Background
On April 23, 2024, the Wage and Hour Division of the Department of Labor (DOL) issued its final rule regarding the executive, administrative, and professional (EAP) and the highly compensated employee (HCE) exemptions under the Fair Labor Standards Act (FLSA). The DOL made no changes to the duties tests for these exemptions. However, it substantially increased the minimum salary and compensation thresholds for the EAP and HCE exemptions.
Summary of Changes/Timeline
EAP employees
- Effective July 1, 2024, the salary threshold will increase from the current $684 per week ($35,568 per year) to $844 per week ($43,888 per year).
- Effective January 1, 2025, the salary threshold will increase again to $1,128 per week ($58,656 per year).
HCE employees
- Effective July 1, 2024, the salary threshold will increase from the current $107,432 per year to $132,964 per year.
- Effective January 1, 2025, the salary threshold will increase again to $151,164 per year.
Potential future changes
- Future updates will occur every three years starting January 1, 2027. DOL will use then-current wage date to determine the increases.
Anticipated Challenges to the New Rule
The DOL’s prior rule to increase minimum salary and compensation levels for EAP and HCE exemptions in 2016 was successfully challenged in court. On May 23, 2016, the Obama-era DOL published a rule more than doubling the minimum salary level for exempt employees from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The State of Nevada and twenty other states filed lawsuits to have the rule declared unlawful, arguing the DOL exceeded its authority in passing that rule. The federal court in Texas held that the DOL exceeded its rulemaking authority. Therefore, the 2016 final rule was held to be unlawful and never took effect.
Similar challenges to the DOL’s new rule may be expected, however, it is unclear whether such as a ruling on any such challenge will be rendered before the July 1, 2024 effective date.
Also, on May 9, about 90 organizations asked the Wage and Hour Division of the DOL to delay implementation of its final rule for 60 additional days to allow them time to prepare for its impact on millions of workers. It is unclear if the DOL will grant the extension, but either way employers should prepare now.
Next Steps
Employers are encouraged to the following steps in preparation of the new rule:
Employers should audit current exempt employees impacted by the new salary thresholds. Employers should identify exempt employees that currently earn less than the new EAP minimum thresholds. This means also ensuring on a case by case basis whether those employees meet the Job Duties test for the relevant exemption.
Determine whether to reclassify employees. If this rule goes into effect, many employers will need to increase salaries for their employees to maintain the exemption. Employers may, as a business decision, decide to reclassify certain employees as non-exempt under the FLSA.
Prepare for proper implementation. Reclassifying an employee from exempt to non-exempt requires careful analysis and implementation. At a minimum, employers will need to determine an hourly rate based, in part, on the effect of anticipated overtime on overall compensation. Employers should also work with their payroll department or third-party service, to ensure that a system is in place for proper record keeping and administration.
Employment law is constantly changing, and this is one of many pending regulations that can have a significant impact on your business. At BCC, we are closely monitoring the developments to provide up to date advice to our clients.
Authors:
Schuyler D. Geller
Shuwei Li