CLIENT ALERT: The Department of Labor Raises the Salary Thresholds for Certain Exempt and Highly Compensated Employees 

The Fundamentals

On April 23, 2024, the U.S. Department of Labor (the Department) released its much-anticipated final rule, which updates and revises the Fair Labor and Standard Act’s overtime exemptions for executive, administrative, professional, and highly compensated employees.  The most significant changes include increasing the minimum salary thresholds for exempt and highly compensated employees and adding a mechanism to automatically update the salary and compensation thresholds.  The salary increase will take effect in two stages over the coming year.

Under the new rule, to be classified as an exempt executive, administrative, or professional employee, the employee must be paid a salary of at least:

• $43,888 per year ($844 per week), effective July 1, 2024; and
• $58,656 per year ($1,128 per week), effective January 1, 2025.

To be classified as an exempt highly compensated employee, the employee must receive total annual compensation of at least:

• $132,964 per year, effective July 1, 2024; and
• $151,164 per year, effective January 1, 2025.

The 2025 salary thresholds will automatically be adjusted every three years based on current wage data from the U.S. Bureau of Labor Statistics.  The first automatic update is set to occur on July 1, 2027.  However, the rule provides that the Department has the power to delay or forgo the update if warranted by unforeseen economic hardship.

Impact of the Rule

While the rule makes significant changes to the salary threshold test, it does not impact the duties test or the salary basis test, which must also be met for an employee to be classified as exempt under the affected categories. Accordingly, an employee must still perform exempt duties that are considered executive, administrative, or professional, and must be paid on a salary basis (as opposed to hourly, or in some other manner) to be exempt from overtime eligibility.

The new FLSA salary threshold increase is expected to impact 4 million workers. Prior to this rule, the standard salary levels for exempt and highly compensated employees were $35,568 per year, and $107,432 per year, respectively. The Department and the Biden-Harris Administration have asserted that the updated rule seeks to expand overtime protections to lower-paid salaried workers and reduce excessive hours of unpaid work. Ultimately, the rule is intended to ensure that lower-paid salaried workers are appropriately paid for working more than 40 hours a week.

How Employers Should Prepare

The first phase of the rule will take effect July 1, 2024. The rule will almost certainly face challenges in the courts.  Similar efforts by the Obama and Trump Administrations were enjoined before they became effective.

Despite likely legal challenges and a high probability that the rule will be enjoined before it becomes effective, employers should prepare for the rule to take effect this summer. Employers should promptly conduct an internal audit of current exempt and non-exempt employees to determine whether it makes economic sense to raise salaries to meet the new thresholds or convert employees to non-exempt status. Please contact us with any specific questions about compliance for your workforce.

About Potter Anderson

Potter Anderson & Corroon LLP is one of the largest and most highly regarded Delaware law firms, providing legal services to regional, national, and international clients. With more than 100 attorneys, the firm’s practice is centered on corporate law, corporate litigation, intellectual property, commercial litigation, bankruptcy, labor and employment, and real estate.