On April 23, 2024, the U.S. Department of Labor (DOL) released a final overtime rule – significantly increasing the minimum salary for certain employees in order to be exempt from the Fair Labor Standard Act’s (FLSA’s) overtime payment requirements. The final overtime rule will produce mid-year changes to the salary threshold for overtime exemptions, with the potential to affect millions of workers.  The rule has three substantial changes to the framing of exempt employee status under the FLSA.

HIGHLY COMPENSATED EMPLOYEE SALARY INCREASE:

The final overtime rule explains that the salary threshold for highly compensated employees to receive an exempt status will initially rise from its current $107,432 to $132,964 on July 1 of this year and will then increase to $151,164 on January 1, 2025. This increase will implement about a 24 percent increase from the current salary requirements. As a reminder to Pennsylvania employers, a “highly compensated employee” is not recognized as an exempt status under Pennsylvania’s Minimum Wage Act of 1968.

“WHITE COLLAR” EMPLOYEE SALARY INCREASE:

Currently, a “white collar” employee, meaning executive, administrative, or professional employee, must receive an annual salary of $35,568 ($684 per week) to receive an exempt employee status. This will increase to $43,888 ($844 per week), effective July 1, 2024, and as of January 1, 2025, the annual salary threshold will rise to $58,656 ($1,128 per week). The final increase will implement a near 65 percent increase from the current salary requirements.

THREE-YEAR AUTOMATIC UPDATING TO THRESHOLDS:

The final rule also provides that the threshold salary requirements are subject to automatic updates and adjustments every three years to align with worker salaries and provide employers with a predictable schedule for those future adjustments starting on July 1, 2027. This means that employers will face additional overtime exemption salary threshold changes in the future.

Employees who are salaried, work in a “bona fide executive, administrative, or professional capacity” or are “highly compensated,” and make more than the thresholds requirements addressed herein are exempt from the FLSA requirements that employers must pay a time-and-a-half rate for any work logged beyond 40 hours in a week. Employees must meet all three of these requirements for the exemption to apply. The changes to the rule do not modify the duty requirements for exempt employment status.

The threshold salary requirements are higher that what the DOL previewed in the August 2023 proposed rule. While it is expected for a salary threshold to reflect the modern economy, it is unclear if the increase from the current levels corresponds with local wage rate for employees holding administrative, professional, and executive position in all locations throughout the county.

Employer Takeaways:

Employers should prepare for the final rule that takes effect on July 1, 2024. The following concepts should be considered by employers in the wake of this rule:

• Look to exempt employees whose salaries fall between the current salary threshold and the proposed new threshold and decide whether to increase their salary to maintain their exempt or convert the employee to a nonexempt classification. Approximately 1 million exempt workers are between the new salary threshold level and the current threshold.
• Develop an accurate picture of the current exempt workforce and plan for how to roll out the reclassification decisions. This will include training reclassified employees on potential timekeeping requirements and rules against work employees perform outside of their working hours, and managing employee relations concerns that employees might raise if they are upset about losing their salaried status.
• Employer should budget for increases in salary and overtime expenses for those employees that were previously classified as exempt that will now be subject to overtime pay.
• Decide whether the salary changes will be accomplished in two phases or move straight to the 2025 threshold, given the interim and 2025 salary-level thresholds.
• Be mindful that state and local wage and hour laws may also update to impose additional requirements in order for employees to maintain an exempt status.
• Work with attorneys to understand how these changes affect the workforce. Employers should consider other potential changes to employment and any important training and communication that should be done.

The final overtime rule will likely face challenges in the event of presidential administration turnover following the November 2024 election. Previous administrations have attempted to revise the FLSA exemption requirements in a similar manner (i.e., an increased salary threshold with automatic, inflation-based salary threshold adjustments), but such revisions never came into effect due to legal challenges. Nevertheless, employers should prepare for the changes in advance to avoid violations to the FLSA.

The DOL’s final overtime rule: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees