Employers, Beware and Prepare: Summer Will Bring Higher Salary Limits for FLSA Exemptions

By Samantha Halem, Sarah Ruter   May 2, 2024

Employers, Beware and Prepare: Summer Will Bring Higher Salary Limits for FLSA Exemptions

Last summer, the Department of Labor proposed to increase salary thresholds for workers who received a salary of at least $684 per week ($35,568 annually) and worked in a “bona fide executive, administrative, or professional capacity.” This summer, on July 1, 2024, this proposal will likely become reality. On April 23, 2024, the DOL issued its final rule to increase compensation thresholds for overtime eligibility, gradually increasing the salary threshold for the overtime exemption for the remainder of 2024 to $844 per week ($43,888 annually) and to $1,128 per week ($58,656 annually) starting in 2025. Thereafter, the minimum salary threshold will be automatically increased every three years based on the latest earnings data.

This gradual shift seeks to extend overtime protections to lower-paid salaried workers. Acting Secretary of Labor Julie Su noted that “[t]oo often, lower-paid salaried workers are doing the same job as their hourly counterparts but are spending more time away from their families for no additional pay. That is unacceptable. The Biden-Harris administration is following through on our promise to raise the bar for workers who help lay the foundation for our economic prosperity.”

The final rule also increases the total annual compensation threshold to be considered a highly-compensated employee from $107,432 to $132,964 per year on July 1, 2024, and to $151,164 on January 1, 2025. The DOL expects that these increases will nullify an unintended exemption of large numbers of employees in high-wage regions who would otherwise fall under the “highly compensated employee” exemption.

Finally, the final rule continues the use of non-discretionary bonuses and incentive payments to satisfy up to 10% of the standard and special salary thresholds under certain circumstances.

What does this mean for employers?

It could mean anything from a brief classification analysis to a complete payroll overhaul. First, employers need to review employee classifications to ensure that employee job duties meet the “duties” test for the particular exemption under the Fair Labor Standards Act (FLSA). Far too often, employers fail to realize that to meet an FLSA exemption, BOTH the “duties” and the “salary basis” test must be met except in a few rare circumstances.[1] Only employees whose job duties fall within one of the FLSA exemptions (such as executive, administrative, professional, or outside sales) may be classified as exempt. The “duties” test remains unchanged by the DOL’s new rule.

Next, employers should analyze their current group of employees currently classified as exempt and earning between the current threshold ($35,568 annually) and the new threshold ($43,888 to start; and then $58,656 as of January 1, 2025). This is the “target group” that employers must zero in on for assessment.

Finally, employers will need to decide whether they want to convert these “target group” employees to non-exempt status, which would require the tracking of hours and payment of overtime for these employees, or whether they want to raise these employees’ salaries to meet the new minimum salary threshold.

Why is this important?

Wage and hour litigation is on the rise, and penalties are stiffer than ever. Misclassification and underpayment of employees in Massachusetts could cost an employer treble (triple) damages if the employee can prove even inadvertent mistakes in an employee’s wages. Most states assess hefty fines for failure to pay overtime when it is required. We have also seen that often when an employee is making less than $55,000 a year and is paid on a salary basis, it is a good idea to check to make sure they are properly classified under the duties test, regardless of whether they are meeting the salary requirements.

Multistate employers should also check the state minimum salary rules for the particular state in which an employee works, as some states have higher minimum salaries for exemptions than the federal standard. For example, in New York, salary thresholds for exempt workers are already much higher than the current $684 per week threshold: effective January 1, 2024, the weekly minimums are $1,200 per week in New York City and Nassau, Suffolk, and Westchester counties, and $1,124.20 per week for the rest of the state. Similarly, in California, the minimum salary to be classified as exempt in 2024 is $66,500.

When deciding to increase salaries to maintain exemptions or to convert workers to non-exempt status, consider your business needs, the total impact on payroll, employee morale, and administrative burdens. It is not a violation of law to treat arguably exempt employees as non-exempt; it is indeed problematic to treat non-exempt employees as exempt. Employers who misclassify employees as exempt/salaried and do not keep track of employee hours bear the burden to prove that the employee claiming they are entitled to overtime is not lying about the hours that they worked.

What do we have to do now?

In the months leading up to July 1, 2024, companies with employees in the “target group” (classified as exempt and earning between $35,568 and $43,888) need to make some decisions about raising salaries or converting these employees to non-exempt status and keeping track of hours and overtime. This analysis will need to be repeated before January 1, 2025 for exempt employees in the $43,888 to $58,656 range.

This all assumes no legal challenges to the rule, however, and legal challenges are likely. In 2016, when the DOL issued a similar increase, the Fifth Circuit enjoined the increase because it placed greater importance on the salary amount to be paid to the worker than it did on the duties performed by the worker – and a similar argument could be raised to challenge the 2024 “final rule.” The DOL’s ability to automatically update the threshold every three years may also falter under legal scrutiny.

Even though legal challenges to this rule may follow, we advise employers to prepare for the possibility of the rule becoming effective in less than three months. Please reach out to your HRW attorney for assistance with analyzing the best strategy for your company and for questions about classifications or changes to exempt and non-exempt status.

[1] The salary basis pay requirement does not apply to certain jobs (for example, doctors, lawyers, and teachers are exempt even if the employees are paid hourly).

Thank you for reaching out to contact Hirsch Roberts Weinstein LLP (“the Firm”). Before you send your message, we wanted to make sure you are aware of the following. Please do not send any confidential information in response to this link. Sending an e-mail to the Firm or any of its attorneys does not give rise to an attorney-client relationship, and will not be deemed to disqualify the Firm from undertaking any engagement for a current or future client. Before any attorney-client engagement may be formed, the Firm will need to check for possible conflicts of interest, you will need to consider whether you wish to retain the Firm as counsel, and we will need to consider whether we wish to accept the potential engagement. In the meantime, the Firm reserves the right to represent parties with interests adverse to you.

Accept Decline