On April 23, 2024, the Department of Labor (DOL) finalized its regulation entitled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees” covering exemptions from the Fair Labor Standard Act’s (FLSA’s) minimum wage and overtime regulations. On the final rule’s implementation date of July 1, 2024, 3.6 million additional workers will be covered under the FLSA’s overtime protections.
The final rule increases the standard salary level as well as the highly compensated employee (HCE) total annual compensation threshold. The standard salary level and HCE total annual compensation threshold will each increase on a schedule through 2027, when DOL will recalculate both standards.
Main Provisions
- Starting July 1, 2024, the current overtime salary threshold would be raised from $684 a week, or $35,568 per year, to $844 per week, equivalent to $43,888 per year. This so-called “white collar” exemption includes executive, administrative, professional, and outside sales professionals.
- On January 1, 2025, the overtime salary threshold will again be raised to $1,128 per week, equivalent to $58,656 per year.
- The salary threshold would be automatically updated every three years beginning July 1, 2027, based on current earnings data.
- On July 1, 2024, the earnings threshold for the HCE exemption would be increased from $107,432 to $132,964. In 2025, the threshold would once again be raised to $151,164 a year.
National Club Association Outlook
With the first changes scheduled for July of this year, employers will need to move quickly to assess the classification status of their workers. As with previous attempts to expand overtime requirements, we expect this regulation to face a legal challenge before it is implemented.
In the final rule, DOL clarified that it set the salary level using earnings data from a lower-salary regional data set (as opposed to nationwide data) to accommodate businesses for which salaries generally are lower due to geographic or industry-specific reasons. As such, the proposed rule does not explicitly consider any geographic differences, such as the cost of living, in its calculation of data used to update the overtime salary threshold.
Under the proposed rule, there will be no changes to how bonuses are counted towards the minimum-salary level requirement. Under current rules, only 10 percent of bonuses and commissions can count toward the minimum threshold. There will also be no changes to existing job duties requirements.
There are limited options to comply with the proposed rule. One way would be to give employees whose salary is right below the threshold a raise to reestablish themselves back into exempt status. Staffing levels can be managed to avoid excessive overtime payments. However, current labor shortages would make it increasingly challenging to recruit part-time workers necessary for filling any scheduling gaps.
The implementation of the final rule as written is unclear. On Wednesday, May 22, 2024, a coalition of business groups filed a lawsuit in the Eastern District of Texas, requesting that the judge vacate DOL’s overtime rule. The coalition argues that a prior ruling in 2017 on an Obama administration overtime proposal provides legal precedence demonstrating how the Biden administration regulation exceeds DOL’s legal authority under the Fair Labor Standards Act. In the 2017 case, a judge from the same Texas court found that the Obama-era DOL rule focused so much on a salary level to determine whether a worker was exempt from overtime, it eliminated the consideration of their job duties.
The May 22 lawsuit also contends that the automatic updates to the salary threshold every three years would violate notice and comment requirements under the Administrative Procedure Act, which governs the process by which federal agencies develop and issue regulations. The business coalition requested the court provide expedited consideration of the case given that the first phase of the rule is due to go into effect July 1.
Notably, the case was filed in the same Texas court that struck down a similar overtime rule issued by the Obama administration that sought to raise the salary threshold to $47,476. In that 2017 ruling, Judge Amos Mazzant found that the DOL rule focused so much on a salary level to determine whether a worker was exempt from overtime, it eliminated the consideration of their job duties.