On April 23, 2024, the U.S. Department of Labor (DOL) released a final rule that will increase the minimum salary required to qualify for exemptions from the FLSA’s overtime requirements for executive, administrative, professional and highly compensated employees. Here are five key facts about the new rule.
#1: The final rule affects exemptions from overtime for administrative, professional, executive and highly compensated employees.
The Fair Labor Standards Act (FLSA) requires virtually all employers to pay most employees at least the federal minimum wage for each hour worked, as well as overtime pay for all hours worked in excess of 40 in a workweek.
The FLSA allows for exemptions from these overtime and minimum wage requirements for certain executive, administrative and professional employees. To be considered "exempt," these employees must satisfy specific salary and duties tests:
- Meet the minimum salary requirement (currently $684 per week, $35,568 annually, based on the 2019 Final Rule that became effective on January 1, 2020). Note: The new final rule increases this amount to $844 per week on July 1, 2024. Learn more under fact #2 below.
- With very limited exceptions, the employer must pay the employee their full salary in any week they perform work, regardless of the quality or quantity of the work.
- And, the employee's primary duties must meet certain criteria.
There is also a special exemption for "highly compensated employees" who are paid a total annual compensation of at least $107,432 per year (currently at least $684 must be paid on a weekly salary basis) (this amount is based on the 2019 Final Rule that became effective on January 1, 2020) and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee. Note: The new final rule increases this amount to $132,964 per year on July 1, 2024. Learn more under fact #2 below.
#2: The final rule increases the minimum pay requirements for these exemptions on July 1, 2024.
Effective July 1, 2024, the minimum salary required for the executive, administrative and professional exemptions from overtime will increase to $844 per week (equivalent to $43,888 per year).
This means that to qualify for an administrative, professional and executive exemption from FLSA's overtime requirements, employees will be required to be paid a minimum weekly salary of $844 and continue to perform the applicable job duties. Exempt computer professional employees may also be paid hourly, if it is at least $27.63 per hour, which won’t change under the new rule.
Employers continue to be permitted to use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the minimum salary requirement ($84.40 per week under the rule) for the administrative, professional and executive exemptions, as long as these forms of compensation are paid at least annually.
The minimum total compensation requirement for the exemption for highly compensated employees will increase to $132,964 per year, including at least $844 per week that must be paid on a salary or fee basis.
#3: The minimum pay requirements for overtime exemption will increase again on January 1, 2025.
Effective January 1, 2025, the minimum salary required for the executive, administrative and professional exemptions from overtime under federal law will increase to $1,128 per week (equivalent to $58,656 per year).
Employers continue to be permitted to use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the minimum salary requirement ($112.80 per week) for the administrative, professional and executive exemptions, as long as these forms of compensation are paid at least annually.
The minimum total compensation requirement for the exemption for highly compensated employees will increase to $151,164 per year, including at least $1,128 per week that must paid on a salary or fee basis.
#4: Future minimum salary increases will occur every three years.
The final rule includes a mechanism to automatically update the salary and total compensation thresholds every three years. The next update will take place on July 1, 2027.
#5: Employers have options for complying with the new rule.
If your exempt employees fall below the new salary threshold, you will generally have two options: (1) reclassify the employees as nonexempt and pay them overtime whenever they work more than 40 hours in a workweek; or (2) raise their salary to meet the new requirement. We will cover these options in more detail in a future Tip of the Week.
Here are some steps to consider taking now:
- Review the final rule and guidance. The DOL has published a copy of the final rule (PDF) and answers to frequently asked questions.
- Review current classifications. Take this opportunity to review all exempt classifications to ensure that employees still qualify under the existing duties tests.
- Evaluate the impact on your business. This includes identifying those employees who currently earn less than $844 per week (second half of 2024) and $1,128 per week (2025) and are classified as exempt from overtime.
- Watch for potential updates. The final rule will likely face legal challenges. We will be monitoring the status of the rule closely and updating our FLSA and Overtime Exemption Rule Guide as any developments unfold.
Conclusion
The rule could have a significant impact on many small business employers, so it is important to begin preparing for the changes now.