The U.S. Department of Labor (DOL) issued a final rule that updates and revises the regulations issued under the federal Fair Labor Standards Act (FLSA) implementing the exemptions from minimum wage and overtime pay requirements for executive, administrative, professional, outside sales, and computer employees. The new rule entered into effect on July 1, 2024, with additional changes effective January 1, 2025.

This article discusses the key elements of the rule, the historical context of how the standard salary level has changed over time, how this can impact your organization, and what you should consider doing now.

The rule revises Section 13(a)(1) of the FLSA, which exempts executive, administrative, or professional (EAP) employees from federal (but not state or local) minimum wage and overtime pay requirements. The revisions include:

• Increases to the standard salary level below which overtime must be paid.
• Increases to the highly compensated employee total annual compensation threshold above which overtime is not required.
• The implementation of a methodology whereby the standard salary level and highly compensated employee total annual compensation threshold are reevaluated every three years to ensure the accurate reflection of up-to-date earnings data.1

The types of jobs most likely to be impacted by this change are exempt jobs that are on the cusp of being below the minimum salary level. Those jobs may fall below the minimum salary level following the increase, making an exempt job nonexempt. This could include administrative professionals, entry level business professionals, and social services workers, as well as others.

The table below outlines the revisions, and illustrates the growth in salary level thresholds, with both overall change and annualized growth presented.

• Changes in the standard salary level through July 1, 2024, reflect annualized increases that are somewhat above historical inflation rates: i.e., 5% annualized salary growth versus annual inflation averaging about 2.6%  from 2004 through 2023. However, increases established effective January 1, 2025, are far in excess of inflation (i.e., 11% vs. 2.6%), representing an actual increase in today’s dollars.
• Annualized growth of the highly compensated employee threshold though January 1, 2025, is 7% vs. the standard salary level growth of 11%, essentially making the gap between the two thresholds a bit narrower than in the past.

Final Rule: Restoring and Extending Overtime Protections

To determine which employees are covered by the EAP exemption, more than just salary is taken into consideration. Specifically, three tests must be satisfied:

1. The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test).
2. The amount of salary paid must meet a minimum specified amount (the salary level test).
3. The employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the duties test).1

According to the DOL, this rule is expected to impact the FLSA status of approximately 4 million currently exempt employees.3 Given the extent of the potential impact, it is important to use this as an opportunity to review all your employment classifications. Some jobs that are considered nonexempt may surprise you. Licensed practical nurses (LPNs), some RN nurse roles (such as those serving in call centers), staff accountants, and paralegals are examples of jobs that are commonly miscategorized as exempt.

Keep in mind that in addition to having a direct impact on jobs and employees whose FLSA status changes, reclassification can also impact the jobs that remain exempt. One potentially problematic scenario arises in career ladders when a junior level job becomes non-exempt while the next level above is still exempt, creating the potential for the junior level to earn more (with the addition of overtime pay) than an exempt level above.

Employers have a few alternatives for handling the changes; examples include increasing salaries to the standard salary level to maintain exempt status, paying non-exempt employees overtime at 1.5x the hourly rate, or eliminating the authorization of overtime hours altogether.3 It is crucial to consider the possible impact that each approach may have on your organization’s current salary structure (such as potential “eligibility compression”), overtime practices, culture, and costs. Employers should consider assessing the FLSA status of their employees as soon as possible to identify the potential impact and mitigate risk.

BDO USA’s Global Employer Services practice is equipped to assist in analyzing the impact these options may have on your organization’s current compensation structure.

Written by Judy Canavan. Copyright © 2024 BDO USA, P.C. All rights reserved. www.bdo.com

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