DOL’s New 2-Phased Salary Basis Increase for OT Exemptions Has Businesses Crying Foul

After convening nearly 30 listening sessions and reviewing over 33,000 written comments to its rulemaking proposal issued last fall, the DOL is not only ready to play ball but is swinging for the fences.

For years, the U.S. Department of Labor (DOL) has sought to funnel more money into workers’ hands. Foremost among its initiatives has been raising the weekly salary threshold that must be met when classifying employees as exempt from overtime pay under the Fair Labor Standards Act (FLSA). After convening nearly 30 listening sessions and reviewing over 33,000 written comments to its rulemaking proposal issued last fall, the DOL is not only ready to play ball but is swinging for the fences. Its long-awaited final rule updates the regulations issued under FLSA Section 13(a)(1), creates a two-step approach to increasing worker wages, with a process for additional increases to continue into perpetuity—positively impacting millions of workers across every business in every industry in the United States.

The Current Salary Threshold for EAP Exemptions and Changes to Come

Currently, employees must receive a base salary of not less than $684 per week ($35,568 annually) to meet the salary basis test to be exempt from overtime. This minimum level of compensation is in addition to their performing bona fide duties consistent with one of the traditional white-collar exemption classifications—i.e., executive, administrative, or professional (EAP).

Step One

Effective July 1, 2024, the minimum annual base salary to be eligible for exemption consideration will increase to $844 per week ($43,888 annually). The DOL projects this first increase will positively impact approximately one million employees who earn more than the current minimum salary threshold of $684 per week but less than the new minimum. Further, citing data from the Bureau of Labor Statistics, the DOL claims that this 23% increase, while substantial, is nonetheless consistent with the 24% aggregate increase that full-time wage and salary workers nationally have enjoyed since 2019. See 89 Fed. Reg. 32849.

Step Two

Rather than playing it safe on first, the DOL bets big and mandates additional minimum salary increases after only six months. Effective Jan. 1, 2025, the salary threshold will adjust to $1,128 per week ($58,656 per year). This represents a 65% increase over the minimum salary threshold currently in effect today. (29 CFR Section 541.600). The DOL projects an additional three million employees will be positively impacted by this second wave because they earn more than the $844 weekly minimum that will then be in effect, but less than the increase to $1,128.

Step Three

The salary increases do not stop there. Determined to align with shifts in worker salaries and provide employers with a predictable timetable for future adjustments, the final rule sets the salary threshold to automatically increase again every three years starting on July 1, 2027, applying the then-current methodology used for setting the salary level to newly available national salary data. By requiring these periodic adjustments indefinitely, the DOL seeks to keep the bases loaded, ensuring worker compensation will continue to increase for years to come.

The Star Players: Highly Compensated Employees Get a Bump Too

The final rule also upwardly adjusts the minimum salary for those individuals classified as exempt based on their meeting the highly compensated employee (HCE) exemption. Currently, employees must earn at least $107,432 annually and perform at least one exempt duty to meet the HCE exemption. Under the final rule, the salary threshold will increase to $132,964 on July 1, 2024, and to $151,164 by Jan. 1, 2025—an increase of over 41% over today’s current minimum salary threshold—with additional tri-annual increases on the same schedule and using the same methodology as for the other EAP exemptions.

Employees currently classified as HCE will also be positively benefited by the DOL’s changes. Eventually, employers will have to choose between increasing their base wage—so they can continue to meet that exemption—and reclassifying them as EAP exempt if they perform all of the requisite duties. Traditionally, the HCE classification only requires employees to perform a single exempt duty. Of course, employers could also reclassify them as nonexempt and pay them overtime for hours worked over 40 in a workweek.

The DOL Plays Defense and Offense at the Same Time

By basing the July 1 increases on proposals developed during the Trump administration in 2019 —which methodology itself had been in place dating back to 2004—the DOL is determined to fend off legal challenges and deliver on Biden’s Investing in America agenda prior to the November election. In its commentary explaining the final rule, the DOL explains that those who “opposed the proposed updating mechanism nonetheless agreed that the thresholds in the regulations need to be periodically updated” and “generally expressed support for … an increase to the salary level using the 2019 methodology.” The DOL also noted how it designed its first scheduled increases to be entirely severable from the methodology for future increases.

The new minimum standard salary level for the EAP exemption equates to the 20th percentile of weekly earnings of full-time salaried workers in the South and in the retail industry nationally using the most recent data. The new minimum for HCE annual compensation threshold will initially be set at the 80th percentile of full-time salaried worker earnings nationwide using the most recent data. The second increase sets the standard salary level for EAP exemptions at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census region in the country.

Will the DOL Strike Out on Its Latest Rulemaking?

Business groups recently joined together to file a lawsuit seeking to enjoin the rule nationally. See Plano Chamber of Commerce v. U.S. Department of Labor, E.D. Tex. Civ. Action No. 4:24-cv-468. Entirely intentionally, they chose the U.S. District Court for the Eastern District of Texas because it was ground zero for successful challenges to the DOL’s 2016 attempt at increasing the salary threshold. The current lawsuit alleges, among other things, that the minimum salary thresholds and escalator provisions exceed the DOL’s authority under the FLSA and the Administrative Procedures Act, and that the final rule is arbitrary, capricious, and otherwise contrary to law.

The final rule may face additional scrutiny if there is a change in the office of the president or contours of Congress following the November 2024 election. Depending on Congress’ makeup, the rule might also face challenges under the Congressional Review Act.

How Employers Need to Prepare for Their at Bat

While the increases scheduled for Jan. 1, 2025, may be more vulnerable to legal challenge than those effective on July 1, 2024, given the temporal proximity and new methodology, employers should audit their compensation practices now to prepare to meet at least one if not both of the new standards, especially since the first increase will go into effect next month. Employers cannot and should not bank on the success of the pending lawsuit and relax. While there are major variables with the pending lawsuit and upcoming presidential election, employers need to prepare to comply with the current version of the final rule.

Where to start? Develop an accurate picture and understanding of your exempt workforce by asking questions like:

  • What roles does it comprise?
  • How many employees occupy the roles?
  • Where are the employees located?
  • What functions do they perform?
  • How many hours do they work per week?
  • To what extent do their hours fluctuate?
  • Most importantly, how much are they paid on a weekly basis?

Understanding the contours of the exempt population will allow employers to begin thinking strategically to identify and triage the roles that are most impacted by the final rule or should otherwise command attention during this time of change.

Ultimately, periodic FLSA audits are always a beneficial, proactive process to undertake—now more so than ever. Think of it as a productive seventh-inning stretch, while we all wait for the Eastern District of Texas court to have its say.

Jennifer Platzkere Snyder and Marjorie McMahon Obod are co-chairs of the labor and employment practice at Dilworth Paxson, advising employers from entrepreneurs to Fortune 500 companies, nonprofits, and public sector entities on a wide variety of labor and employment laws and defending them in litigation challenging compliance.

Reprinted with permission on 6/14/2024 from The Legal Intelligencer. © 2024 ALM Global Properties, LLC. All rights reserved.

Further duplication without permission is prohibited. If you have any interest in getting reprints, you can contact 877-256-2472 or asset-and-logo-licensing@alm.com.