee primarily performs administrative, executive, or professional duties, as defined by the DOL’s regulations. 

DOL regulations also set forth an alternative exemption for highly compensated employees who (1) satisfy a minimal duties test, (2) are paid a weekly salary (which, like the white collar exemption, presently must be at least $684 per week), and (3) also earn total annualized compensation (inclusive of salary, commissions, non-discretionary bonuses and other non-discretionary compensation) of at least $107,432.

While the final rule does not change the “duties” test for either the white collar or highly compensated employee exemptions, it does increase the salary thresholds for each of them. The salary thresholds are significant because employees who are not paid at least the minimum amounts are eligible for overtime pay regardless of the type and importance of their respective job duties.

The New Numbers

Under the final rule, the minimum salary for employees under the administrative, executive, and professional exemptions will increase as follows:

• July 1, 2024: The salary threshold increases from the present minimum of $684 per week ($35,568 per year) to $844 per week ($43,888 per year).
• January 1, 2025: The salary threshold will increase to $1,128 per week ($58,656 per year).

The minimum threshold for the highly compensated employee exemption will increase significantly, as follows:

• July 1, 2024: The annualized compensation threshold will increase from $107,432 to $132,964.
• January 1, 2025: The annualized salary threshold will increase again to $151,164.

In addition, the final rule provides that, starting July 1, 2027, there will be automatic updates to these salary thresholds every three years. According to the DOL, the automatic updates are designed to allow for timely, predictable, and efficient updating of the earnings thresholds. Barring substantial downturns in the economy, it is likely that these periodic adjustments will result in further increases to the salary thresholds over time.

Changes from the DOL’s Proposed Rule

The DOL’s overtime salary thresholds have long been a politically divisive and hotly debated topic. Unsurprisingly, the proposed rule that the DOL initially issued in September 2023 received extensive public comments, and the final rule reflects modest changes to the proposed rule. For example, comments noted concern over an abrupt increase to the minimum thresholds without adequate time to prepare. As an apparent solution to that concern, the final rule now includes the intermediate salary bump on July 1, 2024, with the full targeted increase taking effect on January 1, 2025. 

Additionally, although the DOL initially proposed to raise the minimum annual salary level for the white collar exemption to approximately $55,000, the final rule’s threshold of $58,656 per year by January 1, 2025 is higher than what the DOL initially proposed, reflecting updated wage data from the Bureau of Labor Statistics.

The final rule also dropped several provisions that had been included in the proposed rule, such as raising the overtime salary threshold for certain US territories that are currently subject to a looser standard. 

Takeaways for Employers

Employers should take several steps in light of the final rule. For example, employers should promptly review compensation levels of their exempt workforce to determine whether any employees presently classified as exempt under the white collar or highly compensated employee exemption will fall below the increased salary thresholds. Given the short six-month period between the initial salary threshold increases on July 1, 2024, and the subsequent increase on January 1, 2025, employers should analyze these compensation levels sufficiently in advance of each of those dates to assess what classification-related changes they may wish to make.

Further, employers should periodically review existing classifications within their exempt workforce, including: (1) the roles encompassed within each of the exemptions, (2) how many employees work in those roles; (3) where the employees are located; (4) what specific job duties the employees actually perform (as the “duties” test extends beyond what may be set forth in a job description), and (5) how much the employees are paid. This is particularly critical for any exempt employees who are at or near the current threshold, or the future thresholds set forth above.

The final rule means that, as a practical matter, many exempt employees are set to become non-exempt based on their salary alone. Accordingly, employers should be ready to make potential workforce changes, and implement training and communication plans for affected employees and the managers who work with them.

Finally, employers should also be mindful of state laws, which often have their own overtime requirements and/or salary thresholds that are higher than those established in the final rule. For example, as of January 1, 2024, California has a minimum salary threshold of $1,280 weekly ($66,650 per year) for certain exempt employees, higher thresholds for certain other positions (such as computer software employees), and does not recognize the highly compensated exemption. Alaska, Colorado, Maine, New York and Washington have their own thresholds, as well.