Department of Labor’s Final Salary Rule Dramatically Increases Scope of Overtime Eligibility

The US Department of Labor (DOL) released its highly awaited final overtime rule. The final rule dramatically increases the salary threshold for “white collar” workers to be exempt from overtime under the Fair Labor Standards Act (FLSA). The rule substantially impacts most, if not all, employers currently relying on an overtime exemption.

What Are the New Salary Levels?

Effective July 1, 2024, executive, administrative, or professional employees (EAP) must receive a minimum salary of $43,888.00 per year ($844.00/week) to qualify for the salary requirement of the EAP exemptions.

Effective January 1, 2025, the minimum salary amount increases for the EAP exemptions to $58,656.00 per year ($1,128.00/week).

For highly compensated employees (HCE), the annual compensation threshold increases to $132,964.00 per year on July 1, 2024, and to $151,164.00 per year on January 1, 2025. For HCEs, while there is some flexibility in accruing this total, HCEs must receive at least $844.00 per week and then $1,128.00 per week on a salary basis.

To appreciate the significant monetary increase, the current thresholds implemented in January 2020 are: $35,568.00 per year minimum salary for the EAP exemptions and $107,432.00 per year for HCEs.

The DOL estimates that approximately 4 million workers will qualify for overtime when the rule is fully implemented in January 2025.

Automatic Inflation-Based Salary Increases

Similar to the Obama Administration’s 2016 rule, which was completely stalled by legal challenges, the DOL final rule includes updates to the salary levels every three years. These automatic increases are based on earnings data using the US Bureau of Labor Statistics’ most recent available data and using “the methodologies in effect at the time of each update.”

Interestingly, the final rule departs from the DOL’s August 2023 rule by setting higher salary thresholds in the final version and leaving intact the special federal salary levels for US territories.

Quick Review on Exemption Eligibility

A review of the requirements for the white-collar overtime exemptions is helpful to place this final rule in context. To qualify for the EAP exemptions, an employee must meet three basic requirements: (1) perform work that primarily involves executive, administrative, or professional duties as defined in DOL regulations (“duties” prong); (2) be paid a pre-determined fixed salary not subject to reduction due to work quality or quantity (“salary basis” prong); and (3) receive a minimum salary amount (the “salary threshold” prong). The HCE exemption provides a less stringent “duties” prong for individuals otherwise meeting the specific salary requirements of the HCE exemption.

Potential Challenges?

Uncertainty surrounds the legality of the rule. The final rule exceeds levels proposed by the Obama Administration’s 2016 rule, which sought to raise the salary level threshold to more than $47,000.00 per year. Days before that rule was scheduled to take effect, a Texas federal court invalidated that rule.

Challenges to the DOL’s 2019 rule are ongoing as the US Court of Appeals for the Fifth Circuit is currently considering whether the Trump-era rule increasing the salary level threshold is authorized by federal law. The appellants are contesting the DOL’s fundamental authority to issue any salary-level test. Interestingly, in a recent US Supreme Court decision on the salary basis prong in the context of a daily salary, one of the Justices also seemed to question whether the DOL had the authority to set minimum salary thresholds.

Next Steps to Consider…

https://bracewell.com/insights/department-labors-final-salary-rule-dramatically-increases-scope-overtime-eligibility