A final rule issued by the U.S. Department of Labor (DOL) is set to raise the minimum salary threshold for an employee to be considered exempt from overtime requirements under the federal Fair Labor Standards Act (“FLSA”) as of January 1, 2025. The FLSA sets the federal minimum wage and overtime rate for non-exempt employees who work over forty hours per week. Under the new rule, the minimum salary for exempt employees will jump to $58,656 per year ($1,128 per week), pushing many employees who previously qualified for exempt status into a non-exempt status.
Exempt vs. Non-Exempt
Most employees are covered by the FLSA, entitling them to the federal minimum wage and to 1.5 times their hourly pay for time worked in excess of forty hours per week. However, certain employees who perform executive, administrative, or professional roles are exempt from these requirements, provided they are paid a fixed salary that is greater than a specified amount, and is not subject to reduction based on variations in the quality or quantity of work performed (the “EAP exemption”). In general, an employee who meets both the salary test and the duties test is considered “exempt” for FLSA purposes. Otherwise, the employee is “non-exempt” and is entitled to overtime pay. A DOL fact sheet helps guide employers in determining whether an employee is exempt from overtime pay.
What changes are going into effect January 1, 2025?
Beginning January 1, 2025, the minimum salary threshold for an employee to be considered exempt will increase from its current $43,888 per year ($844 per week) to $58,656 per year ($1,128 per week). So, as of the first of the year, an employee in a bona fide executive, administrative, or professional role who earns, for example, an annual salary of $50,000, would, under the new rule, no longer be exempt for FLSA purposes. Future updates are scheduled to occur every three years, based on then-current wage data, with the next to take effect as of July 1, 2027.
Legal challenges to the DOL final rule
Although legal challenges to this rule have been asserted in several jurisdictions, the rule remains in effect as of the date of this alert. Notably, the U.S. Court of Appeals for the Fifth Circuit, in deciding a case arising out of an earlier round of rulemaking, recently held that DOL has the authority to set a minimum salary requirement in the course of defining the scope of the EAP exemption. However, its decision leaves open the question of whether the DOL may exceed its authority by setting a salary floor too high so as to impermissibly overshadow the duties test. Other challenges remain pending in federal district courts in Texas and Tennessee.
Takeaway
The new salary floor is scheduled to go into effect on January 1, 2025. Employers should take proactive steps to comply with the new DOL standards by increasing compensation for exempt employees, reclassifying affected employees as non-exempt, or limiting work hours for affected employees to reduce or eliminate overtime.
For additional guidance, please contact our attorneys at Cain Hibbard & Myers.