It's 2024! Do You Know Who's Exempt?

You definitely can be forgiven if you don't know the minimum salary level for exemption from the Fair Labor Standards Act (FLSA).

Let me explain.

The FLSA is the basic federal law requiring payment of a minimum wage (currently $7.25 per hour) and payment of overtime for working more than 40 hours in a workweek. (Note that many states require a higher minimum wage, but that's a different discussion.)

The FLSA further says that the two requirements just mentioned — minimum wage and overtime — do not apply to “any employee employed in a bona fide executive, administrative, or professional capacity,” as those terms are “defined and delimited” by the U.S Department of Labor (DOL). Traditionally, DOL has defined the terms "executive, administrative, or professional" using a combination three-part test: duties, salary basis, and minimum salary level. Notably, the FLSA itself does not specify any minimum salary level for an employee to qualify for the executive, administrative, or professional exemption.

In 2019, DOL set the minimum salary level for exemption equal to the 20th percentile of weekly earnings of full-time, salaried workers in the South, the lowest wage part of the country. This raised the salary level for exemption from $455 per week to $684 per week (or from $23,660 annually to $35,568 annually) and had the effect of rendering about 1.2 million previously exempt workers nonexempt.

In 2024, DOL again raised the minimum salary level for exemption — this time from $684 per week to $844 per week (or from $35,568 annually to $43,888 annually) starting on July 1, 2024. This change used the same 20th percentile metric mentioned above; it just updated the data. Approximately 1 million employees became nonexempt — i.e., eligible for overtime pay — on July 1, 2024 as a result of this change.

The 2024 regulation would have made further changes to the test for exemption, as well. First, it would have raised the salary level from $844 per week to $1,128 per week (or from $43,888 annually to $58,656 annually) starting on Jan. 1, 2025. This planned increase departed from the 20th percentile metric that previously was used. Instead, starting on Jan. 1, 2025, the salary level would be based on the 35th percentile of weekly earnings of fulltime, salaried workers in the lowest-wage Census Region and/or retail industry nationally. DOL predicted that this change would result in an additional three million workers becoming nonexempt. Also, the 2024 regulation enacted a mechanism to automatically increase the salary level triennially based on contemporary earnings data. The first automatic change — which would not require notice and comment — was scheduled to occur on July 1, 2027.

The 2024 rule did take effect on July 1, 2024, requiring employers to make changes in how they treated previously exempt employees earning between $684 and $844 per week. Some of those employees became nonexempt, while others got raises and remained exempt. But several plaintiffs sued to stop the rule, arguing that it exceeded DOL's authority to “define and delimit” the exemptions. To simplify, the parties argued that Congress' use of the expression “bona fide executive, administrative, or professional capacity” indicates Congress' intention that the determination of whether an employee is exempt or nonexempt be based primarily on the employee's “capacity,” i.e., duties. While the employee's salary has traditionally been a component of the exemption test, a rule that moves 4 million workers from the exempt column to the non-exempt column in one fell swoop ignores that focus on duties and is beyond DOL's authority. In the court's words, "Congress elected to exempt employees based on the capacity in which they are employed. It’s their duties and not their dollars that really matter.”

To make a long story short, a judge in the United States District Court for the Eastern District of Texas agreed with the plaintiffs and threw out the entire 2024 rule. The judge's ruling applies nationwide. As a result, the minimum salary for exemption is once again $684 per week. A copy of the decision is at https://www.cupahr.org/wp-content/uploads/OT-SJ-Decision.pdf. DOL could appeal, but the upcoming change in administration makes it unlikely that an appeals court will get the opportunity to rule.

One warning: Many employers make the same mistake that the court found DOL made — putting too much emphasis on salary and ignoring the importance of the duties test when making exemption determinations. Don't fall into that trap.

If you have any questions about the proper way to make exemption determinations or any other wage-hour matter, please get in touch with the author or your regular Brown Rudnick contact.