Yes, friends, the Department of Labor's (DOL) new Final Rule raising the minimum salary requirements for exempt employees are about to go into effect as of July 1, 2024. If you feel like we've been here before, you are right. The last time the DOL tried something like this during an election year it didn't work out so well and the litigation that followed went long past Election Day.
New Salary Rates
The DOL's Rule raises the minimum salary requirements for exempt workers in two phases. Here's what employers can expect:
- Current minimum salary $684/ week ($35,766/ year)
- July 1, 2024 -$844 per week ($43,888/ year)
- January 1, 2025 -$1,128/week ($58,656/ year)
- July 1, 2027, and every 3 years thereafter, the minimum salary threshold will be automatically increased
The Rule also ushers in other wrinkles to include: (a) non-discretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to Ten Percent (10%) of the minimum salary level; and (b) to qualify for the FLSA's highly compensated employee exemption, an employee must be paid a total annual compensation of at least $132,964 (effective July 1, 2024) and then at least $151,164 (effective Jan. 1, 2025), paid on a salary basis; and (c) for the highly compensated employee exemption, the exempt worker only has to satisfy one job duty instead of the entire job duties test. Beware- recent caselaw makes it clear that traditional blue collar jobs won't meet the test.
Think of all the problems these big jumps in the minimum salary test can cause. While a nearly 25 % raise is a lot, you must also look to 2025 when the salary goes up yet again less than half a year after the first bump, and in a greater amount than the first phase. While employees will be happy, employers will definitely need a game plan.
The DOL perspective on all this is that Four Million employees are not getting paid enough and so they need a raise. The DOL's logic follows that if you have to pay more to salaried employees, (who are undoubtedly overworked), the DOL encourages you to just pay these employees on an hourly basis.
As we all know, that is much easier said than done. Employers are currently facing many legal challenges; the independent contractor rules have tightened up; the Federal Trade Commission is trying to eliminate non-compete agreements and, in 2025, employers are going to have to pay more money for the same job the employee did last year for nearly half the price.
What to do?
Any time an employer is faced with an FLSA challenge the first step is to evaluate all your job classifications to see if personnel are truly exempt or teetering on the line. You may find employees who are basking in the overtime-pay-glow who could be exempt from overtime, and those salaried employees who don't come close to meeting any of the exemptions but feel more important when they are salaried.
Once you have evaluated your workforce, tough decisions have to be made. On the one hand, you will have more control over non-exempt employees as they are only paid for time served. Great in theory except for those rogue employees who are told not to work overtime and do so anyway. While you must pay employees for any hours they "suffered" to work for their employer you can still discipline them for not following your overtime rules, including prohibitions against working overtime unless it is first authorized in writing by a member of management.
Employees who have been used to receiving the same paycheck every week may complain about switching to an hourly status. Can you keep paying them a salary once you decide to no longer categorize them as exempt? Of course, you can but, if they ever work more than 40 hours in a week, you will owe them overtime wages. And there can be no rebate for those weeks they only worked 30 hours, but you still paid them for 40 hours. It can get even more complicated if you have not established a regular pay rate, as the pay rate could be routinely subject to change for overtime purposes. Best practices suggest that if you decide to provide a non-exempt employee with a fixed salary, establish your agreed hourly rate before you make the change. If they are working only 30-hours/week and not the 40 you dreamed of, then the employee should be counseled so they can explain why that is the case. It's up to you if you want to eliminate the set salary; you can always convert them to a regular hourly rate as long as you tell them you are doing so in advance of taking action.
Put it in Writing.
A written wage memo in all these scenarios is crucial. It's not uncommon for employees to go from hourly to salaried and think they are being robbed. Likewise, someone who has found status in being paid a salary may feel betrayed when they have to punch a time clock. That's why a Memorandum of Understanding (MOU) on the new pay-rate is crucial. Nothing fancy – just outline pay terms, the hours you expect the employee to be on duty and set the workdays. This is especially invaluable if you have any remote workers. Contrary to popular opinion, there is no Constitutional right to work from home.
Finally, be prepared to explain to the employee why you are making the change and how it will benefit them. Don't forget to include an "employee at will" disclaimer in your MOU and any other written agreements discussing terms and conditions of employment. And for Heaven's sake, if it's not signed and dated it didn't happen. These strategies and others from your employment law legal counsel can help make this less jarring this time around. Unless, of course, legal battles or political changes in November make all of the DOL's new Rule go away. I guess it would just be déjà vu all over again!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.