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Department of Labor Substantially Increases Salary Threshold for Exempt Employees


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Department of Labor Substantially Increases Salary Threshold for Exempt Employees

The U.S. Department of Labor (DOL) announced a final rule this week that would increase the salary thresholds for certain exempt employees under the Fair Labor Standards Act (FLSA). While the new rule likely will face legal challenges like similar proposals have in the past (such as in 2016 and 2017), with the new rule potentially taking effect July 1, 2024, employers should begin taking steps now to prepare.

The new rule, which would affect the salary thresholds for the FLSA’s executive, administrative, and professional exemptions, is not a one-off increase to the applicable salary threshold, but rather two increases in quick succession, followed by increases every three years beginning in 2027.

Under the rule, the current salary threshold of $684 per week ($35,568 annualized), which took effect in January 2020, would increase twice by early next year:

  • First, to $844 per week ($43,888 annualized) on July 1, 2024, and
  • Second, to $1,128 per week ($58,656 annualized) on January 1, 2025

Along with these increases, the salary threshold for “highly compensated employees” under the FLSA (currently $107,432) also would increase twice, first on July 1, 2024 to $132,964, and then again on January 1, 2025 to $151,164.

The rule, however, would not make any changes to the various “duties tests” an employee must satisfy in order to properly be classified as exempt.

In addition to the two increases described above, the rule would implement automatic increases to the salary thresholds for the executive, administrative, and professional exemptions and for highly compensated employees, with the first automatic increase on July 1, 2027, and then additional increases every three years thereafter. These automatic increases will be based on earnings data, and the new threshold amounts would be announced by the DOL several months in advance of taking effect.

What’s Next?

Similar to previous DOL attempts to increase the salary thresholds for exempt employees, this rule likely will face legal challenges. On top of that, with a presidential election this fall, there is the possibility of a repeat of the cycle employers experienced with the DOL’s proposed increase to the salary thresholds in 2016. Then, the DOL’s proposed rule was blocked at the eleventh hour and subsequently withdrawn by a new administration, after employers had spent months preparing, and in some cases already announcing, changes to employee compensation and classifications in anticipation of the rule taking effect.

However, given that these would be substantial increases to the current thresholds, with the first increases potentially taking effect just over two months from now, sitting idle and hoping a court will block the effectiveness of the rule may not be a practical solution.

Employers should begin reviewing their current employee classifications to determine which employees would be affected by this new rule (and which employees may not be properly classified even under current rules). For any employee classified as exempt who meets the applicable duties tests but does not earn enough to meet the proposed new salary thresholds, employers will face many of the same decisions as under previous proposed salary threshold increases. These decisions include, for example, potentially increasing the employee’s salary to the new level (if financially feasible) or reclassifying the employee as non-exempt and paying overtime moving forward in accordance with applicable law.

It also bears mention that the DOL increase would only affect exemptions under the FLSA. Many states have their own salary thresholds and duties tests for an employee to qualify for an exemption from overtime under state law, which can differ from the FLSA’s thresholds and duties tests. For example, California employers already have been operating under state salary thresholds for exempt employees that are higher than what the DOL proposes in the new rule. With more employees working remotely across the country, the DOL’s new rule may be a good opportunity for employers to audit their workforce classifications to ensure compliance with both federal and state laws.

For more information and guidance about the final rule, as well as what options and approaches may work best for your business, please contact your Much Labor & Employment attorney.