The Department of Labor Rule Increasing Exempt Employee Salary Threshold Has Gone into Effect

On July 1, 2024, despite ongoing litigation challenging its validity, the Department of Labor’s (DOL) rule increasing certain exempt employees’ salary threshold went into effect, with further salary threshold increases slated for January 1, 2025.  This rule relates to exempt employees, namely those who are exempt from overtime pay requirements.  This significant regulatory change impacts the classification and compensation strategies for many employers and employees alike.  We explain the importance of these changes below, and provide suggested company responses to align with the new requirements.

Background and Overview

On August 20, 2023, the DOL announced its proposed rulemaking to increase the minimum salary required for employees to qualify for the “white-collar exemptions” under the Fair Labor Standards Act (FLSA). These exemptions pertain to executive, administrative, and professional employees who meet a specified minimum compensation requirement, as well as all “highly compensated” employees regardless of the nature of their work. The proposed adjustments are designed and intended to reflect current economic conditions and ensure fair compensation practices.

Specifically, the new DOL rule increases the minimum salary for exempt employees from $684 per week ($35,568 annually) to $1,059 per week ($55,068 annually). For highly compensated employees, the threshold rises from $107,432 annually to $132,964 annually. These changes are based on 2022 earnings data, and further adjustments may follow based on future data assessments.

Legal Challenges and Implementation

The rule’s implementation has not been without controversy. Multiple legal challenges have arisen, primarily in the U.S. District Court for the Eastern District of Texas, a jurisdiction with a history of opposing similar DOL regulations.

The challengers argue that the DOL has overstepped its authority, particularly by focusing heavily on the salary component of the exemption test, which plaintiffs claim undermines the duties test.

Employers must now navigate the complexities of compliance while monitoring the ongoing legal proceedings that could potentially impact the rule’s enforcement. Despite these challenges, compliance with the rule is mandatory until and unless a court issues an injunction or ruling to the contrary.

Proposed Steps for Compliance

Given the current landscape, employers should take immediate and strategic actions to ensure compliance with the new salary thresholds. Here are key steps employers should consider to comply with the rule:

1. Conduct an Internal Audit:  Review pay policies and job classifications to ensure they align with the new DOL requirements.  This includes assessing job duties to confirm they meet the white-collar exemption criteria and identifying employees whose salaries need adjustment.  For employees previously classified under the Highly Compensated Employees exemption, ensure their compensation meets the new thresholds and that they fulfill the required duties.
2. Provide Notice to Affected Employees: Communicate changes in compensation and job conditions to impacted employees promptly.  It’s also crucial to educate managers and payroll departments about the new requirements and their implications.
3. Implement Overtime Policies: Develop and enforce policies requiring pre-approval for overtime hours in order to manage labor costs effectively.  Ensure all hours worked are compensated in compliance with the FLSA.
4. Review and Adjust Other Policies:  Evaluate how changes in exemption (from overtime) status may affect other policies, such as PTO, vacation, and bonus plans, to maintain fairness and consistency.
5. Plan for Future Adjustments:  As discussed, further increases are slated for January 1, 2025 and likely beyond.  The rule also includes provisions for automatic updates to salary thresholds every three years. Employers should establish processes to review and adjust compensation accordingly.
6. Stay Informed on State and Local Laws:  Some jurisdictions may have higher salary thresholds for exemptions, so employers should check the rules in the jurisdictions in which they operate. Employers must remain vigilant about these regulations and any additional legal challenges that may arise.
7. Impact of WFH:  We note, it is all the more important for employers to understand the other state and local regulations that may be applicable, in the event their employees work from home in different states.
8. Manage Employee Morale: Significant changes in compensation can impact employee morale.  Company management or HR should handle these transitions sensitively, offering clear communication and support to affected employees.

Conclusion

Employers should act swiftly to comply with the new regulations while keeping an eye on the evolving legal landscape. Through careful planning and proactive communication, employers can navigate these changes effectively, ensuring compliance and maintaining a motivated workforce.

This regulatory change is poised to have significant implications on job markets and hiring practices as well. The increased salary thresholds may lead to higher labor costs, influencing hiring decisions and potentially reducing the number of exempt positions available.  Additionally, the ongoing legal challenges, including potential federal judicial actions such as injunctions, add another layer of complexity and potential change, necessitating vigilant monitoring and flexible strategies from employers to adapt to the dynamic legal environment.