Long-Time Coming: Increase in the Federal Exempt Salary Threshold Expected in 2024
A lot has changed for employers since 2019, but one of the few areas of consistency has been the salary level required for an employee to be eligible for exempt status under the federal law.
The federal exempt salary threshold holds sway in any state or locality that does not have its own, higher threshold. As of January 1, 2024, the only states not utilizing the federal threshold are Alaska, California, Colorado, Maine, New York, Washington and Wisconsin. Consequently, the planned increase from the current $684 per week ($35,568 annual) to $1,059 per week ($55,068 annual) will impact most employers nationwide – significantly! Please continue to our blog for a detailed overview and analysis of this upcoming change.
Is it 2019 or 2016? DOL Proposes FLSA Exempt Salary Threshold Increase
On August 30, 2023, the U.S. Department of Labor (DOL) announced a much-anticipated notice of proposed rulemaking (NPRM) that, if implemented, would increase the minimum salary for exemption under the Fair Labor Standards Act (FLSA) by over 50% to $1,059 per week (the equivalent of $55,068 per year). The agency is also proposing adding an automatic updating mechanism to the regulations. Because the salary threshold amount referenced in the NPRM is based on 2022 data (which isn’t yet finalized), it’s likely that the annual salary threshold would be as high as $60,000 by the time a final rule is issued.
This is what we can glean now from the DOL’s NPRM:
- It would increase the standard salary level to the 35th percentile of earnings of full-time salaried workers in the lowest-wage census region (currently the South), which would be $1,059 per week ($55,068 annually) based on current data.
- It would apply the standard salary level to Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands and increase the special salary levels for American Samoa and the motion picture industry.
- It would increase the highly compensated employee (HCE) total annual compensation requirement to the annualized weekly earnings of the 85th percentile of full-time salaried employees nationally, which would be $143,988 per year based on current data.
- It would automatically update the earnings thresholds every three years with current wage data to maintain their effectiveness.
Under the FLSA, an employer may elect to treat an otherwise exempt employee as nonexempt. Keep in mind that you may not go the other way and elect to treat a nonexempt employee as exempt.
Nonexempt employees must be paid an hourly wage at or above the minimum wage and time and one-half base hourly pay for time worked in excess of 40 hours in a given work week. Such an election by an employer is both cumbersome and often unwelcome by existing exempt employees, however.
The DOL last updated the executive, administrative, and professional (EAP) exemption regulations in 2019. That update—which included setting the standard salary level test at its current amount of $684 per week (equivalent to a $35,568 annual salary)—has been in effect since January 1, 2020. In 2016, the DOL attempted to increase the salary threshold, but that initiative was initially blocked at the end of 2017 and subsequently tackled in courts.
The Department is not proposing changes to the standard duties test, consistent with its approach in both the 2016 and 2019 rules.
The DOL welcomes public comments regarding the NPRM within 60 days from the publication date in the Federal Register, or on or before November 7, 2023, unless the public comment period is extended.
The exact timeline for the DOL’s publication of a final rule, or when a final rule might go into effect, is murky. In 2019, the proposed rule and final rule took approximately 10 months. If this rulemaking process follows a similar route, the final rule could be in effect by the second half of 2024.
The DOL also has an acting secretary rather than a permanent, confirmed Secretary of Labor, which some have indicated violates the Senate’s constitutional Advice and Consent powers. It’s a virtual certainty that any final rule will be challenged in various courts.
The current DOL proposal includes a severability provision, which if enforced would have the operative effect of keeping most parts of the rule in place if one piece of the rule is eventually invalidated in court.
Two legal rulings loom large as far as prospective challenges to the DOL’s proposed salary-based changes to overtime exemptions under the FLSA:
In 2017, a Texas-based U.S. district court struck down an attempt by the Obama administration to raise the salary threshold to $47,476. By focusing too heavily on the amount of money workers make instead of their job duties, the Obama DOL expanded overtime protections to workers Congress sought to exclude, Judge Amos Mazzant said in that ruling. Judge Mazzant—an Obama appointee backed by Texas’s Republican senators—is still a sitting judge in the Eastern District of Texas.
From the U.S. Supreme Court, Justice Brett Kavanaugh has recently implied that overtime laws shouldn’t consider pay at all. In his dissent in Helix Energy Solutions Group, Inc. v. Hewitt, Kavanaugh wrote: “The [FLSA] focuses on whether the employee performs executive duties, not how much an employee is paid or how an employee is paid. So, it is questionable whether the [DOL’s] regulations—which look not only at an employee’s duties but also at how much an employee is paid and how an employee is paid—will survive if and when the regulations are challenged as inconsistent with the Act.”
The question now is whether the current proposal will share a fate with the 2016 proposal or the 2019 proposal. Keep the DeLorean at the ready, we are in for an interesting start to 2024—and beyond.
Article courtesy of content partner BLR. Author John David Gardiner is an attorney with Bodman PLC in Grand Rapids, Michigan.