Under new federal regulations issued by the Department of Labor (DOL) effective as of July 1, 2024, employees who are not paid a salary of at least $844 per week ($43,888 per year) are eligible for overtime pay, irrespective of the nature of the work the employee is performing and the level of authority the employee has in the organization.  An additional increase in this minimum salary threshold is scheduled to take effect in six months (on January 1, 2025), at which time any employee who is earning less than $1,128 per week ($58,656 per year) will be deemed non-exempt.

How Salary Level Relates to Overtime Eligibility

Federal law provides that all employees are presumed to be entitled to overtime, unless they fall into one of several discrete categories of exceptions that make them “exempt” from the overtime pay requirements.  As we discussed in a separate blog article, to qualify as exempt:

• • the employee must be paid on a “salary basis,” meaning the same weekly amount, no matter how many hours the employee actually works in any given week;
  • the employee’s work must satisfy a “duties test,” meaning the nature of the employee’s work must satisfy one of several tests (g., administrative, executive, professional, computer or outside sales); and
  • the employee must be paid a minimum weekly salary, which is set by DOL regulations.

If an employee is not paid at least the minimum weekly salary, then the employee must be paid overtime for hours worked in excess of 40 in a week.  The employee cannot be classified as exempt under federal law, even if the employee is the CEO of the organization.

In 2004, which was the last time the DOL successfully overhauled its regulations on overtime and exempt status, it introduced a modified test for highly-compensated employees, under which employees who were earning a six-figure salary were more presumptively exempt, and only had to satisfy one element of the duties test.

Maximizing Overtime Eligibility

The DOL takes the position that most employees should be overtime-eligible, and it has repeatedly endeavored to use the salary threshold requirement as a shorthand method of reclassifying large segments of the workforce as non-exempt.to achieve that objective.  In 2016, the DOL sought to more than double what was then the minimum salary threshold for exempt status, and a federal district court in Texas invalidated that increase, largely on the grounds that it was so substantial, relative to the salaries of large numbers of individuals who otherwise met the other two parts of the exemption analysis, that it “untethered the salary level test from its historical justification.”

Following that court decision, the DOL introduced a much more modest increase to the salary threshold in 2020, setting the minimum weekly salary at $684 ($35,568 annualized), which at the time aligned to the 20^th percentile of earnings in relation to the lowest- wage Census Region and/or the retail industry nationally.  The new $844 weekly rate is reportedly based on that same methodology, increased to 2024 earnings levels.  The planned increase for 2025 to $1,128 weekly is based on a different benchmark and aligns with the 35^th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (which is the South).

The salary level required for the highly-compensated employees test has increased under the DOL’s new regulations from a 2020 figure of $107,432 to $132,964, which the DOL explained aligns to the 80^th percentile of full-time salaried workers.  The threshold salary for highly-compensated employees is scheduled to increase again in 2025 (to $151,164) by maintaining the current benchmark of full-time salaried workers nationally, but raising the threshold to the salary for the 85^th percentile of such workers.

To prevent the threshold from stagnating again, the DOL’s recent regulations provide that beginning on July 1, 2027, the minimum salary level for exempt status will be updated every three years. Future increases are intended to align with the 35^th percentile figure for full-time salaried workers nationally and use the 85^th percentile as the threshold for highly-compensated employees.

Part-Time Employees Present an Additional Wrinkle

FAQs issued by the DOL expressly provide that the minimum salary level is not pro-rated for part-time employees.  To be classified as “exempt” under federal law, they too must receive a minimum weekly salary of $844, no matter how many hours or days per week the employee works.  Practically speaking, the DOL noted, a part-time employee by definition is usually working less than 40 hours.  Therefore, even if classified as non-exempt, such an employee usually will not have worked sufficient hours to be eligible for overtime.

Employers also may pay their part-time workers on a salaried basis, even if classified as non-exempt.  Employers must still ensure that the part-time worker’s weekly salary at least equals minimum wage (when measured against the actual hours worked on a weekly basis), and that the employee receives overtime pay for any week in which the employee actually works more than 40 hours.

Will It Stand

The DOL’s recent increases in the minimum salary threshold are already being challenged in multiple lawsuits.  One suit, brought before the same federal district court in Texas that considered this issue in 2016, recently issued an injunction that temporarily precludes application of the higher salary threshold, citing the same reasoning that the court had applied to strike down the 2016 regulation.  Notably, however, this time the court only granted the injunction against enforcement in the state of Texas.  Employers in the other 49 states are currently still required to ensure that employees are paid overtime if they are not paid a salary of at least $43,888 per year.

The U.S. Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo (June 28, 2024), which we discussed in a separate blog post, increases the likelihood that the regulation will be overturned.  Under that decision, courts are empowered to make an independent assessment of whether an administrative agency has acted within its statutory authority and need not defer to the agency’s expertise when reviewing administrative rulemaking.

Remain Mindful of State Laws

As we discussed in a February 2024 blog post, a handful of states – including New York and California – have their own minimum salary thresholds under state overtime requirements.  Even with the recent increases to the FLSA regulations, those state law thresholds remain higher, and employees in those states cannot be classified as exempt unless the employee is paid a salary that meets or exceeds the state minimum.

Where This Leaves Employers

While the new federal salary threshold regulations may not survive judicial review, no court has invalidated them to this point and none outside of Texas has suspended their enforcement.  Employers in the other 49 states must, therefore, review their workforces and ensure that employees who are classified as exempt are being paid an annual salary of at least $43,888.  Where that is not the case, employers have three options – increase the salary, change the classification, or risk the consequences of noncompliance.

By Tracey I. Levy and Delaney Rechenberg