By Kim Adamson

The highly anticipated ruling from the Wage & Hour Division of the U.S. Department of Labor (DOL) was finally unveiled at the end of April! This ruling, which updates and revises the Fair Labor Standards Act regulations, is a significant development for employers and HR professionals. It implements the exemptions from minimum wage and overtime pay requirements for “white collar exemptions” that include Executive, Administrative, and Professional employees (EAPs). The key revisions involve increases to the standard salary level thresholds for EAPs and increases to the total annual compensation threshold for Highly Compensated Employees (HCEs). The final rule, titled ‘Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees’, will be implemented in two parts, with increases required on July 1, 2024, and January 1, 2025. It also introduces a mechanism for the timely and efficient updating of the salary and compensation thresholds every three years, starting from January 1, 2027.

Here Are the Key Provisions of the DOL’s Final Rule:

  1. Defining and Delimiting Exemptions
    • The updated rule defines and delimits who qualifies as a bona fide Executive, Administrative, or Professional (EAP) employee exempt from FLSA’s overtime protections.
  2. Salary Threshold Increases for EAP Employees
    • Effective July 1, 2024, the minimum salary threshold for exempt EAP employees will increase to the equivalent of an annual salary of $43,888 (or $844 per week).
    • On January 1, 2025, the threshold will further increase to $58,656 (or $1,128 per week).
    • These adjustments ensure that salaried workers making less than these amounts receive fair pay for working long hours.
    • The new rule will provide additional pay to lower-paid salaried employees who often perform the same job as their hourly counterparts but spend more time away from their families.
  3. Methodology Update
    • The increase, effective on July 1, 2024, will update the present annual salary threshold of $35,568 based on the methodology used by the prior administration in the 2019 overtime rule update.
    • Starting January 1, 2025, the rule’s new methodology takes effect, resulting in an additional increase.
    • Beginning July 1, 2027, salary thresholds will be updated every three years by applying up-to-date wage data to determine new salary levels.

    4.  Highly Compensated Employees (HCE)

    • Effective July 1, 2024, the rule adjusts the total annual threshold for HCEs to $132,964 per year, including at least $844 per week is paid on a salary or fee basis.
    • Starting January 1, 2025, the annual threshold for HCEs increases to $151,164 per year, including at least $1,128 per week is paid on a salary or fee basis.

     5.  Engagement and Consideration

    • The DOL engaged extensively with employers, workers, unions, and other stakeholders before issuing the proposed rule in September 2023.
    • Over 33,000 comments were considered in developing the final rule.

Items Not Impacted By The Final Rule:

  • Exception for doctors, lawyers, and teachers
  • Exception for certain computer employees paid at least $27.63 per hour
  • Right to pay administrative and professional employees on a fee basis
  • Other non-EAP exemptions, including:
    • Outside Sales
    • Commissioned Employees of Retail or Service Establishments
  • The final rule does not change the treatment of bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary test requirement, provided such payments are paid annually or more frequently. Employers may use nondiscretionary bonuses and incentive payments earned during a 52-week period to satisfy the HCE total annual compensation threshold; however, such bonuses and incentive payments cannot be used to satisfy the weekly standard salary level portion of the HCE test.

What Should Employers Do Now?

  • Employers should review their compensation and pay practices and update employee handbooks and policies as applicable.
  • Identify exempt employees as of the July 1, 2024 deadline:
    • Who earn less than $844 per week ($43,888 per year)
    • Who are classified as an HCE according to the HCE test and are paid less than $132,964 per year
  • Identify exempt employees as of the January 1, 2025 deadline:
    • Who earn less than $1,128 per week ($58,656 per year)
    • Who are classified as an HCE according to the HCE test and are paid less than $151,164 per year
  • For the exempt employees identified, review salaries and evaluate employee classifications to determine what is necessary to comply with the new overtime rule and salary thresholds. Employers may need to increase salaries or reclassify currently exempt employees as non-exempt, which is a decision that can be complicated and may require the guidance of outside counsel.
  • In addition to the salary threshold, to qualify for the “white-collar exemptions,” employees must also meet the following criteria:
    • Be paid on a salary basis;
    • Be paid at least the designated minimum weekly salary threshold and
    • Ensure exempt employees meet the duties test for the Executive, Administrative, and Professional exemptions.
  • Colorado employees have a higher minimum salary than the federal new rule requirement. Exemptions from the Colorado Overtime & Minimum Pay Standards Order, effective January 1, 2024 (“COMPS Order #39”), are:
    • Executives/Supervisors, Administrators, and Professionals be paid at least a salary (not hourly wages) of $55,000, except $33.17 per hour for highly technical computer work.
    • Other highly compensated, non-manual-labor employees paid at least 2.25 the above salary ($123,750 in 2024).
    • 20% owners, or at a nonprofit, the highest-paid/highest-ranked employee, if actively engaged in management.
    • For various (not all) types of salespersons, taxi drivers, camp/outdoor education field staff, or property managers, the minimum salary to be considered exempt from overtime pay requirements is $1,057.69 per week or $54,999.98 annually, and employees must qualify based on specific job duties tests.
    • COMPS Order rates are expected to increase on January 1, 2025.
  • The minimum wage in Denver, Edgewater, and unincorporated Boulder County is higher than the current federal minimum wage. The minimum wage should be reviewed to determine the requirements for exempt employees working in these locations.
  • Decide whether to raise exempt employees’ salaries to meet the new minimum thresholds or reclassify exempt employees as non-exempt
    • Determine the cost of salary increases and consider the impact of wage or salary compression with other exempt employees.
    • Determine the cost of reclassifying exempt employees
      • Ascertain the average hours worked per week
      • Consider predictability and variable pay (i.e., incentive pay or commissions)
      • Determine the calculation to be used for converting exempt to hourly
      • Decide the method of payment (i.e., hourly or salaried non-exempt based on salary for fixed or fluctuating hours) or
      • Note: Before converting an employee to non-exempt status, determine if they qualify for another exemption, such as the outside sales exemption that does not require a minimum salary threshold.
    • Misclassifying employees can have significant consequences for both employers and employees. Accurate classification of employees is crucial to ensure fair treatment, protect employees’ rights, and maintain a healthy economy. Employers should diligently classify employees to avoid legal and financial repercussions.
  • Communications and Training:
    • Develop communications focused on employee relations and morale.
    • Prepare talking points and FAQs for leadership, managers, and employees.
    • Employers should provide employees with written notification about the specific changes to their exempt or non-exempt classification, compensation, and if any benefits are affected, as well as their responsibilities related to the changes, such as timekeeping, meal and rest breaks, and other requirements.
    • Provide detailed training to newly reclassified employees and their managers before the changes take effect to ensure they understand timekeeping policies and procedures, overtime approval policies, the prohibition of working off the clock, etc.

The DOL expects the new rule will benefit millions of workers across various industries and compensate employees who work more than 40 hours a week accordingly. While it is anticipated that there will be challenges and litigation opposing the new rule based on whether the DOL has statutory authority to issue salary requirements, employers cannot count on the new rule being paused before the July 1, 2024 deadline. Employers must be prepared to comply with the DOL’s new rule!