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On April 23, 2024, the U.S. Department of Labor (DOL) announced a final rule that will significantly impact overtime eligibility for white-collar employees under the Fair Labor Standards Act (FLSA). This rule implements a dramatic increase in the minimum salary level required for an employee to be exempt under the FLSA’s administrative, executive, and professional exemptions (the so-called “white collar exemptions”) as well as the FLSA’s highly compensated employee exemption.

Overview of White-Collar Exemptions:

The FLSA establishes overtime requirements for most employees. Specifically, the FLSA mandates that employers pay employees an overtime premium at 1.5x their regular rate of pay for time worked more than 40 hours per week. However, certain classifications of employees, including employees that satisfy the white-collar exemptions, are not entitled to overtime pay under specific conditions.

To qualify for a white-collar exemption, employees must generally satisfy both a salary basis test and a duties test. That is, employees must generally be paid a predetermined salary on a weekly or less frequent basis, regardless of the quality or quantity of work performed. In addition, employees' primary job functions must generally involve executive, administrative, or professional duties characterized by a high degree of independent judgment and discretion (or, in the case of the highly compensated exemption, one or more of these duties), as further described in the DOL’s regulations.

Key Changes:

Under the final rule, the minimum weekly salary is now substantially higher. Specifically, effective July 1, 2024, to satisfy the salary basis test, the minimum salary threshold jumps nearly 24% to $844 per week ($43,888 annually). This minimum salary threshold then takes another significant leap to $1,128 per week ($58,656 annually) on January 1, 2025, representing a total increase of about 66% from the previous threshold.

The DOL rule also raises the minimum annual salary for the highly compensated employee exemption. This threshold increases to $132,964 on July 1, 2024, and then to $151,164 on January 1, 2025.

Automatic updates to the earning thresholds will also be implemented every 3 years, beginning July 1, 2027. However, the duties test used to classify employees as exempt remains unchanged.

Potential Legal Challenges:

While the DOL's rule is scheduled to take effect in the coming months, legal challenges are a possibility. Business groups have expressed concerns about the significant increases and their potential impact on employer costs. Unlike the DOL’s earlier proposed rule from September 2023, however, the final rule includes more gradual salary bumps and a delayed implementation timeline, making it more likely to withstand legal challenges. Nonetheless, our team will continue to monitor any legal developments that may affect the implementation of this rule.

Practical Guidance and Takeaway:

Employers should act now to ensure compliance with the DOL’s final rule, including by: (i) conducting a comprehensive review of all potentially impacted employees' salaries; (ii) identifying employees classified as exempt under the duties test but earning below the new thresholds; (iii) developing a plan to address these employees either by reclassifying them as non-exempt and adjusting their compensation to include overtime pay if applicable, or providing raises to meet the new salary minimum for their applicable exemption; (iv) reviewing overtime pay practices to ensure compliance with the new rule; and (v) updating employee classification systems to reflect the changes. In doing so, employers should also keep in mind that certain state and local jurisdictions, including California, Colorado, New York, Washington, and others, may continue to require minimum weekly salary thresholds that are higher than the FLSA’s updated requirements as described in the DOL’s final rule.

If you have questions or require additional information or guidance on how this rule may impact your business, please reach out to Brennan, Manna & Diamond, LLC’s Labor & Employment Group, or contact Partner/Group Co-Chair, Bryan Meek (bmeek@bmdllc.com), or Attorney Jacob Bruner (jabruner@bmdllc.com), directly.