Potentially Affecting Millions of Employees, the DOL Expands Overtime Protections by Raising the Salary Basis Threshold

For each workweek, the FLSA requires employers to pay certain employees no less than the federal minimum wage of $7.25 for all time worked up to 40 hours and time and one half the employee’s “regular rate” for all time worked over 40 hours. The FLSA exempts from these requirements, among others, bona fide executive, administrative, professional and computer employees (sometimes referred to as the “EAP Exemption”). To qualify for the EAP Exemption, an employee must have certain duties and responsibilities and meet other criteria, including being paid no less than the minimum salary threshold. The current salary threshold, before the DOL’s latest final rule takes effect, is $684 per week or $35,568 per year.

Starting in a mere 63 days – on July 1, 2024 – the salary threshold will increase by 19% to $844 per week or $43,888 per year. On January 1, 2025, the threshold will increase again by another approximately 25% to $1,128 per week or $58,656 per year. In other words, between today and January 1, 2025, the salary threshold will increase by 40%. The DOL explained that its goals in implementing this rule were to set effective earnings thresholds that “define and delimit” the EAP Exemption and recognize current wage standards.   

In addition to the foregoing, the final rule will impact another exemption known as the Highly Compensated Employee Exemption. To qualify for that exemption under the current salary threshold, the employee must be paid at least $107,432 per year. Under the DOL’s newest rule, starting on July 1, 2024, that employee must be paid at least $132,964 per year, and, starting on January 1, 2025, the employee must be paid at least $151,164 per year. Like the EAP Exemption, these are significant increases in a relatively short period of time.

As if the foregoing were not enough to think about, the rule provides for an automatic update to the salary thresholds every three years. According to the DOL, the automatic updates will bring greater predictability for employers and prevent any further erosion of overtime protections.

If the past is prologue, it is quite possible there will be legal challenges to the DOL’s final rule. In 2016, when the DOL announced an increase in the salary threshold to over $900, various legal challenges stopped the rule in its tracks. Obviously, it never was implemented.

Key takeaways: Although the final rule’s effective date may be stayed or entirely derailed by litigation as has happened in the past, employers cannot count on this happening. Accordingly, employers must act now to evaluate the number of employees who would be affected by the rule, as well as the potential effects of that rule. For example, concerning each currently exempt employee, employers should compare the financial cost of raising that individual’s salary to meet the new threshold numbers versus converting the individual to a nonexempt employee who will earn overtime for all time worked over 40 hours. In making these calculations, employers must remember that the overtime rate is based on an employee’s “regular rate,” which could be significantly higher than the individual’s straight-time hourly rate if the employee earns other remuneration such as nondiscretionary bonuses and/or commissions that would need to be added to the hourly rate before determining the overtime rate. Employers also should consider the potential impact of converting a current exempt (salaried) employee to a nonexempt (hourly) one. Such a change could adversely impact morale. Many employees take great pride in being a “professional employee” who is not required to clock in and out. Ultimately, employers should consult experienced legal counsel on responding to the DOL rule. Klehr Harrison’s Labor and Employment Group is available to address any questions employers may have. 

Author Lee Moylan is chair of the labor & employment practice group at Klehr Harrison.