Department of Labor Updates FLSA Exemption Rules: What Employers Need to Know

by Adam Hudoba

The U.S. Department of Labor (“DOL”) has issued a final rule that significantly alters the landscape of overtime pay exemptions under the Fair Labor Standards Act (“FLSA”). Effective July 1, 2024, this new rule updates certain exemptions from overtime pay requirements for executive, administrative, professional, and highly paid employees in two major ways. First, the rule raises the minimum salary levels required for employees to qualify for these exemptions. Second, the rule establishes a mechanism for automatically updating these thresholds every three years, starting July 1, 2027. Employers who fail to adjust accordingly may subject themselves to liability.

The FLSA

The FLSA is a federal law that establishes minimum wage, overtime pay, recordkeeping, and youth employment standards for workers in the private sector and in federal, state, and local governments. The FLSA requires employers to pay non-exempt employees at least the federal minimum wage for all hours worked, as well as overtime pay at not less than time and one-half the regular rate of pay for all hours worked over certain thresholds (e.g., 40 in a workweek). However, the FLSA exempts certain employees. Teachers, for instance, are exempt from both minimum wage and overtime requirements regardless of salary level. There are also “white-collar” exceptions for those in executive, administrative, and professional positions, as explained below.

The White-Collar Exemptions

Qualifying as a white-collar worker under the FLSA means that the employee need not be paid overtime. To be eligible for a white-collar exemption, an employee must generally pass three tests:

  1. Salary Basis Test: The employee must be paid a predetermined and fixed salary not subject to reduction based on work quality or quantity.
  2. Salary Level Test: The employee must earn at least the minimum salary set by the DOL.
  3. Duties Test: The employee’s primary duties must involve executive, administrative, or professional work as defined by the regulations.

The DOL’s new rule modifies the second prong. Previously, the threshold to qualify as a white-collar worker would only need to make $684 per week ($35,568 annually). But beginning July 1, 2024, this sum has increased to $844 per week ($43,888 per year). Additionally, on January 1, 2025, this threshold will further grow to $1,128 per week ($58,656). Therefore, in the new year, an office employee making less than $58,656 will not be exempt under the FLSA.

The Highly Compensated Employee Exemption

The new rule also modifies the Highly Compensated Employee (“HCE”) exemption, which applies to employees who:

  1. Earn total annual compensation above a specified threshold;
  2. Primarily perform office or non-manual work; and
  3. Regularly perform at least one of the exempt duties outlined in the white-collar exemptions.

Before the rule was amended, an HCE had to earn at least $107,432 annually. Effective July 1, 2024, that sum is now $132,964 per year, and it will rise to $151,164 annually beginning January 1, 2025.

A hand holding a book Description automatically generated Automatic Updates

Importantly, the new rule provides that these salary thresholds will automatically update. Beginning July 1, 2027, and every three years thereafter, the DOL will update the salary thresholds for both the white-collar and HCE exemptions using current wage data.

Impact on Employers

These changes will require employers to reassess their workforce and potentially make significant adjustments to employee classifications and compensation structures. Employers should therefore:

  1. Review current employee classifications and salaries to identify those affected by the new thresholds.
  2. Determine whether to increase salaries to maintain exempt status or reclassify employees as non-exempt.
  3. For reclassified employees, implement systems to track hours worked and calculate overtime pay.
  4. Update payroll systems and processes to accommodate the new salary thresholds and potential reclassifications.
  5. Plan for future threshold increases, both the scheduled January 1, 2025, increase and subsequent updates.

Conclusion

The DOL’s new rule represents a significant change in overtime exemption regulations. By proactively addressing these changes, employers can minimize compliance risks, avoid potential wage and hour violations, and ensure fair compensation for their workforce. It is therefore crucial for employers to review their current practices and seek legal counsel if needed to navigate these complex regulatory changes effectively.