Written by Neal F. Perryman, Brian P. Pezza, Jerina D. Phillips and Christopher M. Brown from Lewis Rice LLC on November 6, 2024
The end of the year is approaching quickly and adjustments to the Fair Labor Standards Act (FLSA) regulations are looming. Specifically, the minimum salary threshold required for executive, administrative, and professional employees to remain exempt from overtime requirements will increase effective January 1, 2025. After a more modest rise earlier this year, the minimum salary level will increase to $58,656 annually and the minimum annual requirement for Highly Compensated Employees will be $151,164 per year. This alert provides background, outlines the new requirements and suggests options for employers in light of the upcoming changes.
Background and Salary Level Changes Since 2019
The FLSA requires that most employees in the United States be paid overtime for all hours worked over the 40 hour mark at a rate of 1.5 times an employee’s regular rate of pay. Notwithstanding this requirement, Section 13(a)(1) of the FLSA provides an exemption for employees who primarily perform executive, administrative, and professional tasks (the so-called “white collar exemptions”). The two main components of these white collar exemptions are that employees (1) are paid a guaranteed, predetermined salary of at least a certain level as set by the DOL (the “Salary Level Test”) and (2) have a primary job responsibility comprising certain tasks defined as either executive, administrative or professional (the “Duties Test”).
In 2019, after remaining unchanged for nearly 15 years, the minimum salary threshold for the white collar exemptions was raised to $684 per week ($35,568 annually) from $455 per week ($23,660 annually). This set the stage for the DOL’s April 2024 Final Rule, which significantly raised the minimum salary threshold for white collar exemptions using a multi-step approach. First, it raised the level to $844 per week ($43,888 annually), effective July 1, 2024. This initial increase will again spike an additional 34 percent to $1,128 per week ($58,656 annually) on January 1, 2025. Rather than settling upon a round figure, the DOL pegged the threshold to the 35th percentile of weekly earnings of full-time non-hourly workers in the country’s lowest-wage Census Region.
Due to this increase, currently-exempt employees will become eligible for overtime if their guaranteed salary does not meet the Salary Level Test. In other words, employees earning between $43,888 and $58,656 will either need to be reclassified as non-exempt and eligible for overtime for hours worked in excess of 40 hours per week, or alternatively, the employer may elect to increase compensation to satisfy the new threshold.
One innovation from the 2004 regulations has been carried forward – the Highly Compensated Employee (HCE) exemption. The HCE exemption provides a streamlined path to exemption for workers who earn total compensation well in excess of the basic salary level. The compensation must include a salary satisfying the Salary Level Test, but the rest can be comprised of other forms of pay like commissions and nondiscretionary bonuses. The benefit of this test is that the requirements of the Duties Test are relaxed significantly. In January, the Final Rule will increase the HCE total annual compensation threshold from the current mark set at $132,964 per year to $151,164 per year. In this case, the DOL has tied the level to the 85th percentile of all salaried worker earnings nationwide.
The Next Update
As part of the Final Rule, updates to the salary and compensation levels will occur periodically, and each corresponding update will apply up-to-date wage data to the salary and compensation methodologies within the regulations. These updates will occur every three years with the next update taking place on July 1, 2027.
Anticipated Impact and Options for Employers
While the minimum Salary Level will increase, the Duties Test applicable to the white collar exemptions will remain unchanged. The same is true for the treatment of bonuses. Employers may still credit nondiscretionary bonuses and incentive payments (such as commissions) for up to 10 percent of the Salary Level requirement, provided that these payments are made at least annually. The same is not true for HCEs, however. For these employees, all nondiscretionary bonuses and incentive payments will count towards the total annual compensation requirement, but the guaranteed weekly portion of the employees’ compensation must satisfy the $1,128 Salary Level without consideration of other compensation.
In light of the approaching changes, employers would be wise to review current exempt employee salaries to determine which, if any, are paid less than the applicable threshold. Assuming they are otherwise qualified because of their duties, these employees’ overtime exemptions can only be maintained by increasing their salaries. Naturally, if no alterations are made, the loss of exemptions means that employees would be eligible for overtime, with additional timekeeping requirements that apply to non-exempt workers. Faced with this possibility, employers should assess how often the lower-paid employees actually work more than 40 hours per week. If it is an infrequent occurrence, then the loss of the exemption may not be significant.
If, on the other hand, it is likely that impacted employees regularly work more than 40 hours in a week, employers have options. The simplest and most efficient option in many cases may be to increase employees’ guaranteed salary to keep pace with the new Salary Level. But other alternatives exist as well, such as restructuring jobs and setting an employee’s hourly rate somewhat lower than their current salary equivalent (i.e., less than their current salary divided by 40 hours) in order to keep total compensation consistent and account for potential overtime expense.
Additionally, as jobs evolve and court opinions flesh out the application of the Duties Test, the classification of other exempt positions may be worth reevaluating to confirm compliance. Although the Duties Test remains unchanged, the new regulations provide an opportunity for employers to review and confirm the exemptions of workers whose salary remains above the new Salary Level.
Preparing now will ensure all impacted employers are in compliance with the changes at the beginning of 2025. Should you have questions or concerns with the pending increases, or would like assistance navigating the various options available to address the new Salary Level, feel free to contact any member of Lewis Rice’s Labor and Employment Practice Group.
