The U.S. Department of Labor Has Spoken: Final Rule Increasing Salary Thresholds for Certain FLSA Overtime Exemptions

On April 23, 2024, the U. S. Department of Labor (DOL) released its long-awaited Final Rule regarding the new salary-level threshold to qualify for exemption under the FLSA. HR and compensation professionals have been sitting on the edges of our proverbial seats since August 30 of last year to find out where the threshold would land. 

The suspense is now over (drumroll, please!). 

What did we find out?

 1 - Effective July 1, 2024, the threshold will increase from $35,568 to $43,888 and then again on January 1, 2025, to $58,656. 

2 - The minimum compensation levels required to qualify for the highly compensated employee exemption will go from $107,432 to $132,964 on July 1, 2024, and then to $151,164 effective January 1, 2025. Note:  This exemption is not recognized in the state of Pennsylvania. 

3 - Adjustments to both thresholds will be made every 3 years, based upon prevailing wage data, with the next scheduled for July 1, 2027. 

What isn’t changing?

1 - The duties tests remain in place.

2 - The 3-pronged hurdles for exemption are still:

• Paid a salary (a predetermined and fixed amount that is not reduced by variations in quantity or quality of work)
• Paid at least the exemption threshold in effect at that time
• Primary duties meet the executive, administrative, or professional duties tests as defined in the DOL’s regulations.

3 – Employers can continue to use nondiscretionary bonuses, including commissions, to satisfy up to 10 percent of the salary level

What don’t we know?

Will it stick?

Back in May 2016, the DOL published the then-Final Rule, intended to bring the exemption salary threshold to $57,467 (or $913 per week) effective December 1, 2016. Employers diligently reviewed and made changes to pay practices, FLSA classifications, and employee pay to comply with the upcoming shift. On November 22, 2016, just 10 days before the intended effective date, a U. S. District Judge from Texas issued a temporary injunction delaying implementation of the rule on the basis that the DOL had overstepped its authority. Ultimately, no change was made to the salary threshold.

On January 1, 2020, the exemption threshold was increased from $24,232 to $35,568, and the highly compensated threshold from $100,000 to $107,432. No changes have been made since that time.

 What should employers do?

Our recommendations haven’t changed much since our previous blog on this topic back in 2023.

• Ensure that your positions are classified correctly from the perspective of the duties tests. 

As we said, nothing will change on this front; however, many employers have at least a few positions that are incorrectly classified. This is rarely by intent. Interpretation and proper application of the exemptions aren’t easy. Many of us were hoping that, in addition to the threshold adjustment, the Department of Labor would create greater clarity in the definitions provided. This is not the case. If your organization hasn’t already done so, don’t wait. Now is the perfect time to audit your FLSA classifications to make sure that you are compliant. Particular attention should be given to those roles that fall between the current threshold and the new one. Work with an external partner to ensure the expertise and objectivity needed for this process.

• Formulate your plan.

Assume that the Final Rule won’t be overturned. Create a list of those exempt employees that are still classified as exempt who fall below the new thresholds – both the July 1, 2024, and the January 1, 2025, ones. These are the folks that you will need to make some decisions about – will you raise their pay or convert them to a non-exempt classification and pay overtime for hours worked more than 40 in a workweek? Analyze your options. What are the cost implications of increasing the base compensation of those employees to meet the proposed threshold vs changing the classification of affected positions?

In addition to considering the cost implications, also think about the impact on morale, administrative work, the intended communication plan, etc.

When doing this analysis, don’t forget that the threshold will increase every three years – this means that, for those employees “on the cusp,” the need to increase base salaries to ensure compliance may become an “every three years” process. While you may want to wait until closer to the effective date to finalize, communicate, and make any changes, this analysis will ensure that you understand the scope of impact for your organization and determine the preferred path forward assuming the Final Rule sticks.

Bottom line

Time will tell what will happen this time around. Prepare for the expected change and stay tuned. If you need help figuring it all out, reach out. Challenge and change are always easier to navigate with an expert partner at your side.

To learn more about the new salary thresholds for FLSA overtime exemptions, contact our HR Consulting department.


Article Contributed by Karen H. DiGioia