DOL Issues Final Rule Updating the Salary Thresholds for Overtime Eligibility—What Employers Should Know

DOL Issues Final Rule Updating the Salary Thresholds for Overtime Eligibility—What Employers Should Know

DOL Issues Final Rule Updating the Salary Thresholds for Overtime Eligibility—What Employers Should Know

By: Alan Lin

On April 23, 2024, the U.S. Department of Labor (DOL) released its final rule that would increase the minimum salary thresholds for employees to qualify for selected exemptions from federal overtime requirements. The final rule affects workers currently classified as exempt from overtime under the executive, professional, and administrative (EAP) exemptions and also raises the minimum salary threshold for “highly compensated” employees. If the final rule is not challenged (which is likely but has not yet occurred) and enjoined, it will take effect on July 1, 2024.  The DOL estimates that this final rule will impact over 4 million workers once fully implemented.

The Final Rule

The final rule sets forth a two-step increase in the minimum salary thresholds required to qualify for the EAP and highly compensated employee exemptions, with the first increase on July 1, 2024 followed by another on January 1, 2025. The final rule also provides that these minimum salary thresholds will be automatically updated every three years based on the DOL’s wage data, with the first automatic update happening on July 1, 2027.

Under the present rule, EAP employees who meet the applicable “duties” test must also receive a guaranteed salary of $684 per week ($35,568 per year) to be exempt from overtime requirements.  On July 1, 2024, this will increase to $844 per week ($43,888 per year).  The threshold for EAP employees will further rise to $1,128 per week ($58,656 per year) on January 1, 2025.

Likewise, highly compensated employees who satisfy a modified “duties” test must currently be paid an annualized salary of $107,432 to qualify for this exemption. That threshold will increase on July 1, 2024 to $132,964, and again on January 1, 2025 to $151,164.

Importantly, the final rule does not change or alter the federal “duties” test that EAP and highly compensated employees must satisfy to be properly classified as exempt from overtime eligibility.

Impact For Employers

The relatively short time frame in which the first phase of the final rule will take effect means that employers should promptly begin analyzing how their organization will comply with the final rule should it become effective. The significant salary increases contemplated by the final rule mean that employers should evaluate not only the legal implications of this final rule for how they classify their employees, but its financial impact for their organizations. Our firm recommends taking the following initial steps:

  • Review the positions in your organization that will be affected by one or both minimum salary threshold increases and evaluate whether your organization will raise the salaries of those positions to comply with the final rule or reclassify them as non-exempt. Doing so may require you to assess the amount of work time logged by employees in these positions in order to estimate potential overtime payments.
  • To the extent employees are reclassified, your organization should be prepared to address questions from affected employees regarding how the reclassification impacts the terms and conditions of their employment, like benefits, promotions, and compensation, including bonuses, incentive pay, and commissions (if applicable).
  • Review your organization’s employment policies and procedures to ensure they are up to date, particularly with respect to your organization’s timekeeping and pay practices as such policies will be important for any employee your organization decides to reclassify as non-exempt. You may also consider providing training for employees who will be reclassified and policies regarding how your organization will monitor and follow up with employees who may not be familiar with recording their hours worked.
  • Ensure that any changes your organization decides to undertake remains in compliance with any applicable state wage and hour laws, especially in this era of remote work.

Whether this final rule will ultimately take effect remains to be seen. Previous increases in minimum salary thresholds for overtime eligibility issued by the DOL under both the Obama and Trump Administrations have been challenged, and we anticipate the same to occur here. Indeed, it is clear that the DOL anticipates that there will be challenges to this final rule as it has inserted what is called a “severability” provision into the final rule. This means that even if challenged and some provisions of the final rule are held to be unenforceable, there may be parts of the final rule that will be allowed to take effect.  And given that there are only approximately 8 weeks until the first increases become effective, employers should begin evaluating their options as soon as practicable.

Attorneys at our firm are ready and prepared to assist you with any questions related to these changes, evaluate the risks of these changes to your business or entity, and advise you on bringing your business or entity into compliance, should these changes become effective.