On April 26, 2024, the Wage and Hour Division of the Department of Labor (“DOL”) will publish its Final Rule regarding 29 CFR Part 541, which governs compensation for exempt employees under the Fair Labor Standards Act’s (“FLSA”) white-collar exemptions. The DOL’s stated goal, which the contemplated regulations are clearly tailored to accomplish, is to significantly decrease the number of employees who are exempt under the FLSA. Exempted from the Final Rule is the motion picture industry and the U.S. territories. Additionally, this Final Rule does not change any of the duties tests for FLSA exemptions.

The DOL’s Rule focuses on the minimum salary level for white-collar exempt employees and the total annual compensation level for the highly compensated employee exemption. The regulations, including the revised salary thresholds, go into effect on July 1, 2024, giving employers a fast turnaround to adjust their pay policies.

The Final Rule will significantly raise the FLSA exemption levels TWICE in the next eight months.

First, on July 1, 2024, the standard salary level requirement for exemptions increases to $844 per week (from $684 per week), which equates to $43,888 annually. Additionally effective July 1, the annual salary level for the highly compensated employee exemption will increase to $132,964 (from $107,432 per year).

Second, on January 1, 2025, a new methodology based on average weekly salary data goes into effect. The standard salary level requirement will increase to $1,128 per week (from $844 per week), which equates to $58,656 annually. The Final Rule increases the salary level for the highly compensated employee exemption to $151,164 per year (from $132,964 per year) as of January 1, 2025.

The DOL estimates that the Final Rule increases will cause approximately 4.3 million exempt workers to become non-exempt.

The DOL has also included an auto-adjustment mechanism for the required salary levels for the exemptions so that they will adjust as wages increase over time. Every three years (starting on July 1, 2027) the minimum required salary levels will be updated for the standard exemption and the highly compensated employee exemption. The DOL projects that in ten (10) years, the updating mechanism will push the minimum salary threshold to $1,494 per week (which equates to $77,688 per year) and the highly compensated employee exemption threshold to $208,373 per year.

Employers may wish to begin reviewing their payroll and planning for the July 1, 2024 changes as soon as possible. To the extent employees need to be switched from exempt to non-exempt, those employees should be educated on why the switch is taking place, how they will be eligible for overtime pay, and what the expectations for clocking their time and reporting overtime is. Further, employers should be wary of the (untrue) perception some workers may have that being switched from salary to hourly is a type of demotion.

We anticipate that the Final Rule will be challenged in court, but as of today, employers should plan on the July 1 and January 1 increases to become effective. If you have any questions about this new rule, please do not hesitate to contact a Kullman attorney.