Extra, Extra…Pay for Exempt Employees: DOL Published Final Rule on Overtime Exemptions

On April 23, 2024, the U.S. Department of Labor (DOL) issued a final rule altering the requirements for “white collar” exemptions under the federal Fair Labor Standards Act (FLSA). This is the final step in a process that began in August 2023 and is projected to significantly impact workplaces relying on the standard to exempt employees from minimum wage and overtime.

The final rule increases the salary levels that must be paid for an employee to be exempt from minimum wage and overtime under the Executive, Administrative and Professional (EAP) exemptions, as well as for the Highly-Compensated Employee (HCE) exemption.

Changes to Salary Levels

The final rule updates the salary levels for the EAP and HCE exemptions as follows:

• Effective Date Before July 1, 2024:
  • Salary Level for EAP Exemption: $684 per week ($35,568 per year)
  • Salary Level for HCE Exemption: $107,432 per year (paid on a salary or fee basis at a rate of at least $684 per week)
• Effective Date Beginning July 1, 2024:
  • Salary Level for EAP Exemption: $844 per week ($43,888 per year)
  • Salary Level for HCE Exemption: $132,964 per year (paid on a salary or fee basis at a rate of at least $844 per week)
• Effective Date Beginning January 1, 2025:
  • Salary Level for EAP Exemption: $1,128 per week ($58,656 per year)
  • Salary Level for HCE Exemption: $151,164 per year (paid on a salary or fee basis at a rate of at least $1,128 per week)
• Effective Date Beginning July 1, 2027, and every 3 years thereafter:
  • Salary Level for EAP Exemption: Salary level to be updated using then-current earnings data and the methodology prescribed in the final rule.
  • Salary Level for HCE Exemption: Salary level to be updated using then-current earnings data and the methodology prescribed in the final rule.

Notably, the final rule sets a higher salary threshold than what was projected in the August 2023 proposed rule. This change is based on the DOL’s review of 2023 earnings data. The final rule does not change the minimum pay rate for employees exempted as computer professionals, which remains at $27.63 per hour.

Estimated Impact on Employers

The DOL estimates that the salary threshold in the final rule will shift 4.3 million employees from “exempt” to “non-exempt,” making those employees eligible for minimum wage and overtime under the FLSA. That estimate increases to 6 million employees within 10 years of the rule taking effect.

The DOL estimates corresponding direct employer costs of $1.4 billion in the first year it is implemented, and annualized direct employer costs of $802.9 million (assuming a 7 percent discount rate) over the first ten years.

The industries that will be most affected by the changes are professional and business services, as well as leisure and hospitality. Further, the DOL expects that employers in low-wage industries, regions, and non-metropolitan areas may be more affected because they typically pay lower salaries than their higher-wage counterparts.

Next Steps for Employers

Our labor and employment team is monitoring legal developments related to the DOL’s final rule, including potential legal challenges.

Provided the final rule goes into effect as planned on July 1, 2024, employees who were previously treated as exempt under a white collar exemption may become non-exempt if their pay falls below the updated salary level requirements. This will, in turn, trigger employer requirements for tracking time worked and ensuring that impacted employees are paid at least minimum wage and overtime pay at a rate of 1.5 times their regular rate of pay for any hours worked in excess of 40 hours in a workweek.

In advance of the July 1 effective date, employers should review their current employee classifications and salary levels to ensure that employees will be properly classified as of July 1. Employers should work closely with counsel on any changes or preparations that need to be made before the rule takes effect.

Our labor and employment team is available to assist employers with analyzing the DOL’s final rule and implementation strategies.