Hurry Up (But Also Wait): The DOL’s Final Rule for Overtime Exemptions and Likely Legal Challenges

At a Glance

• The final rule raises the minimum salary threshold for EAP workers to $844 per week or $43,888 per year effective July 1, 2024, and $1,128 per week or $58,656 annually effective January 1, 2025. For highly compensated employees, the threshold will increase to $132,964 in July 2024, and to $151,164 in January 2025. 
• The rule also provides for automatic salary increases every three years thereafter, beginning on July 1, 2027. 
• In addition to traditional arguments that will likely allege the rulemaking process did not satisfy the mandates of the Administrative Procedure Act, it is likely the rule will be challenged as exceeding the statutory authority of the DOL.

On April 23, 2024, the U.S. Department of Labor (DOL) issued its much-anticipated final rule raising the salary threshold for certain workers exempt from the overtime requirements of the Fair Labor Standards Act (FLSA). As written, the rule requires employers to analyze whether they must raise the salaries of their exempt workers as early as July 1, 2024, with subsequent increases to follow. 

The Old Rule 

Under the FLSA, most employers must pay their employees time-and-a-half of their regular rate of pay for all overtime hours worked unless an employee satisfies one of the many exemptions enumerated in the statute. The most commonly utilized exemptions include the executive, administrative and professional (EAP) exemptions. 

Though the FLSA itself sets no minimum salary threshold for the EAP exemptions, the DOL has long held that a worker must both (1) perform duties consistent with an EAP position, and (2) also be paid on a salary basis at a threshold amount established by the DOL before an EAP exemption will apply.

The current minimum salary threshold for the EAP exemptions is $684 per week or $35,568 per year. Highly compensated employees can also be exempt from the FLSA’s overtime pay requirements. Currently, the salary threshold for the highly compensated employee exemption is $107,432 per year. 

The New Rule 

On April 23, the DOL released its final rule increasing the salary threshold for the EAP and highly compensated executive exemptions. The final rule raises the minimum salary threshold for EAP workers to $844 per week or $43,888 per year effective July 1, 2024, and $1,128 per week or $58,656 annually effective January 1, 2025. For highly compensated employees, the threshold will increase to $132,964 in July 2024, and to $151,164 in January 2025. 

The rule also provides for automatic salary increases every three years thereafter, beginning on July 1, 2027. The DOL has stated it will establish those increases based on its evaluation of the earnings data in the United States available at the time of the increase. 

Likely Challenges 

The final rule is almost certain to face legal challenges. In addition to traditional arguments that will likely allege the rulemaking process did not satisfy the mandates of the Administrative Procedure Act, it is likely the rule will be challenged as exceeding the statutory authority of the DOL. 

In 2016, when the DOL (under the Obama administration) attempted to raise the salary threshold from $455 per week to $913 per week, a district court enjoined the rule from going into effect. The court based its ruling on its observation that “nothing in [the statutory EAP exemption] indicates that Congress intended the [DOL] to define and delimit with respect to a minimum salary level.” State of Nevada, et al. v. U.S. Department of Labor, et al., No. 4:16-cv-731 (E.D. Tex. Nov. 22, 2016). In other words, the district court believed that the DOL lacked statutory authority to set a salary threshold that would operate as a de facto salary-only test for exempt workers. The Trump administration later proposed a much more modest increase (to the current threshold of $684 per week), which simply went unchallenged, and the district court’s initial opinion was never meaningfully examined. 

Then, in February 2023, two U.S. Supreme Court justices strongly hinted that they doubted the FLSA authorizes a salary basis test at all. In Helix Energy Solutions Group, Inc. v. Hewitt, 143 S. Ct. 677 (2023), the Court considered whether paying an employee a “day rate” could satisfy the salary basis component of the DOL regulations governing the highly compensated executive exemption. A majority of the Court concluded that it did not. In a dissenting opinion, Justice Kavanaugh, joined by Justice Alito, wrote: “Although the Court holds that [the employee] is entitled to overtime pay under the regulations, the regulations themselves may be inconsistent with the Fair Labor Standards Act. . . . The Act 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 Department’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.” And, in the same case, Justice Gorsuch lamented that the employer had “forfeited” the “foundational argument” of whether the FLSA authorizes a salary basis test in the first place. 

Thus, if this question of whether the FLSA authorizes a salary basis test is properly put before the Court, it is possible that a majority of the Court could issue an opinion with the holding hinted at by Justices Kavanaugh and Alito. 

What Should Employers Do? 

Of course, employers cannot assume that a challenge to the rule will be successful. Accordingly, employers should review their existing exempt workers’ salaries and identify whether any increases may need to be made to comply with the rule’s increases. They should also, though, keep an eye on any challenges that are filed, and be prepared to adjust and adapt as needed.