U.S. Department of Labor Issues Final Rule Raising Salary Thresholds for “White Collar” Overtime Exemptions

On April 23, 2024, the U.S. Department of Labor (“DOL”) released a final rule that raises the salary thresholds for certain exemptions to the overtime pay requirements of the Fair Labor Standards Act (“FLSA”).

The new rule (the “2024 Final Rule”) is the first federal increase to overtime exempt salary thresholds since a rule issued by the DOL in 2019 (the “2019 Final Rule”), which we covered here. The 2024 Final Rule—like its 2019 predecessor—raises the salary thresholds for the FLSA’s three “white collar” exemptions (executive, administrative, and professional employees), as well as its “highly compensated employee” (“HCE”) exemption. The 2024 Final Rule also provides for automatic increases to these thresholds beginning in 2027—a new feature that was not included in the 2019 Final Rule.

Material Provisions of the 2024 Final Rule

Under the 2019 Final Rule, the minimum salary required to qualify for any of the “white collar” executive, administrative, and professional exemptions was set at $684 per week, or $35,568 per year. Under the 2024 Final Rule, the salary threshold for these exemptions will rise according to the following schedule:

“White Collar” Salary Threshold Increases
Beginning July 1, 2024	$844 per week/$43,888 per year
Beginning January 1, 2025	$1,128 per week/$58,656 per year

Up to 10% of the required salary amounts may be satisfied by nondiscretionary bonuses, incentive payments and/or commissions, if these payments are made at least annually.

Under the 2019 Final Rule, the minimum salary required to qualify for the HCE exemption was set at $107,432 per year. Under the 2024 Final Rule, the salary threshold for the HCE exemption will rise according to the following schedule:

Highly Compensated Employee Salary Threshold Increases
Beginning July 1, 2024	$132,964 per year (of this amount, at least $844 per week/$43,888 per year must be paid on a salary or fee basis)
Beginning January 1, 2025	$151,164 per year (of this amount, at least $1,128 per week/$58,656, per year must be paid on a salary or fee basis)

As with the 10% rule above for the “white collar” exemptions, any non-salary or fee-basis compensation must be non-discretionary to qualify for the HCE exemption.

In addition to setting these new thresholds, the 2024 Final Rule provides a schedule for automatic increases to exempt salary thresholds. The first such increase is scheduled for July 1, 2027, and subsequent increases will occur every three years thereafter. These increases will be based on then current earnings data and will be announced with at least 150 days’ advance notice. These automatic increases were not included in the 2019 Final Rule, but the DOL stated in its “Supplementary Information” about the 2024 Final Rule that it is adopting the automatic increase mechanism for purposes of efficiency.

Like the 2019 Final Rule, the 2024 Final Rule does not affect the outside sales or inside retail sales exemptions (which are not subject to a salary threshold), nor does it affect the existing duties tests for the “white collar” exemptions.

Possible Challenges to the 2024 Final Rule

The 2024 Final Rule will almost certainly be subject to legal challenges, and recent history makes it difficult to predict the outcome of any such challenges. The 2019 Final Rule is itself the subject of an ongoing lawsuit before the United States Court of Appeals for the Fifth Circuit, but has so far survived challenges in trial court, which refused to stay the increases set forth in the 2019 Final Rule.¹ However, when the DOL attempted in 2016 to double the then existing “white collar” salary thresholds and lock in automatic threshold increases every three years, a federal district court in Texas struck down this attempt as overstepping the DOL’s authority.²

Next Steps for Employers

If legal challenges do not prevent the 2024 Final Rule from taking effect, the DOL estimates that approximately 1 million workers will no longer retain overtime exempt status under the FLSA as of July 1, 2024.  When the threshold rises again on January 1, 2025, the DOL estimates that a further 3 million workers will be so affected.

Employers should act now by reviewing their current exempt employees’ salaries to determine which employees will be impacted if the 2024 Final Rule takes effect.  Employers should then determine whether to increase compensation for impacted employees to maintain the exempt classification or reclassify the employees as non-exempt, overtime eligible employees.

As we previously advised regarding the 2019 Final Rule, raising salaries may have an impact with respect to both the direct cost of higher salaries and indirect costs resulting from pressure to raise salaries for other employees at higher levels of the organization. Employers should also be aware that some states (including California, New York, and Washington) set higher salary thresholds for exempt workers and should evaluate compliance with these existing state laws in addition to preparing for the implementation of the 2024 Final Rule. Finally, investment firms and strategic acquirers should take the 2024 Final Rule into account when conducting diligence on targets—i.e., asking sellers what their plans are to comply with the 2024 Rule.

Please contact any member of Ropes and Gray’s employment team for further guidance on the 2024 Final Rule.