DOL’s New Overtime Rule: Raising the Salary Threshold

On April 23, 2024, the Department of Labor (DOL) released its highly anticipated final rule regarding overtime pay eligibility. The new rule, which goes into effect on July 1, 2024, significantly raises the salary thresholds for the so-called “white collar” or “EAP” exemptions, as well as the highly-compensated employee exemption. Once it is fully implemented, the regulation is expected to extend eligibility for overtime pay to approximately 4 million workers when they work more than 40 hours per week.

Executive, Administrative, and Professional Employee Exemption

An employee may be exempt from the Fair Labor Standard Act’s minimum wage and overtime protections if he or she works in an executive, administrative, or professional capacity, commonly referred to as the “EAP exemption.”

To qualify for the EAP exemption, the employee must be paid on a salary basis, must receive a specified weekly salary amount, and must perform certain duties as defined by DOL regulations. In sum, the test for whether an employee qualifies for the EAP exemption contains a financial or salary-based component and a duties-based component.

Under the current salary requirement for the EAP exemption an employee may be classified as exempt under the EAP exemption if he or she makes at least $684 per week or $35,568 per year. Under the new rule, beginning on July 1, 2024, an employee will only be eligible for the EAP exemption if he or she earns at least $844 per week or $43,888 per year. The salary threshold will increase again on January 1, 2025, and the employee must make at least $1,128 per week or $58,656 per year to qualify for the EAP exemption. The duties tests will remain as they are.

Highly Compensated Employee Exemption

Additionally, the DOL’s final rules changed the total annual compensation threshold for “highly compensated” employees. To qualify for the highly compensated employee exemption (HCE), an individual must be paid a certain salary, and their job duties must meet certain criteria established by the DOL.

Currently, an employee can meet the salary prong of the HCE exemption if he or she makes $107,432 per year or more. On July 1, 2024, the requisite salary prong of the HCE exemption will increase to $132,964 per year. As with the EAP exemption, the salary threshold will increase again on January 1, 2025, to $151,164 per year.

Notably, the final rule also mandates that the salary thresholds for both the EAP and HCE exemptions will be reviewed on July 1, 2027, and every 3 years thereafter, indicating these thresholds will likely increase again.

Employer Next Steps

Although it is likely the DOL’s final rule will be subject to a court challenge, employers should begin determining how they will handle compensation for salaried employees who make less than $43,888, as July 1, 2024, will be here soon. Given that January 1, 2025, is only about eight months away, employers should also evaluate their options for salaried employees making less than $58,565 annually.

If an employee’s current duties meet the requirements for any of the executive, administrative, or professional exemptions, the employer will either need to increase the employee’s salary to exceed the new threshold(s) or ensure the employee is compensated on an non-exempt (e.g., hourly) basis.

There are several factors to consider when determining the best approach for your organization.

Employers should weigh the financial impact of raising affected employees’ salary versus paying those employees for overtime. Some organizations will likely find it easiest to increase affected employees’ salaries and maintain their exempt status. Other employers may elect to convert currently exempt employees into non-exempt workers, and will therefore need to decide what salary or hourly wage is appropriate, especially if the employee regularly worked more than 40 hours per week prior to the new DOL rule.

We suggest employers get in touch with our Labor and Employment team to confirm eligibility for an employee’s exemption status and to figure out the best approach for their organization before the EAP and HCE thresholds increase on July 1st.