On April 23, the U.S. Department of Labor (“DOL”) published a set of final regulations dramatically increasing the salary level most executive, professional, and administrative employees must be paid to retain their overtime exempt status under the Fair Labor Standards Act. In most respects, and after considering 33,000 comments, the final regulations are similar to those proposed last September. The DOL has “dug-in” on many of the proposed regulations’ controversial terms. The changes are to the salary level test, only. The DOL did not modify the other two tests most workers must satisfy to be deemed exempt, i.e., the salary basis test and the duties test.

The New Salary Thresholds

The new standard minimum salary thresholds will be phased in between now and January 2025, as follows:

Current	Effective July 1, 2024	Effective January 1, 2025
$684/week, i.e., $35,586/year	$844/week, i.e., $43,888/year	$1,128/week, i.e., $58,656/year

These increases equate to a 65% increase by the end of the year. These weekly salaries will still have to be paid on salary basis.

In addition, the compensation level for workers to be regarded as “highly compensated” and thereby have to satisfy a less stringent duties test also will increase from its current $107,432 annual pay to $132,964 effective July 1, 2024, and $151,164 effective  January 1, 2025. Overall, this rate will increase by just over 41%.

The DOL estimates the overtime exempt status of roughly four million workers will be implicated by these increases. These workers will either lose their exempt status or will have to have their salaries increased to retain their exempt status.

The DOL Also Created a New Auto-Index for Adjusting the Salary Level in the Future

The final regulations also establish a means for these rates to adjust on January 1, 2027, and then automatically increase every three years thereafter. Each new salary level will increase to that paid at the “35th percentile of full-time salaried workers in the lowest-wage Census Region.” This auto-indexing process is a new development. Until now, any increase in the FLSA salary minimums was subject to the formal regulatory process under which a rate is proposed, followed by a period allowing for public comment, and then the establishment of a new salary level. Indexing bypasses that process unless the Secretary of Labor establishes a new rate after pausing the auto-indexing for 120 days. If a change is not finalized by that deadline, then the level will automatically change. There is no automatic hold in the event of severe unemployment, high inflation, or war.

This new index will also cause the salary level to increase significantly since it is based on the pay given to salaried workers. Since each increase is designed to reduce the number of salaried workers due to their lost exempt status, the average salary of those still paid salaries will increase even more rapidly.

Legal Issues Abound

The DOL tried dramatically increasing the salary level by publishing new regulations in 2016. A district court in Texas enjoined those rules. That court was concerned about the volume of employees who would lose their exempt status overnight without some clear and statutory basis for that to occur.

These new regulations will be vulnerable to a similar challenge, but perhaps now with more refined arguments. For instance:

• Expanding on the court’s rationale for the injunction issued in 2016, the fact that so many workers may lose their status may rise to the level of a “major question”, a standard often deployed in recent years by the U.S. Supreme Court.

• Another basis may be the general right of the DOL to create a salary level test in and of itself given that the statute does not suggest that salary level matters; what matters is if the employee is an executive, professional, or administrative employee. This concern was raised by at least one justice, but the issue of the test’s legality was not before the Court at that time. The Supreme Court has been wary about how much deference should be given to regulators.

• In addition, many in the business community believe that auto-indexing is contrary to the statute and ordinary administrative law standards.

Lawsuits challenging the new regulations are assured, and these regulations may be enjoined as they were in 2016. But the outcome of any such litigation is obviously unknown for now.

What Should Employers Do Now?

While the first change becomes effective on July 1, 2024, the DOL has also said that it will give employers until January 1, 2025, to bring their compensation plans into compliance. So that gives employers some breathing room to see if the courts will intervene. For this reason, employers may resist the temptation to overreact by quickly changing their compensation systems to conform to the new levels.

Still, employers should not totally sit back and wait for a court to put these regulations on hold. Instead, they should consider taking action now by auditing the exempt status of those on staff who are currently regarded as exempt. For those employees who meet the salary basis and duties tests, employers can then determine whose exempt status may lapse if the new regulations go into effect. As to that smaller subset of employees, employers can consider their options. Part of that process mandates a consideration of how often currently exempt employees work more than 40 hours during a workweek and how far their current pay falls below the new salary levels. Once that analysis is complete, employers can consider who should be reclassified as non-exempt (and perhaps limit their ability in the ability work overtime), who should have their base pay reduced so that the overtime they may regularly work will be cost neutral as compared to the current earnings, and who should have their weekly salaries increased to retain their exempt status. Employers also can consider how any changes may compress their compensation structures and they weigh their options for dealing with the compression.

Once this is done, employers should consider waiting to make changes for as long as they can so that changes are not made only to later learn that new regulation has been enjoined in whole or in part. Once changes are implemented, they will be hard to reverse.

Dykema’s attorneys will be closely monitoring these legal developments. They are also available to counsel employers on how to best plan for complying with these regulations if needed.