As previously reported in our May Newslfash, on April 23, 2024, the U.S. Department of Labor (“DOL”) issued a final rule (the “Final Rule”) intended to raise the minimum salary requirement for exempt employees under the Fair Labor Standards Act (“FLSA”). In the first step of this two-step adjustment, on July 1, 2024 the minimum salary requirement increased from $684 per week ($35,568 annually) to $844 per week ($43,888 annually). The second step is coming quickly – set to be effective January 1, 2025 with an increase of the minimum salary requirement to $1,128 per week ($58,656 annually).

Similar to the prior attempt to administratively adjust the salary threshold requirements, lawsuits were filed in federal district courts in Texas to challenge the implementation of the Final Rule. Employers are anxiously awaiting the next phase of one of these cases, Flint Avenue, LLC v. DOL, Case No. 5:24-cv-130.

In Flint Avenue, the initial requested relief was a nationwide injunction to prevent the Final Rule from taking effect. Although this initial request was denied, the court noted that the challenge to the DOL’s authority to issue the Final Rule was more appropriate for consideration at the summary judgment phase and that it intends to rule on this prior to January 1, 2025.^[1] As such, while the second step of the increase in the salary basis requirement remains in limbo pending the outcome of the above-referenced litigation, as we turn the page into the fourth quarter of 2024 and edge closer to the potential effective date of the second increase, employers should reinvigorate their efforts to assess the impact of the Final Rule on their current personnel and wage structures.

Notably, the Final Rule did not change or adjust the respective “duties tests” that are applicable to each of the various FLSA “white collar” exemptions. Thus, the first issue that employers need to explore is whether workers currently classified as “exempt” do, in fact, meet the requirements of that exemption irrespective of the salary basis test.

In order to meet the executive exemption, it must be demonstrated that: 

• The employee’s primary duty is to manage the enterprise, or manage a customarily recognized department or subdivision of the enterprise;
• The employee customarily and regularly directs the work of at least two or more other full-time employees or their equivalent; and
• The employee has the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees is given particular weight.

In order to meet the administrative exemption, it must be demonstrated that: 

• The employee’s primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
• The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

In order to meet the learned professional exemption, it must be demonstrated that: 

• The employee’s primary duty is the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
• The advanced knowledge must be in a field of science or learning; and
• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

(Note that for the “creative” professional exemption, the test is instead whether the employee’s primary duty is the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.)

To the extent it is determined that all workers currently classified as exempt satisfy the elements for the applicable duties test for the exemption, employers should then turn to the salary basis requirement – based on current levels and whether there will be an impact based on the second step of changes from the Final Rule.

If exempt workers are not currently earning a salary in excess of these new minimum amounts, and it is not viable to increase the base salary to reach this level, the Final Rule does allow nondiscretionary bonus compensation, incentive compensation, and/or commissions to satisfy up to 10% of the new salary threshold. Notably, this still has to be “guaranteed” compensation such that the employees must earn at least the minimum salary on an annualized basis.

Thus, while employers may be able to rely on this allowance for relief on a payroll to payroll basis, it may be necessary to pay the employee a lump-sum amount at the end of the year to make up the difference (if any) between the salary earned and the minimum level at the end of the year. In any event, employers that want to take advantage of this allowance should work to ensure that employees classified as exempt earn at least 90% of the new salary basis amount on a weekly basis.

If workers currently classified as exempt are not projected to earn at least the new minimum amount, employers should consider reclassifying the employees as non-exempt. Of course, this would require the employer to track hours worked and provide overtime compensation in compliance with applicable federal and state laws.

Koley Jessen is continually monitoring the status of the Final Rule. We encourage you to contact a member of our Employment, Labor, and Benefits practice group with any questions regarding the foregoing or if you would like assistance in strategizing how your company can comply.

^{[1] Notably, the U.S. Court of Appeals for the Fifth Circuit just recently issued a decision in a case that challenged the DOL’s authority to adjust the salary threshold requirements, determining on the facts of that case that the DOL did not exceed its authority. See Mayfield, et al. v. U.S. Department of Labor, et al., No. 23-50724 (5th Cir. Sept. 11, 2024). This was a “win” for the DOL and could have an impact on how the current challenges are adjudicated.}

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