New DOL Overtime Rule Increases Salary Thresholds for Exempt Workers

By John F. Lomax, Brook T. Barnes, Clint Engleson, and Tiffanny Brosnan

On April 23, 2024, the U.S. Department of Labor (DOL) announced its final rule change to employee exemptions under the Fair Labor Standards Act (FLSA). The rule, among other changes, increases the minimum salary threshold for certain “white collar” exempt employees by nearly $20,000 per year and provides overtime eligibility to millions of additional American workers.

The DOL’s Prior Overtime Rule

There are several overtime exemptions available under the FLSA, but the three “white collar” exemptions subject to the new rule are the executive, administrative, and professional exemptions. If an employee is deemed exempt, the employer is not required to pay overtime premiums for working more than 40 hours in a week. To qualify for these exemptions, such employees must satisfy both (i) the applicable duties test; and (ii) the salary basis test. Under the prior rules, exempt executive, administrative, and professional employees needed to earn a guaranteed salary of at least $684 per week, or $35,568 per year.

The prior DOL rules also contained a less restrictive duties test for certain “highly compensated” salaried employees (HCE) who received a total annual compensation of $107,432 or more.

The DOL’s New Overtime Rule

On August 30, 2023, the DOL announced its proposed changes to its overtime rules, covered here. On April 23, 2024, after receiving comments, the DOL announced its final rule change.

The new overtime rule raised the salary threshold for executive, administrative, and professional exempt employees, but did not change the associated duties tests.¹ As of July 1, 2024, the minimum weekly salary for these employees will increase to $844, equivalent to $43,888 annually. Starting January 1, 2025, the threshold will jump to $1,128 per week, equivalent to $58,656 annually. If employees earn less than this new threshold, they will need to be paid an overtime premium for any hours worked beyond 40 in a workweek.

It is important for employers to remember that some states have different duties and salary basis tests, and some require a daily overtime premium to be paid. For example, California currently has a $66,560 salary threshold, different duties tests, and requires an overtime premium for hours over 8 in a workday.

The new rule also provides that the FLSA salary threshold will be updated every three years to reflect the earnings of the 35th percentile of full-time salaried workers in the lowest-wage Census region. Accordingly, the new rule anticipates periodic increases to the salary threshold.

The DOL estimates that, in the first year after the new rule takes effect, approximately three million American workers exempt from overtime under the prior rules will, without some intervening action by their employers, become newly entitled to overtime under the FLSA based on the new salary threshold.

The new DOL rule also sets the HCE annual compensation level equal to the 85th percentile of earnings for full-time salaried employees nationwide. Thus, the new HCE threshold will increase to $132,964 annually by July 1, 2024, and $151,164 annually by January 1, 2025. Likewise, as with the salary threshold for the white collar exemptions, the HCE annual compensation level will be updated every three years to reflect the earnings of the 85th percentile of earnings for full-time salaried employees nationwide.

The DOL estimates that an additional 248,000 workers who earn at least $107,432 per year (the prior HCE total annual compensation level) and who meet the minimal HCE duties test but not the standard duties test would, without some intervening action by employers, become eligible for overtime under the eventual HCE total annual compensation level of $151,164 annually.

Notably, and in a departure from the proposed rule, the new rule does not apply the executive, administrative, and professional exemptions to certain U.S. territories like Puerto Rico, Guam, the U.S. Virgin Islands, and the Northern Mariana Islands. However, the DOL indicated that it plans to address U.S. territories in a future rule.

Practical Takeaways 

In light of the DOL’s new overtime rule employers should consider doing the following:

• Review their employee classifications to determine which of their employees qualify as exempt under the executive, administrative, and professional exemptions. After confirming these employees are properly classified, companies should consider creating a list of any such employee making less than $43,888 as of July 1, 2024 or less than $58,656 starting January 1, 2025. These employees will either need to be converted to hourly employees, or have their salaries raised to the new thresholds.
• Guard against “off-the-clock” work for any newly-nonexempt employees. Such measures may include reviewing policies and procedures to ensure that rules specifically written for salaried or hourly employees still control behavior as intended if a salaried employee is converted to a nonexempt, hourly employee who is eligible for overtime. Such policies may include those concerning company-issued mobile devices or access to company resources, such as email and chat groups, outside of “regular” work hours.
• Consider training employees who may now be entitled to overtime regarding the company’s policies and practices concerning time worked, recording time worked, rest and meal breaks, timesheet review and approval processes, whether approval is needed to work overtime, and other issues applicable to hourly workers.

Employers who are concerned about the potential impact of the new DOL rule should consider contacting their legal counsel.

Footnotes

1. For certain other FLSA exemptions, there is no salary basis requirement. For example, there is no salary test required to qualify as an exempt outside sales employee, and certain exempt professionals, including doctors, lawyers, and teachers, are also not subject to the salary tests. [Back]