Updated: 11/21/2024
On November 15, 2024, a Texas federal court struck down a U.S. Department of Labor (DOL) 2024 final rule that raised the minimum salary required to be paid to most employees classified as exempt from overtime and minimum wage requirements under the Fair Labor Standards Act (FLSA). The court's order invalidates the rule nationwide effective immediately. Unless a higher court overrules the decision, this means that the minimum-salary increase scheduled for January 1, 2025 won’t go into effect. It also means the minimum-salary increase implemented on July 1, 2024 is nullified. Finally, the mechanism that would increase the threshold every three years is set aside. As such, the federal minimum salary required for the executive, administrative, and professional exemptions from overtime reverts to $684 per week. Employers that increased their exempt employees’ salaries to comply with the July 1 increase may want to discuss possible next steps with legal counsel.Background
The 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 employees who work in administrative, professional, executive, highly compensated, outside sales, and computer professional jobs. These employees are known as "exempt" employees. To be considered "exempt," these employees must generally satisfy three tests:
- Salary-level test. Employers must pay employees a salary of at least a specified amount per week to qualify for the executive, administrative, and professional employee exemptions.
- Salary-basis test. With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.
- Duties test. The employee's primary duties must meet certain criteria.
On April 23, 2024, the DOL released a final rule (the 2024 rule) that would have raised the minimum salary required to be paid to most employees classified as exempt from the FLSA overtime and minimum wage requirements (the salary-level test). The final rule specifically impacted those employees classified as exempt under the executive, administrative and professional employee exemptions.
The 2024 rule raised the minimum salary in two phases. First, the final rule raised the salary amount from $684 per week ($35,568 annually) to $844 per week ($43,888 annually) effective on July 1, 2024. A second increase would have raised the salary amount to $1,128 per week ($58,656 annually) on January 1, 2025.
On November 15, 2024, a Texas federal court blocked the increase that was scheduled to go into effect on January 1, 2025 and invalidated the July 1, 2024 increase nationwide. Effective immediately, the salary level test amount for executive, administrative and professional employees returns to $684 per week ($35,568 annually).
Employers that have already raised compensation amounts based on the final rule might be considering whether to now decrease amounts based on prior DOL requirements. If you are planning to decrease amounts or are planning to not increase amounts in the future that have been previously communicated (e.g., increases that were planned for January 1, 2025), then you should discuss your strategy with legal counsel.
Several states have their own test for exempt status. These tests are typically harder to satisfy. You should apply both the state and federal tests to determine an employee's status under both federal and state law.
Finally, be prepared to communicate any changes to employees promptly and in writing, taking into consideration any state or local requirements governing the timing of pay change notifications.
Rules that Remain in Effect
Due to the federal court decision on November 15, 2024, the following federal rules remain in effect.
Salary requirements:
On September 24, 2019, the DOL released a final rule that increased the minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive exemptions from $455 per week to $684 per week ($35,568 annually). The change (the 2019 rule) became effective January 1, 2020.
Beginning January 1, 2020, employers are also permitted to use nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least annually.
The 2019 final rule permits employers to make a final "catch-up" payment within one pay period after the end of year to bring an employee's compensation up to the required level. For example, if an employer chooses this option, each pay period, the employer must pay their exempt executive, administrative, or professional employee at least 90 percent of the salary level ($615.60 per week). Then, if at the end of the year, the employee's paid-out salary plus the nondiscretionary bonuses and incentive payments (including commissions) does not equal at least $35,568, the employer would have one pay period to make up for the shortfall.
Highly compensated employees:
The 2019 rule increased the total annual compensation requirement for the "highly compensated employees" exemption to $107,432 per year (at least $684 must be paid on a weekly salary basis).
For the highly compensated employee exemption, employers are already allowed to include commissions, nondiscretionary bonuses, and other nondiscretionary compensation toward meeting the total annual compensation requirement, but there is no 10 percent cap like the other exemptions. This didn't change under the 2019 rule. Thus, as long as the employer pays the employee at least $684 on a weekly salary basis, the employer will be able to count these other forms of compensation toward meeting the minimum total compensation requirement ($107,432 per year).
State Rules
Some states have their own rules on overtime exemptions. Generally, if state law is more protective (i.e., requires a higher salary amount or has duties tests that are more difficult to satisfy), then state law must be followed. As of November 15, 2024, six states (Alaska, California, Colorado, Maine, New York, and Washington) have minimum salary requirements for exemption that already exceed $684 for one or more of the exemptions. These states are also increasing their minimum salary requirements for 2025.
Keep in mind that state rules may prohibit employers from using bonuses to satisfy part of the salary requirement. Therefore, to maintain the state exemption in these locations, employers must satisfy the state's requirement with a salary alone. Check your state law to ensure compliance.