On April 23, 2024, the U.S. Department of Labor (DOL) published its final rule, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees,” which raises the salary thresholds for “white-collar” and highly compensated employees, rendering millions of employees eligible for overtime. The final rule phases in the new thresholds beginning July 1, 2024.

The FLSA and the Executive, Administrative, Professional (EAP) Exemption

The FLSA requires employers to pay workers overtime at a rate of 1.5 times the employee’s regular rate of pay for all hours worked in excess of 40 per week. Section 13(a)(1) of the FLSA carves out an exemption to overtime pay for employees who are “in a bona fide executive, administrative, or professional capacity” (EAP), which generally applies to “white-collar” employees. However, in order to qualify for the EAP exemption: (1) the employee must be paid a predetermined and fixed salary not subject to reduction (the salary basis test); (2) the amount of salary paid must meet a minimum specified amount (the salary level test); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties defined by the regulations (the duties test). 

The new rule significantly increases the annual salary threshold (currently $35,568) in a phased approach:

• Effective July 1, 2024, the salary threshold will increase to $43,888 annually/$844 per week.
• Effective January 1, 2025, the salary threshold will increase to $58,656 annually/$1,128 per week.

The Highly Compensated Employee (HCE) Exemption

The final rule also increases the annual earnings threshold for the highly compensated employee (HCE) exemption (currently $107,432) to $151,164 for full-time salaried workers. The HCE exemption does not require a duties test analysis because the high compensation serves as a strong indicator of exempt status. The DOL will increase the HCE threshold in two phases:

• Effective July 1, 2024, the HCE threshold will increase to $132,964 annually.
• Effective January 1, 2025, the HCE threshold will increase to $151,164 annually.

Future Increases

The EAP and HCE thresholds will automatically increase every three years beginning on July 1, 2027.

Preparing for Change

It is likely the rule will face legal challenges and scrutiny, which may delay implementation. The DOL proposed a similar rule increasing the overtime exemption threshold in 2016. The rule was challenged shortly after publication, and later invalidated by a federal judge. However, employers should prepare for the final rule to take effect on July 1, 2024. Employers should be proactive and review current employee classifications to identify the impact on their workforce, adjust or redefine work duties, and reclassify employees as necessary.

Ballard Spahr’s Labor and Employment Group frequently advises employers on issues related to worker misclassification and the development of wage and hour policies. We also regularly defend employers in wage and hour litigation and DOL investigations. Please contact us if we can assist you with these matters.