HR REPORT: U.S. Department of Labor Final Rule Increasing Minimum Exempt Salary: Update and What to Expect

On April 23, 2024, the U.S. Department of Labor (“DOL”) announced a final rule increasing the minimum salary required to properly classify employees as exempt from federal minimum wage and overtime. The first change outlined in the rule is scheduled to go into effect on July 1, 2024, with a subsequent change effective January 1, 2025, and automatic adjustments on a triennial basis starting in 2027 thereafter.

Under state and federal law, employers are required to pay employees minimum wage for every hour worked and overtime for every hour worked in excess of forty (40) hours in a work week, except for employees that the employer can properly classify as “exempt” from these rules. The most commonly utilized exemptions are sometimes referred to as the “white collar” or “EAP” exemptions and apply to employees who perform exempt executive, administrative, and professional, outside sales, or computer duties, and who generally receive a guaranteed salary of at least the minimum required amount. The law also provides a special exemption for certain “highly compensated employees,” who make above a certain amount in total annual compensation and meet a less stringent duties test (“the HCE exemption”). The necessary duties are outlined in detail in the regulations. Notably, even if an employee may qualify for an exemption, the employer is not required to apply an exemption – i.e., it is always lawful to classify an employee as non-exempt and eligible to receive overtime.

The DOL’s newly announced final rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, once effective, will increase the minimum salary threshold required for most EAP exemptions and the HCE exemption. Of note, the final rule does not modify the exempt duties, which, as referenced above, are also required to properly classify an employee as exempt under the EAP and HCE exemptions. The revised final rule will:

Increase the minimum required guaranteed salary level for the EAP exemption in two steps (as outlined below):

Increase the total annual compensation threshold for the HCE exemption in two steps (as outlined below):

Adds a mechanism that will provide an automatic update to these minimum salary and compensation thresholds every three years beginning on July 1, 2027.

The first of these changes is expected to go into effect on July 1, 2024 contemporaneously with the publishing of this article.1 Employers who have not done so should immediately identify workers whose classification will be impacted by the July 1st salary threshold increase and take action to avoid being out of compliance.

Looking forward to the January 1, 2025 change and the subsequent automatic adjustments starting in 2027, employers should identify workers who will be impacted by the threshold increases and analyze how best to proceed with classification changes going forward. Employers may decide to take into account budgetary and other business considerations including the number of hours per week currently worked, anticipated overtime, and the administrative costs of training and enforcing timekeeping and rest/meal break requirements. Employers can then make an informed choice whether to reclassify employees to non-exempt hourly positions or raise salaries to exceed the updated thresholds.

As employers are reclassifying positions, it is important to communicate any classification change clearly to impacted employees. This includes communicating any change of status, rate of pay, and impact on benefits such as leave accrual. Employers will want to clearly explain if there will be changes to how employees are expected to track their hours worked, including how to seek and record authorized overtime. Employers can also clarify that the purpose of any classification change is to ensure compliance with federal law and is not related to the quality or importance of the employee’s work.

This same assessment must be done for employees covered by a collective bargaining agreement. If such an employee’s wages would cause them to lose their exemption, the employer can negotiate a higher salary with the union or, without bargaining, convert them to non-exempt status (as that is required in order to comply with the change in the law). In this latter instance, however, it is likely that the individual will still be subject to a collective bargaining agreement under which they are promised a salary. While it is lawful to have an employee in a salaried non-exempt status, it can make the calculation of overtime complicated. Therefore, it would be prudent for employers to assess the potential impact of these changes on unionized employees carefully.

Finally, given the nationwide shift caused by the modified exemption rule, savvy employers may also take this opportunity to engage in a more comprehensive analysis of the primary duties of all positions and make further adjustments as needed to ensure compliance across their workforce.

This is not a legal document nor is it intended to serve as legal advice or a legal opinion. Drummond Woodsum & MacMahon, P.A. makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such.

¹As of the writing of this article, the changes are anticipated to go into effect on July 1, 2024 and the rule may have gone into effect before the publication date. Notably, in the past, changes to the EAP exemptions and salary thresholds have been challenged and injunctive relief has prevented the regulations from being enforced as scheduled. While such litigation is pending at the time of the writing of this article, no court had published a decision staying the implementation of the rule. Towns and cities are encouraged to contact their attorneys for an update on the status of the rule.