DOL Raises Overtime Exemption Salary Threshold—Millions of Workers Soon Newly Subject to Overtime Laws

Last week, the Department of Labor (“DOL”) announced its long-awaited final rule raising the minimum salary that certain employees must earn in order to be exempt from overtime pay under the Fair Labor Standards Act (“FLSA”).

The final rule, which takes effect on July 1, 2024, increases the minimum salary for overtime exemptions to $844 per week, equating to a minimum annual salary of $43,888. This increase represents a nearly 25% increase from the existing $35,568 (or $684 per week) threshold and is higher than the amount originally suggested by the DOL in its September 2023 Proposed Rule. The final rule bumps up the weekly minimum amount again on January 1, 2025, to $1,128 per week (equivalent to a salary of $58,656 per year). Further increases on an automatic index are scheduled for July 1, 2027, and every three years thereafter.

The rule likewise increases the minimum salary requirement for “highly compensated” employees to $132,964 per year on July 1, 2024, and to $151,164 per year on January 1, 2025. These amounts (up from the current rate of $107,432 per year) will also be indexed for further increases on July 1, 2027, and every three years thereafter. Above this salary amount, only a minimal showing is needed to demonstrate that an employee is not eligible for overtime.

However, the final rule makes no changes to the “duties test,” under which individuals employed in an executive, administrative, professional, or computer employee role must meet certain minimum requirements related to their primary job duties. Thus, simply compensating an employee at or above the minimum salary does not automatically make them overtime exempt. 

The increase of the minimum salary level to $43,888 equates to the 35th percentile of earnings for full-time American salaried workers in the South, which is the lowest-income Census region. The increase to $134,004 for highly compensated employees equates to the 85th percentile of full-time salaried workers nationally. The DOL estimates that more than four million workers currently exempt under current regulations will become entitled to overtime under the final rule.

Though legal challenges to the 2024 final rule are expected, employers should still plan to act now to prepare for the July 1, 2024, compliance deadline. Indeed, the DOL issued similar final rules in 2016 and 2019, and both were vigorously challenged in court—a Texas federal court invalidated the 2016 rule in 2017, and a lawsuit challenging the 2019 rule is still pending.

Employers have a range of options for responding to the updated standard salary level. For each affected employee newly entitled to overtime pay, employers may:

• increase the salary of an employee who meets the duties test to at least the new salary level to maintain exempt status;
• reclassify a position as non-exempt and pay an overtime premium of one and a half times the employee's regular rate of pay for any overtime hours worked;
• reduce or eliminate overtime hours;
• reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
• use some combination of these responses.

Additionally, employers should be mindful of state and local wage and hour laws that may impose additional requirements for exempt status beyond federal requirements under the FLSA.

For more information or assistance complying with the FLSA or related state wage and hour laws, please contact your Quarles & Brady counsel or:

• Ted Hollis: (317) 399-2834 / edward.hollis@quarles.com
• Amanda Collins: (414) 277-3083 / amanda.collins@quarles.com