DOL Issues Final Rule Increasing Salary Threshold for FLSA Exemptions

On April 26, 2024, the Department of Labor (“DOL”) published the Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees Rule (“Final Rule”), which will increase the minimum salary thresholds for bona fide executive, administrative, and professional exemptions under the FLSA.  Effective July 1, 2024, the annual salary thresholds for these “white collar” exemptions will increase to $43,888 (from $35,568) and increase again on January 1, 2025 to $58,656 and the threshold for highly-compensated employees will also increase from $107,432 to $132,964.  Effective July 1, 2025, the methodology will change and these thresholds will increase again (to $58,656 and $151,164, respectively).

As Crowell previously advised, the DOL issued a proposed rulemaking back in September 2023 proposing to raise the annual salary thresholds for the “white collar” exemptions (For more information on the proposed rulemaking, please see our September 2023 alert.).  The Final Rule will increase these threshold and institute a mechanism for adjusting the threshold going forwards, but will not affect the job duties test, which is also part of the consideration of whether an employee qualifies for an exemption.  The Final Rule is scheduled to go into effect on July 1, 2024. 

In announcing the Final Rule, Acting Secretary Julie Su explained, “This rule will restore the promise to workers that if you work more than 40 hours in a week, you should be paid more for that time.”  The DOL estimates that approximately 1 million employees will be impacted by the changes effective July 1, 2024 and another 3 million employees by the increase scheduled to be effective July 1, 2025.

The Final Rule:

While the Final Rule is substantively similar to the proposed rulemaking, we highlight below the key provisions in the Final Rule, as well as where they differ from the propose rulemaking.

• Effective July 1, 2025, Increase Under Existing Methodology for Salary Threshold: The proposed rulemaking did not contemplate the phased increase in the salary threshold that is in the Final Rule.  Under the Final Rule, effective July 1, 2024, the standard salary threshold will increase to $43,888 annually and to $132,964 annually for highly-compensated employees.  This is an adjustment based on salary data, under the current methodology for calculating the salary thresholds which was adopted in 2019.
• Effective January 1, 2025, New Methodology for Salary Threshold: As in the proposed rulemaking, the Final Rule will ultimately tie the salary thresholds to the percentiles of weekly earnings of full-time salaried workers. The salary thresholds are slightly higher than published in the proposed rulemaking because—as the DOL warned at the time—the current data has shifted.
  
  For most workers, the standard salary level is set at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently $58,656 annually).  And for highly compensated employees, the salary level is set at the annualized weekly earnings of the 85th percentile of full-time salaries workers (currently $151,164 annually).
• Effective Every Three Years, Regular Increases to Salary Thresholds: As in the proposed rulemaking, under the Final Rule, the salary thresholds will be updated every three years based on then-current wage data.  If, for example, there was a significant downturn in the economy, these periodic updates could result in a decrease in salary thresholds.
• S. Territories and Motion Picture Industry: Unlike the proposed rule, the changes in the salary thresholds will not apply to Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, and the Northern Mariana Islands. The DOL stated that it will “address these aspects of the proposal in a future final rule.”

Key Dates and Changes:

The DOL published the below chart explaining the changes and their effective dates:

DATE	STANDARD SALARY LEVEL	HIGHLY COMPENSATED EMPLOYEE TOTAL ANNUAL COMPENSATION THRESHOLD
Before July 1, 2024	$684 per week (equivalent to $35,568 per year)	$107,432 per year, including at least $684 per week paid on a salary or fee basis.
July 1, 2024	$844 per week (equivalent to $43,888 per year)	$132,964 per year, including at least $844 per week paid on a salary or fee basis.
January 1, 2025	$1,128 per week (equivalent to $58,656 per year)	$151,164 per year, including at least $1,128 per week paid on a salary or fee basis.
July 1, 2027, and every 3 years thereafter	To be determined by applying to available data the methodology used to set the salary level in effect at the time of the update.	To be determined by applying to available data the methodology used to set the salary level in effect at the time of the update.

Takeaways:

Though scheduled to go into effect this summer, the Final Rule is likely to be challenged in courts.  In fact, previous attempts by the DOL to adjust the FLSA exemption tests have been challenged in the courts. If challenged in the courts, even if the DOL prevails, implementation of the Final Rule could be delayed or even enjoined.  It’s important to note that the Final Rule is severable—meaning, if only one part of the rulemaking is enjoined or found unlawful—the other portions of the rulemaking could still stand.  In practice, that could mean that the July 2024 increases go into effect, while the January 2025 increases are challenged, because that requires the application of a new methodology.

The best practice, despite this uncertainty, is for employers to evaluate their compensation systems before the scheduled effective date.  Employers should review employee compensation with an eye towards identifying employees likely to be affected by the July and January changes to the salary levels.  Employers have a number of tools and options once they have identified the employees who are likely to be affected.  If an employee no longer passes the salary basis test (i.e., has a salary level below one of these thresholds), employers will need to consider either: (1) increasing their salary, so that they can maintain their exemption status; or (2) re-classifying the employee as non-exempt.

Please contact Crowell & Moring with any questions about the Final Rule or other FLSA issues.