The Federal Fair Labor Standards Act (“FLSA”) requires employers in the United States to pay all employees overtime pay of at least time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek unless they are exempt from overtime pay. The U.S. Department of Labor (“USDOL”) periodically reviews these exemptions for modifications and adjustments.
On April 23, 2024, USDOL announced a final rule (“Federal Exemption Rule”) redefining the standards for overtime exemptions under the FLSA for employees under one or more of the following job classifications: Executive, Administrative, Professional, Outside Sales, and Computer Employees, along with highly compensated workers (collectively, “Exempt Employees”). The Federal Exemption Rule increases the annual salary levels for Exempt Employees under the FLSA in two stages, with the first salary level increase for overtime-Exempt Employees taking effect on July 1, 2024, and then increasing again on January 1, 2025.
Under the FLSA, Exempt Employees are not eligible for overtime pay, but must be paid a salary that exceeds the threshold amount and must also meet certain duties tests. If these employees are paid less than the exemption threshold or do not meet the duties tests, they must be paid 1.5 times their regular hourly rate for hours worked in excess of 40 in a workweek.
OlenderFeldman LLP has prepared this FAQ to further explain the Federal Exemption Rule and how it may apply to your business.
Q. What is the new Federal Exemption Rule?
A. The Federal Exemption Rule will increase the salary levels for Exempt Employees and sets forth a mechanism for regular updating of these earnings thresholds. Starting July 1, 2024, most salaried workers who earn less than $844 per week (or $43,888 per year) will become eligible for overtime pay under the Federal Exemption Rule. The salary threshold will then increase again by next year and, as of January 1, 2025, most salaried workers who make less than $1,128 per week (or $58,656 per year) will become eligible for overtime pay. Currently, this rule is set to go into effect as of July 1, 2024, but employers will have until January 1, 2025 to fully comply with these new salary adjustments. The Federal Exemption Rule will also increase the salary level for the “highly compensated employee” exemption under the FLSA, which exempts certain high-salaried employees from overtime if they receive a total annual compensation of at least $132,964 (as of July 1, 2024) and $151,164 (as of January 1, 2025).
Q. Why is Understanding the new Federal Exemption Rule important?
A. Because the Federal Exemption Rule increases the salary threshold, millions of employees who are currently overtime-Exempt Employees in the United States could be impacted by the salary threshold change and become eligible for overtime pay. Employers must carefully review their salary pay levels to ensure their pay practices align with this significant change.
Q. Does the Federal Exemption Rule change the Definitions of Exempt Employees?
A. No. the full list of exemptions under the FLSA can be found here and is not changed by the implementation of the Federal Exemption Rule.
Q. What is the best way to ensure Exempt Status remains in place despite the new Federal Exemption Rule?
A. Employers should review Exempt Employees who make less than the current $35,568 salary threshold and either increase their annual salary or convert those employees to non-exempt status. Employers should also review and update job descriptions to ensure the duties outlined meet the exemption criteria. Employees may be considered Exempt Employees if they earn less than the salary threshold, and primarily perform certain duties. Employees who meet both the salary and duties test are considered Exempt Employees. Employees making less than the current annual salary limit of $35,568 must either receive a raise to meet the new levels or be paid overtime.
Q. If an Employee earns more than the Salary Threshold are they Automatically Exempt?
A. No, simply meeting the salary threshold does not automatically make an employee exempt from overtime pay. Employees must earn at least the standard salary threshold of $58,656(as of January 1, 2025) and fulfill one of the exemptions in the standard duties test. The employee's job duties must primarily involve executive, administrative or professional duties as defined by the USDOL’s regulations. In short, exempt employees must earn above the threshold and meet one of the exemptions in the standard duties test.
Q. What if a State has established its own Overtime Rules?
A. Many states have issued higher, stricter, or different overtime requirements that employers must comply with just like the Federal Exemption Rule. In cases where an employee is subject to both state and federal overtime laws, the employee is entitled to overtime according to the higher (more lucrative) standard (i.e., the standard that will provide the higher overtime pay or the duties test that is easier to satisfy). Simply put, employers must follow the state law if it is more favorable to employees than the federal law.
Q. Have there been any Legal Challenges to the Implementation of the Federal Exemption Rule since the USDOL’s Announcement?
A. On May 22, 2024, several businesses filed a lawsuit seeking to block the Federal Exemption Rule, alleging that the USDOL acted arbitrarily and capriciously in setting the new salary thresholds, despite concerns from the business community. These legal challenges could delay the implementation of the new rule’s threshold increases and OlenderFeldman LLP will provide further updates, prior to the effective date of July 1, 2024.
For more information on compliance, please contact the OlenderFeldman Employment Practices Group here.
