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).

Important Policy Updates from the U.S. Department of Labor

By Samantha Halem, Samuel Gates   March 1, 2024

Important Policy Updates from the U.S. Department of Labor

The U.S. Department of Labor (DOL) recently made important policy updates addressing how it will enforce two key statutes under its domain, the Family and Medical Leave Act (FMLA) and the Fair Labor Standards Act (FLSA). These policy adjustments will affect all employers and are still relevant even in situations involving an employee located in a state offering more generous paid leave laws or stricter independent contractor requirements, such as Massachusetts, California, New York, and New Jersey.

New Fact Sheets on FMLA Requirements

  • Fact Sheet 28D: sets forth in clear terms an employer’s notice obligations when informed that an employee may need FMLA qualifying leave, and the consequences for not providing the required notices. This fact sheet reiterates what we have always told clients: regardless of the reason for a covered leave, even if the employer has already decided to give the leave, the employer must follow the notice requirement or risk not having the leave be credited against their statutory obligations. An employer should provide detailed notice letters with links to the required documentation each and every time an employee requests a leave of absence, in all situations, including intermittent leave, and including in cases where the employee is not actually eligible for the leave (in such cases the notice informs the employee that they are not eligible and why).
  • Fact Sheet 28E: sets forth how an employee must provide their employer with notice of FMLA leave. Although this fact sheet reiterates what we have long known—that an employee need not specifically request an “FMLA Leave”—the employee must provide sufficient information to allow the employer to determine that the requested leave may be covered by the FMLA. For example, an employee who tells their employer that they need to quit their job to care for a terminally ill family member must be alerted that their situation may qualify for leave under the FMLA.
  • Fact Sheet 28H: an employee is entitled to twelve weeks of leave per year. This fact sheet reminds the employer of the four methods available for defining a 12-month FMLA “leave year.” With a limited exception, the employer may select any one of the four methods to establish the 12-month period, so long as they use the same 12-month period for all employees, and if the employer fails to select one of the four methods discussed above, the employer must use the 12-month period that is the most beneficial to the employee.
  • Fact sheet 28I: an eligible employee has the right to use up to 12 workweeks of FMLA leave in a 12-month period. This fact sheet sets forth in detail how to count the amount of leave available and amount of leave used under the FMLA.
  • Fact Sheet 28L: addresses the rarely applicable rules for situations where both spouses work for the same employer and how those circumstances may reduce available eligibility.

Final Rule on Independent Contractor Classification

The DOL rescinded its previous rule on classifying workers as independent contractors and published a new, final rule effective March 11, 2024.  The final rule sets forth how to determine whether a worker is an employee or an independent contractor under the FLSA and may significantly impact business operations and personnel policies.

Nuts and Bolts of the Final Rule:

  • Economic Reality Test: The final rule reaffirms the use of the longstanding “economic reality” test to determine a worker’s status under federal law. The ultimate inquiry is whether the worker is economically dependent on the employer for work (and is therefore an employee) or is in business for themself (and is therefore an independent contractor).
  • Six Relevant Factors: Unlike the previous iteration, the final rule does not assign degrees of importance to the relevant factors. Instead, employers should consider all of the following:
    • Control: The nature and degree of employer’s control over the work.
    • Opportunity for Profit or Loss: The worker’s opportunity for profit or loss depending on managerial skill.
    • Skill and Initiative: The amount of skill required for the work.
    • Permanence: The degree of permanence of the working relationship between the worker and the potential employer.
    • Importance to the Business: Extent to which the work performed is an integral part of the employer’s business.
    • Investments: Investments (usually capital or entrepreneurial in nature) by the worker and the potential employer.
  • Totality of the Circumstances: This is a departure from previous guidance because employers are now required to conduct a “totality of the circumstances” analysis of a worker’s economic reality. No single factor is determinative, and all factors must be considered in the context of the particular employment relationship.  The list of factors is also non-exhaustive—other factors may be considered where relevant to an assessment of economic dependence.

Implications for Employers:

The final rule reflects the DOL’s more pro-employee approach to worker classification and employers should review their current classification practices in light of the final rule to ensure they are properly classifying independent contractors under the FLSA.  Misclassification of workers can lead to legal challenges, including claims for unpaid wages, overtime, and benefits. Employers should take proactive steps to mitigate the risk of misclassification and may need to review and potentially revise their agreements with workers to accurately reflect their classification status.

Employers with workers in states utilizing the so called “ABC Test” for independent contractors, such as Massachusetts, California, Illinois, and New Jersey, must continue to abide by the even stricter requirements. 

For Questions / Compliance

If you have any questions about the U.S. Department of Labor policy updates, please contact:

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