DOL Final Overtime Rule

By Jerry D. Pinn

On April 24, 2024, the United States Department of Labor (DOL) announced its final rule on overtime, entitled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees”.  This rule updates and revises the DOL’s regulations that implement the Fair Labor Standards Act (FLSA) exemption of certain kinds of “white-collar” employees from the Act’s minimum wage and overtime pay requirements.  Specifically, the final rule raises the salary thresholds that are part of the test for exemption and establishes a mechanism for future salary increases. 

Unless the new rule is stopped in court, and legal challenges are expected, there will be an initial update to the minimum salary level for executive, administrative, and professional employees to $844 per week on July 1, 2024.  The minimum salary level will increase to $1,128 per week on January 1, 2025. 

Starting July 1, 2027, these minimum salary thresholds for exempt status will be updated every three (3) years, to keep pace with inflation and changes in worker pay.  DOL believes this will help  employers adapt more easily because they will know in advance when salary updates will happen and how they’ll be calculated.

To be exempt from overtime as an executive/managerial, professional or administrative employee, an employee must be paid at least a certain minimum salary level.  Under the 2024 final rule, the minimum salary level will change as follows:

•On July 1, 2024, the minimum salary level will increase from the current $684 per week (equivalent to $35,568/year) to $844 per week (equivalent to $43,888/year).

•On January 1, 2025, the minimum salary level will increase to $1,128 per week (equivalent to $58,656/ year).

•On July 1, 2027, and every three (3) years thereafter, the minimum salary level for the white collar exemptions will update by applying  the most recent four quarters of data. The Department will publish a notice announcing the updated salary level amount at least 150 days before the update takes effect. 

The minimum salary level test does not apply to outside sales employees, teachers, and employees practicing law or medicine.  The salary level test also does not apply to business owners who own at least a bona fide 20-percent equity interest in their enterprise and are actively engaged in its management.  Exempt computer employees may be paid a salary of at least the standard salary level per week, or on an hourly basis of at least $27.63/hour.

Employers may use certain bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the minimum salary levels, with certain requirements.  There are other bonuses that cannot be used to satisfy the minimum salary level.  Employers paying bonuses and providing incentives which could make a difference in reaching the new minimum salary level should carefully evaluate whether such bonuses and incentives can be used to satisfy the new minimum levels.

Employers should note that the FLSA provides minimum standards under federal law and does not preempt states from establishing more protective standards.  Some states have established more restrictive requirements, including higher minimum pay thresholds and more demanding job duties requirements.

It is estimated by DOL that at least four (4) million white collar employees currently classified as exempt from overtime will no longer be exempt after these higher salary requirements take effect, beginning on July 1, 2024.  This portends big changes for many employers, if the new rule is not stopped by the courts.

As a reminder, each of the overtime exemptions requires both a minimum salary be paid and that an employee have certain job duties.  The job duties for the most commonly used exemptions are as follows.

•Executive exemption (for officers, managers and supervisors):  (1) the employee’s primary duty is management of a customarily recognized department or subdivision thereof; (2) the employee customarily and regularly directs the work of two (2) or more other employees; and (3) the employee has the authority to hire or fire other employees or make suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.  Many employers are aware of the first two duties, but not the third.  All three duties must be present for the executive exemption to apply.

•Administrative exemption:  (1) the job involves office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and (2) the job includes the exercise of discretion and independent judgment with respect to matters of significance.  For the latter requirement, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.  The term “matters of significance” refers to the level of importance or consequence of the work performed.  This exemption is the most mis-applied exemption, as many employers mistakenly assume that, because a job involves administrative-type work, it automatically qualifies for exempt status.

•Professional exemption: (1) the employee’s primary duty is the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; (2) the advanced knowledge must be in a field of science or learning; and (3) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction (evidenced by a 4-year college degree in the same or related field).

It is virtually certain that lawsuits will be filed to stop the new rule, as occurred in 2016 when the outgoing Obama administration tried to increase the minimum salary level.  One of the legal justifications to stop the Obama rule was that it would have increased the minimum salary by a much higher percentage (101%) than the new Biden rule (65%) will for the next 3 years.

Some legal commentators believe that, with the new rule, DOL has exceeded its rulemaking authority by setting a new salary threshold that would quickly exclude millions of employees previously deemed exempt non-exempt in a relatively short time period, even though the job duties for each exemption have not changed.

Pro-employer advocates also contend that the DOL automatically increasing the minimum salary level every 3 years would improperly bypass a federal agency’s duty to provide advance notice and opportunity for the public to comment, as required by the Administrative Procedure Act.  It is expected that those challenging the new rule in court will rely upon the “non-delegation doctrine”, which posits that Congress cannot delegate its legislative powers or lawmaking ability to other administrative agencies such as the DOL.  The FLSA statute does not address the requirements for overtime exemptions, which makes the rule arguably unconstitutional by having the executive branch exercise legislative authority reserved to the legislative branch.

Employers with salaried employees in the range of $35,568 to $58,656/year should closely evaluate whether some of these employees currently classified as overtime exempt may cease to be exempt in the coming 6 or so months.  It may be possible to keep some of these employees exempt if their compensation in the form of salary and bonuses or incentives are increased to the new minimum levels.  Such employers may wish to work with their employment law counsel to navigate these new requirements and determine which employees can remain exempt and which will need to be reclassified to non-exempt (and overtime-eligible) status.  

Employers generally still have the discretion to control scheduling and hours worked by non-exempt employees, and some employers may be able to control overtime costs in that manner.  There are a lot of variables for employers to consider, and there is not a lot of time to adapt to the new rule, if it is allowed to take effect on July 1.