Big pay-level hikes on the way for white-collar overtime exemptions 

June 3, 2024

For the second time in five years, the Department of Labor (DOL) has changed the rules setting the salary and compensation levels for workers exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA). The latest rule implements a two-step process steeply increasing the salary thresholds, first on July 1, 2024, and again on Jan. 1, 2025. The rule also changes the methods of setting the standard salary level and the highly compensated employee (HCE) threshold. In addition, DOL will adjust those salary levels every three years, with the first adjustment on July 1, 2027. DOL estimates 4.3 million employees could become eligible for overtime under the revised salary thresholds within a year of the July 1 increase. These changes may indirectly affect employee benefit plans.

The final rule updates two key amounts for exempting employees working in an executive, administrative or professional (EAP) capacity. This “white-collar exemption” excuses employers from having to meet FLSA’s minimum wage and overtime requirements for some higher-paid employees. DOL last raised the overtime exemption in 2019.

Standard salary level. EAP employees are exempt if they are paid a predetermined and fixed salary that meets two conditions:

• Isn’t subject to reduction based on the quality or quantity of work performed
• Exceeds a certain minimum level — currently $684 per week ($35,568 per year), but increasing to $844 per week ($43,888 per year) on July 1, 2024, and $1,128 per week ($58,656 per year) on Jan. 1, 2025

Nondiscretionary bonuses and incentives (including commissions) paid at least annually can form up to 10% of the salary.

HCEs. An additional exemption applies to HCEs (who are defined differently for this purpose than for nondiscrimination testing). HCEs who satisfy the “minimal duties test” — a more relaxed duties standard than for other employees — are currently exempt if their salary exceeds the standard level, and their total compensation (including commissions, nondiscretionary bonuses, and certain other nondiscretionary compensation) exceeds $107,432 per year. This threshold increases to $132,964 on July 1, 2024, and $151,164 on Jan. 1, 2025.

In addition to updating the thresholds for wage growth since the 2019 revision, the final rule makes two significant changes to the methodology for setting the standard salary and HCE levels:

• Higher benchmarks. The standard salary level will be set at the 35th percentile (up from the 20th percentile) of the weekly earnings of full-time salaried workers in the lowest-wage census region. The HCE threshold will be set at the 85th percentile (up from the 80th percentile) of the weekly earnings of full-time salaried workers nationwide. Although the final rule generally is effective on July 1, 2024, this methodology change doesn’t take effect until Jan. 1, 2025, leading to a two-step increase for these thresholds (on July 1, 2024, and then Jan. 1, 2025).
• Triennial inflation indexing. The standard salary level and HCE threshold will be indexed for inflation every three years on July 1, with the first update on July 1, 2027. The proposal that preceded the 2019 rule would have indexed these amounts every four years, but that provision did not survive in the final rule.

The increased thresholds could have an indirect impact on employee benefit plans.

The overtime rule changes could affect retirement plan costs and nondiscrimination testing results:

• Costs. Retirement plan sponsors that pay overtime to more employees under the new rule could see higher benefit costs, depending on factors such as what the underlying plan benefit formula is and whether the plan counts overtime in the earnings used to determine benefits.
• Nondiscrimination testing. The rule should not substantially change the number of HCEs (as defined for nondiscrimination purposes) and nonhighly compensated employees (NHCEs) since any additional overtime is unlikely to bump NHCEs to HCE status. However, a plan’s NHCE accrual rates and deferral/contribution percentages may fall if the plan excludes overtime from the pay used to determine benefits but includes overtime in the pay used for nondiscrimination testing. Since HCE accrual rates and deferral/contribution percentages won’t be affected — HCEs probably aren’t getting overtime now and won’t be after the rule change — overall testing results may suffer.

The increase in salary thresholds means that some currently exempt employees will be reclassified as nonexempt. Employers should check whether eligibility for any health or fringe benefits (like adoption or education assistance, employee discount programs, or group term life insurance) is conditioned on an employee’s exempt or nonexempt status. A change in the population of eligible employees for any particular benefit could affect its cost and effectiveness. Employers should also review the implications for any group health plan waiting periods tied to exempt/nonexempt status.

A legal challenge seeking to overturn the new rule has already been filed, arguing that DOL acted arbitrarily and capriciously in setting the new thresholds. A federal court overturned a 2016 DOL rule that contained a similar automatic inflationary index provision for the salary thresholds. That ruling also held that DOL had exceeded its authority by establishing a salary level so high that it effectively eliminated the duties test. Legal challenges could delay the implementation of the new increases, but given the looming July 1 deadline, employers will still want to review payroll data and prepare to start classifying employees according to the new thresholds.

• Plano Chamber of Commerce v. US Dep’t of Labor, No. 4:24-cv- 468 (complaint filed E.D. TX, May 22, 2024)
• Final rule (Federal Register, April 26, 2024)
• Nevada v. US Dep't of Labor, 275 F. Supp. 3d 795 (E.D. TX, 2017)

• Final overtime rule raises pay levels for white-collar exemption (Oct. 1, 2019)