Hunton Employment & Labor Perspectives

On Tuesday, April 23, 2024, the U.S. Department of Labor (“DOL”) published the final version of a rule originally proposed in September 2023, raising the salary threshold for the Fair Labor Standards Act’s (“FLSA”) exemption for executive, administrative, professional, and computer employees and the total annual compensation level for the highly compensated employee exemption. The final rule also provides for periodic, automatic increases going forward. So, what should employers know about the final rule, and how can they stay compliant with this shifting landscape?

Background

The FLSA requires that most employees in the U.S. be paid at least the federal minimum wage for all hours worked and overtime pay at not less than one-and-one-half times their regular rate for all hours worked over 40 hours in a workweek.

However, Section 13(a)(1) of the FLSA provides an exemption from the FLSA’s minimum wage and overtime requirements for “any employee employed in a bona fide executive, administrative, or professional capacity … as such terms are defined and delimited from time to time by regulations of the Secretary [of Labor].” This exemption is commonly referred to as the “white-collar” or executive, administrative, or professional (“EAP”) exemption. For this exemption to apply, DOL regulations require that each of the following three tests must be met:

1. the employee must be paid a predetermined, fixed salary (the salary basis test);
2. the amount of the fixed salary paid must meet a minimum salary level (the salary level test); and
3. the employee’s primary job duties must involve executive, administrative, or professional duties as defined by the regulations (the duties test).

Under existing regulations, the minimum salary level is $684 per week. Employers are permitted to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the minimum salary level under the EAP exemption. If the sum of the employee’s salary, nondiscretionary bonuses, and incentive payments at the end of the year is less than the minimum salary level, the employer can make a final “catch-up” payment within one pay period after the end of the year to bring the employee’s compensation up to the required level. Any catch-up payment will count only toward the employee’s prior year salary amount and not toward the salary amount in the year in which it is paid.

The FLSA’s regulations also contain a special rule for “highly compensated” employees that combines a much higher annual compensation requirement with a minimal duties test. Under the existing regulations, an employee was deemed as exempt under the highly compensated employee (“HCE”) exemption under Section 13(a)(1) if:

1. the employee earns a total annual compensation of $107,432 or more, which includes at least $684 per week paid on a salary or fee basis;
2. the employee’s primary duty includes performing office or non-manual work; and
3. the employee “customarily and regularly” performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.

The New Final Rule

In furtherance of what the DOL perceives as its “broad authority under the Act” to define and delimit the terms of these exemptions, the new rule will increase the minimum salary level to $844 per week (or $43,888 annually) effective July 1, 2024, which will again increase to $1,128 (or $58,656 annually) effective January 1, 2025. According to the DOL, the January 1, 2025, salary level corresponds to the 35^th percentile of the weekly earnings of full-time salaried workers in the lowest-wage U.S. Census region, which is currently the southern U.S.

The new rule will also raise the minimum annual salary threshold for the HCE exemption to $132,964 per year starting July 1, 2024, which will also increase automatically on January 1, 2025, to $151,164 per year—which amount, according to the DOL, is equivalent to the annualized weekly earnings of the 85^th percentile of full-time salaried workers nationally. The employee must receive, on either a salary or fee basis, no less than the minimum salary level then in effect as part of their total annual compensation.

The new rule also provides for automatic updates to the minimum salary level and the HCE total annual compensation threshold every three years based upon the then-current earnings data.

Legal Challenges

If past is prologue, there will invariably be challenges to the DOL’s new rule.

Readers may recall that, on May 23, 2016, the Obama-era DOL published a rule more than doubling the minimum salary level for exempt employees from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The State of Nevada and twenty other states, along with the Plano Chamber of Commerce and more than fifty-five other business groups, filed lawsuits to have the rule declared unlawful, arguing the DOL exceeded its authority in passing that rule. The cases were consolidated and decided by a federal court in Texas, which held the DOL exceeded its rulemaking authority. The 2016 final rule was, therefore, held to be unlawful and never took effect.

Then, in 2019, the Trump-era DOL issued its own new rule to raise the minimum salary level more moderately from $455 per week to the current rate of $684. In the Mayfield v. U.S. Dept. of Labor case filed in a Texas federal court in August 2022, the plaintiff sued to have that rule declared unlawful on the grounds the DOL lacked authority under the FLSA to implement salary thresholds for the white-collar exemptions. The district court sided with the DOL, citing the U.S. Supreme Court’s 1984 ruling in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. that courts should defer to an agency’s reasonable interpretation of an ambiguous statute.

The Mayfield ruling is currently on appeal before the Fifth Circuit Court of Appeals. In briefing filed on April 18, 2024, the parties agreed the new 2024 rule would not moot the case because it is a challenge to the DOL’s statutory authority to issue any salary-level rule.

Regardless of the ruling on appeal in Mayfield, the losing party is very likely to further appeal the case to the U.S. Supreme Court, which recently heard oral argument in a different set of cases challenging the Chevron deference standard.

Like the Obama- and Trump-era rules, the new Biden-era rule is likely to face direct legal challenges, and as a result, it remains unclear as of the date of this posting whether the new final rule will actually take effect on July 1, 2024. 

Next Steps

Despite the pending (and likely future) legal challenges to the DOL’s authority to enact a salary level requirement, the new final rule will take effect July 1, 2024, unless a court stays its implementation or determines it is unlawful. In the meantime, there are several steps employers should take so that they are prepared to comply with the new salary level requirements in the event the new rule is not invalidated or, at least, stayed pending the outcome of litigation.

First, carefully review each exempt employee’s duties to ensure that they do, in fact, perform “bona fide executive, administrative, or professional” duties, as those terms are defined by the DOL regulations.

Second, for those employees who perform such duties, ensure they are paid on a salary basis, meaning their pay is not subject to reduction due to variations in the quality or quantity of their work.

Third, ensure the exempt employees earn (i) a salary equal to the then-prevailing minimum salary level and (ii) for the HCE exemption, total annualized compensation of at least $132,964 per as of July 1, 2024, and at least $151,164 per year as of January 1, 2025. If an employee is paid less than those amounts but his or her primary duties meet the other requirements for the EAP or HCE exemption, employers will need to decide whether to increase that employee’s salary to meet the new salary level or whether, instead, to reclassify the employee as non-exempt, which would require the employer to pay the individual overtime pay for all time worked beyond 40 hours in a single workweek.

The above analyses and decisions will necessarily take time, particularly for large employers with hundreds of exempt employees. As a result, the sooner employers begin to evaluate how they will comply with the new rule, the better. But to be clear, employers should not rush to implement changes too far in advance of the current July 1, 2024 effective date because, if the rule is ultimately invalidated or stayed, it may be difficult for employers to walk back any changes made in the interim, as many employers learned when the Obama-era salary level rule was enjoined.