Is Your Payroll Department Ready to Close Out 2024 and to Start 2025?

Written by Fanny A. Ferdman, Shareef Farag, Matthew P. Eaton, Justin A. Guilfoyle, Christian E. Vieira and William S. Weber from BakerHostetler on December 6, 2024

Key Takeaways:

• As 2024 comes to a close, wage and hour issues abound.  From year-end bonuses to new salary thresholds, employers who do not stop to consider the legal landscape could expose themselves to liability. 
• Here, we cover some of the hottest year-end wage and hour topics that employers should review before the new year.  While we cannot cover all federal, state and local issues, we have attempted to provide a brief overview of some of the biggest updates and reminders to assist employers close out 2024 and start 2025 on the right foot.

Federal Law

No January Salary Threshold Increase… For Now

The FLSA’s minimum wage and overtime requirements do not apply to any employee employed in a bona fide executive, administrative, or professional (EAP) capacity, nor do they apply to highly compensated employees who perform duties defined by the regulations. To receive the benefits of these exemptions, however, employees must receive annual compensation and a weekly salary that exceeds the threshold set by the Department of Labor (DOL).

In April 2024, the DOL raised the salary threshold applicable to both exemptions and created a mechanism for automatic triennial increases. Starting in July 2024, the salary threshold applicable to EAP exempt employees went from $684 per week to $844 per week, and starting January 1, 2025, from $844 per week to $1,128 per week. Likewise, the salary threshold applicable to highly compensated exempt employees jumped in July from $107,732 to $132,964, and starting January 1, 2025, to $141,164 per year.

On November 15, 2024, however, a federal court in Texas vacated the DOL’s 2024 final rule, restoring the salary threshold in effect before the DOL promulgated the 2024 final rule. That means the salary threshold applicable to EAP exempt employees has returned to $684 per week, and the threshold applicable to highly compensated employees has returned to $107,732.

Employers, however, should be warned—the Texas court’s ruling is subject to appeal and potential reversal. In fact, on November 26, 2024, an appeal was filed in Texas v. DOL, No. 4:24-cv-499-SDJ (E.D. Tex. Nov. 26, 2024). If the appellate court reverses the district court’s ruling, employers could be obligated to make retroactive payments at the restored salary threshold. Moreover, employers who have already promised increased salaries on January 1, 2025, should consider the legal and non-legal consequences of rescinding that promise. And, of course, a number of states and localities have salary thresholds that exceed, or greatly exceed, the federal requirements. So, before making decisions on what salaries should be provided to their exempt employees, businesses should review Baker & Hostetler’s recent report, and they should consult with our Labor and Employment team.

A True-up for Highly Compensated Employees

Year-end commissions, non-discretionary bonuses, and other non-discretionary compensation can sometimes afford employers a tool to ensure compliance with the highly compensated employee exemption. To qualify for this exemption in the fiscal year starting January 1, 2024, employees must have earned annual compensation exceeding $107,732 (assuming the DOL’s 2024 final rule remains vacated). If an employee received less than the threshold amount, employers can make up the shortfall with a single lump-sum payment during the last pay period, or in the following month, provided that the employee still earns the minimum weekly salary required by law. Note, however, that any payments made in the following month only count towards the previous year’s pay, and it does not count towards the employee’s annual compensation in the year when it was paid.

Accordingly, employers awarding year-end commissions, non-discretionary bonuses, and other non-discretionary compensation to highly compensated exempt employees should review their payroll records to ensure they meet the required thresholds and consider using these true-ups if/when appropriate to make up a shortfall. Employers should also beware, however, that not all states (e.g. California) recognize the highly compensated exemption, so be sure to review local law before relying on this exemption.

Remember the Regular Rate of Pay for Non-Discretionary Bonuses/Incentives

Employers handing out bonuses/incentive must consider how they impact the regular rate of pay. As a brief refresher, employers must pay non-exempt employees one and one-half times the regular rate of pay for overtime hours, which is not always one and one-half times the hourly rate of pay. To calculate the regular rate of pay, employers must identify all non-discretionary compensation the employee received in any workweek and divide by the total number of hours worked.

Discretionary bonuses/incentives do not count towards the regular rate of pay and are not included when calculating overtime compensation. To qualify as “discretionary,” the employer must retain discretion both as to the fact of payment and as to the amount of payment, until a time quite close to the end of the period for when the bonus is paid. The payment, if any, must be determined by the employer without prior promise or agreement. The employer cannot abandon his or her discretion as to the fact or amount of the bonus. Non-discretionary bonuses (with limited exceptions), by contrast, fall within the regular rate of pay, so employers must include them when calculating overtime compensation.

Determining whether to include a bonus/incentive in the regular rate is only half the battle; the other half is to figure out the right way to include them when calculating overtime. Generally speaking, if a bonus only covers the final weekly pay period (which is quite rare for a year-end bonus), the calculation is easy—add the bonus to other earnings and divide by all hours worked. However, if the bonus is deferred over a period longer than a workweek (which is more common), the employer may pay overtime at a regular rate that excludes the bonus, until the bonus is ascertainable. Then, once ascertainable, the employer must apportion the bonus back over the workweeks when the bonus was earned. If it’s not possible to allocate the bonus proportionately across workweeks when the bonus was earned, the employer must use a method that is reasonable and equitable. For example, it might be reasonable and equitable to assume the employee earned the bonus in equal parts across several weeks to which the bonus relates.

The bottom line is this: employers paying non-discretionary year-end bonuses/incentives must consider the impact of the bonus on the regular rate of pay for overtime purposes. Notably, if an employer pays a non-discretionary year-end bonus as a percentage of gross wages, inclusive of overtime, there is no need to recalculate the regular rate.

The 80/20 Rule

Since 1988, the DOL has taken the position that the FLSA’s tip credit, which allows an employer to pay a tipped worker as little as $2.13 per hour as long as tips carry the work to the standard federal minimum wage of $7.25 per hour, was not available when tipped workers spent more than 20 percent of their time on non-tip producing activities. This is known as the “80/20 rule.”

In December of 2021, the DOL codified its most-recent iteration of the 80/20 rule, which limited the 20 percent of allowable non-tipped duties to only duties that “directly support[] the tip-producing work” (the “2021 80/20 rule”). To further the purpose of this rule, the DOL narrowly defined what duties directly support tip-producing work. Finally, the final rule required full minimum wages to be paid for time when an employee performs non-tipped duties continuously for 30 minutes or more.

However, on August 23, 2024, in Restaurant Law Center v. DOL, the Fifth Circuit vacated the DOL’s 2021 80/20 rule on a national basis. Citing the Supreme Court’s recent decision in Loper Bright v. Raimondo striking down the Chevron doctrine, the Fifth Circuit refused to give deference to the DOL’s interpretation of the FLSA, finding that the 2021 80/20 rule was invalid because it strayed too far from “the FLSA’s focus on employees’ occupations rather than on their discrete pursuit of tips.”

While the Fifth Circuit’s decision in Restaurant Law Center explicitly vacated the DOL’s 2021 rule nationally, it does not overturn the general application of the 80/20 rule on a national basis. This is because vacating the DOL’s 2021 80/20 rule concerning tipped employees does not affect the law in the other circuits that existed prior to the enactment of the 2021 Rule. Employers in the Fifth Circuit can ignore the 80/20 rule entirely because the court in Restaurant Law Center made a separate finding regarding the 80/20 rule that it contravened the statutory language of the FLSA under its own interpretation of the rule as it relates to the FLSA.

Outside the Fifth Circuit, employers must look to the law as it existed prior to the effective date of the DOL’s 2021 rule. Before the enactment of this version, the 80/20 rule existed as sub-regulatory guidance and was followed in numerous jurisdictions. However, there will undoubtedly be future challenges to the 80/20 rule which will use the blueprint provided by the Fifth Circuit. Until then, Baker & Hostetler’s Labor and Employment Group will continue to monitor the interpretation and application of the 80/20 rule nationwide. And we stand ready to help employers navigate other state and local laws that define tipped employee and/or addressing how to hand tips and tip credits.

State Laws

Another Year, Another Dollar – Increases to the Minimum Wage

States throughout the country have continued to increase their respective hourly minimum wage rates. In New York, for example, the minimum wage in 2025 for employees in NYC, Long Island and Westchester is increasing to $16.50, and to $15.50 in the remainder of New York State. In New Jersey, the minimum wage is increasing to $15.59. In California, it’s increasing to $16.50. In California, in addition to the increase to $16.50, California voters had the opportunity to vote on Prop 32, which would have increased the state minimum wage to $17.00 for small employers and $18.00 for large employers. After a tight race, the bill failed to pass, and the $16.50 minimum wage for January 1, 2025, remains in effect.

However, many states, cities, and counties have additional minimum wage requirements, some even for specific types of employees and industries. These are especially relevant in the case of remote workers because generally the location of the worker, not the location of the employer’s office, determines the applicable minimum wage rate. Given these considerations, it is a good idea to conduct a year-end audit of your workforce’s hourly rates to ensure the applicable minimum wage requirements are being met.

Increases to the Salary Thresholds for Overtime Exemptions

Many states have passed legislation establishing annual increases to the weekly salary thresholds for their white-collar exemptions under state law. In New York, for example, the weekly salary threshold in 2025 for employees in NYC, Long Island and Westchester is increasing to $1,237.50

($64,350 annually), and to $1,161.65 ($60,405.80 annually) in the remainder of New York state. In California, it’s increasing to $1,320.00 ($68,640 annually), and the minimum wage increase detailed above also has the effect of increasing the salary thresholds for California overtime exemptions. Employers in other states should determine whether any salary threshold increases apply to their exemptions as well.

Consequently, employers are encouraged to review all their exempt employees to ensure that their salaries satisfy the applicable minimum requirements.

Pay Transparency Laws Across the Country

Pay transparency laws continue to be on the rise, with numerous states and cities enacting such legislation. Although the specifics differ slightly from jurisdiction to jurisdiction, generally speaking, these laws require employers to post the salaries or hourly rates for the posted position.

In addition to the above states, there are several cities, counties, and localities that currently have pay transparency laws in effect, including: Washington, D.C.; New York, NY; Westchester County, NY; Ithaca, NY; Jersey City, NJ; Cincinnati, OH; and Toledo, OH.

Further, numerous states have recently or are currently considering pay transparency legislation, including: Alaska, Kentucky, Maine, Michigan, Missouri, Montana, Oregon, South Dakota, Virginia, and West Virginia.

In California, employers of 100 or more employees (nationwide) are subject to mandatory pay data reporting, which requires them to, by the second Wednesday of May each year, report pay, demographic, and other workforce data to the Civil Rights Department.

California Specific Wage and Hour Updates

PAGA Reform Provides New Tools for Employers – Legislative History and PAGA Refresher

On July 1, 2024, California Governor Gavin Newsom signed SB-92 and AB-2288, reforming the Private Attorneys General Act (PAGA). The reform bills were passed as part of a compromise amongst interested parties whereby Newsom agreed to discard a PAGA repeal bill that was set to hit the ballot in November 2024 in exchange for the passage of SB-92 and AB-2288. As a refresher, PAGA provides a private enforcement mechanism for employees to pursue claims on behalf of the Labor and Workforce Development Agency (LWDA) against employers that allegedly violate the California Labor Code. PAGA actions are almost always brought on a representative basis. However, because representative PAGA actions have lacked the procedural safeguards typical of class actions, they are far easier to pursue, resulting in a flood of PAGA actions since its inception 20 years ago.

New Incentives to Audit Labor Code Violations to Reduce Penalties

Under the PAGA reform bills, employers are actively incentivized to audit their wage and hour practices to ensure compliance with the California Labor Code. If an employer is faced with a PAGA claim and the employer can show that it took “all reasonable steps” to maintain compliance with the California Labor Code before the plaintiff brought their claim, the potential PAGA penalties can be reduced by 85%. Further, if the employer takes all reasonable steps to remedy any alleged violation within 60 days after the employer is served with the required pre-filing notice to the LWDA and the employer (a PAGA notice), any associated penalties can be reduced by 70%. The reforms define “reasonable steps” to include conducting payroll audits, maintaining compliant written policies, and training supervisors on the Labor Code.

Expanded “Cure” Possibilities and the Early Evaluation Conference

In addition to taking reasonable steps to comply with the Labor Code, which may result in reduced penalties, employers can also “cure” Labor Code violations to eliminate PAGA penalties entirely. The preexisting PAGA framework gave employers the opportunity to cure some wage statement violations. The reforms clarify that employers can now cure all wage statement violations, meal and rest break violations, unpaid vacation wages, overtime violations, minimum wage violations, and failures to pay expense reimbursements. To cure a violation, an employer must: (1) correct the alleged violation; (2) comply with the Labor Code Section it allegedly violated; (3) make each aggrieved employee whole; (4) if an employee is owed wages, pay unpaid wages back three years from the notice plus seven-percent interest, liquidated damages, and reasonable attorneys’ fees; (5) for wage statement violations, provide fully compliant wage statements to each aggrieved employee for each pay period of the violation going back three years prior to the PAGA notice.

Further, the reforms change the cure process. Employers with fewer than 100 employees can present a cure plan to the LWDA within 33 days of receiving a PAGA notice. The LWDA can then conduct a conference between the parties to determine if the cure plan is sufficient. Employers with 100 employees or more, on the other hand, can avail themselves of the early evaluation conference (“EEC”), but only after a plaintiff files a PAGA lawsuit. In response to a PAGA lawsuit, an employer may request an early evaluation conference, which stays the civil action pending completion of the EEC. The EEC acts as a settlement conference that also gives the employer an opportunity to submit a cure plan for a neutral evaluator to consider at the conference. Importantly, if the designated neutral rejects the employer’s plan to cure, the employer can bring a motion and seek court approval of its plan and dismissal of the plaintiff’s claim. It remains to be seen whether EECs will be an effective route for employers to resolve PAGA claims.

Changes to Standing Requirements and Manageability

Previously, assuming a PAGA plaintiff had experienced a single Labor Code violation, that plaintiff could pursue penalties for any alleged violations of the Labor Code covered by PAGA, even if the plaintiff never experienced the alleged misconduct. Now, named plaintiffs can only seek recovery on a representative basis for alleged Labor Code violations that the plaintiff personally experienced during the PAGA period. Additionally, the reforms confirm that in a PAGA action, as in a class action, a trial court can consider whether a PAGA action can manageably be tried and “limit the evidence to be presented at trial or the scope of any claim.”

Enhanced Penalties for Repeat Offenders

However, not all the reform provisions benefit employers. If an employer is a repeat offender, PAGA’s baseline penalty of $100 per employee per pay period can be doubled. Specifically, if within the preceding five years, any agency or court has issued a finding or determination that an employer’s policy or practice is unlawful, and the employer is found to have violated the same Labor Code provision a second time, employees will be entitled to $200 per employee per pay period. Additionally, if a court finds that an employer’s conduct giving rise to the violation was “malicious, fraudulent, or oppressive,” the employer may also face double penalties.