Raising the FLSA Exemption Bar: More Workers Will Be Eligible For Overtime

The U.S. Department of Labor (DOL) published its Final Rule on April 23, 2024, updating the minimum salary threshold for exemption from overtime payment obligations under the Fair Labor Standards Act (FLSA). The Rule created a staggered compliance schedule. A worker must make at least $844 per week ($43,888 annually) beginning on July 1, 2024, and then at least $1,128 per week ($58,656 annually) beginning on January 1, 2025, to meet the salary level test for overtime exemption. This is a significant increase from the current salary level of $684 per week ($35,568 annually).

But then these salary thresholds will continue to increase over time. The DOL has incorporated a regular check-in provision in the new regulations that requires the exempt employee salary amount to “be updated to reflect current earnings data,” with notice given in the Federal Register stating the updated amounts. This update will take place every three years, with the next one scheduled for July 1, 2027, and it will account for “the most recent available 4 quarters” of data published by the Bureau of Labor Statistics.

The salary level test is only one part of a three-part test for determining exemption status. First, the employer must look at the duties of the employee (the duties test) to ensure that the employee’s primary work duties fit within one of the statutorily created exemptions. The most common exemption classifications are the Executive, Administrative, and Professional classifications. In addition to meeting the duties test, the employee also must be paid on a salary basis – pay that does not change based on the quality and quantity of work performed (the salary basis test). The only exception to this salary basis test is for certain highly skilled computer professionals who are permitted to be paid hourly. Then, finally, the employee must be paid at least the FLSA’s established minimum salary level (the salary level test), as discussed above.

The FLSA also has an overtime exemption for certain highly compensated employees, who “customarily and regularly perform[] any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee…” and earn a salary at an even higher threshold set by the DOL. The DOL has determined that “a very high level of compensation is a strong indicator of an employee’s exempt status, thus eliminating the need for a detailed duties analysis.” While the current threshold for a highly compensated employee is $107,432 per year, under the Final Rule that threshold will increase to $132,964 per year on July 1, 2024, and then to $151,164 per year on January 1, 2025. The DOL identified this significant increase as a way to “guard against the unintended exemption of workers who are not bona fide [Executive, Administrative, and Professional] employees, including those in high-income regions and industries.” 

So, what should employers do? First, prior to July 1, employers should review all of their exempt employees’ salaries to identify anyone who fails to earn a salary of at least $844/week. And if an employee’s salary falls below that threshold, the employer needs to either increase the employee’s pay or reclassify the employee as non-exempt and thus entitled to overtime. Next, employers need to do this same review in January 2025, when the next increase goes into effect, and then again in July 2027. Failing to properly classify an employee under the FLSA is a major compliance pitfall that can make a company liable for unpaid overtime going back three years, liquidated damages, and attorneys’ fees and costs. Although the new Final Rule will likely face legal challenges in the court system, just as a prior version of the rule did in 2016, unless a federal court enjoins the Rule from going into effect prior to July 1, employers should be prepared to comply with the new salary thresholds as of that date.