Employers have been required since August 20, 2023, when the U.S. Department of Labor (DOL) announced a notice of proposed rulemaking, to increase the minimum salary amount required to be paid to qualify for what is known as the “white-collar exemptions” and to consider the required annual compensation to be paid for “highly compensated” employees exempt from the Fair Labor Standards Act’s (FLSA) federal overtime requirements. We wrote about the specific requirements of the new rule on April 8, 2024, and again on June 10, 2024, and encouraged employers to familiarize themselves with the proposed Rule and to be ready to comply effective July 1, 2024, in spite of the pending litigation challenging the validity of the Rule.
If the summer heat got to you and you have not already taken the necessary steps to comply, be aware that the legal challenges to the implementation of the Rule do not excuse compliance. (Texas, however, is a slightly different story; on June 24, 2024, the U.S. District Court for the Eastern District of Texas issued an injunction of the Rule against the State of Texas as an employer.) The first phase of the Rule is in effect, and a second phase, which will again increase the salary threshold, is expected on January 1, 2025. Therefore, the following are the steps that we recommend employers take immediately to comply with the Rule:
- Conduct an internal audit of your pay policies (with the assistance of legal counsel).
- This audit will consist of two parts: (i) reviewing job descriptions and evaluating job duties to insure that employees qualify for one of the so-called white-collar exemptions; remember that white-collar exemptions have a duties test in addition to the salary threshold; (2) identifying and creating a list of all exempt employees who met the former salary requirement of $35,568. This will allow you to determine whether to increase their salary to the new $58,656 annual requirement or go through the process of changing their status to nonexempt. Under the FLSA, employers are required to keep accurate records of all hours worked in a workweek for each nonexempt employee. It is also prudent to determine if an employee may qualify for another exemption where the salary thresholds are not in play.
- Provide written notice to the employees affected of the changes to compensation and other job conditions. We would normally recommend advance notice (and some states require it), but now that it cannot be done in advance, doing so immediately is still recommended. It would be prudent to also notify managers on FLSA basics and the new requirements as well as a refresher on meal and rest breaks, overtime approval policies, etc. Your payroll department will also need to understand the effect of reclassification on an employee’s paycheck, particularly how to calculate the regular rate of pay and overtime hours for employees converted from salaried to hourly.
- Consider a policy of requiring overtime hours to be approved in advance and discipline employees who violate such policies. Remember, however, that you cannot refuse to pay for the hours worked.
- Review other policies to see how they may be impacted. Employers may have different PTO or vacation policies or bonus plans for exempt employees than they do for nonexempt employees. Be sure to identify and notify affected employees of any change in benefits.
- Keep in mind (and plan) for further salary threshold increases that are provided for in the new Rule. The minimum salary requirements for exempt employees will escalate again on January 1, 2025. After that, the Rule requires that earning thresholds be automatically updated every three years based on then-current earnings data. Therefore, employers will need to reexamine their exempt employees’ compensation every three years.
- Keep abreast of state and local overtime laws that may provide for an even higher salary threshold to be exempt and follow the legal challenges that are pending and are expected to increase after July 1. Regardless of the outcome of those challenges, employers have an obligation now to understand the Rule and to take immediate steps to navigate the process of complying to avoid costly legal claims down the road.
- Don’t forget to review employees who formerly qualified for the Highly Compensated Exemption (HCE). With an increase from $107,432 to $132,964, you will need to determine whether the employee meets the reduced duties test for the exemption to apply. If so, then the salary must be increased in order to continue to be exempt under the HCE.
- Employee Morale. Like all changes in the workplace, they need to be handled sensitively by Human Resources. After announcing the change in writing, be prepared to follow up and engage in dialogue with affected employees with respect to any questions they have about changes in compensation/benefits as a result of the new Rule.
Pay Attention to Pending Lawsuits Challenging the New Rule
The validity of the Rule is far from settled. There are multiple lawsuits pending challenging the new rule. If you have questions about the Rule or its impact, contact the author of this article or your Foley & Lardner attorney.
