The FLSA’s Minimum Salary Rules Increase
The recent changes to the Fair Labor Standards Act (FLSA) White Collar exemption bring substantial implications for small businesses. As of 2024, the U.S. Department of Labor (DOL) has implemented a raise in the minimum salary threshold for the majority of employees not paid hourly but paid a salary. The current exemption threshold is $684 per week ($35,568 per year) – but is set to increase by a whopping 64% over the next six months!
This is how the changes break down:
Increase in Minimum Weekly Salary
July 1, 2024 - The minimum weekly salary will increase to $844 per week, equivalent to $43,888 per year, effective July 1, 2024.
January 1, 2025 - The minimum weekly salary will increase to $1,128 per week, equivalent to $58,656 per year.
Increase in Highly Compensated Employee (HCE) Exemption: The HCE exemption total annual compensation will increase to $132,964 per year on July 1, 2024. This threshold will then increase on January 1, 2025, to $151,164, equivalent to the 85th percentile of full-time salaried workers nationally.
Future Updates: The earnings thresholds will be updated every three years based on up-to-date wage data.
We’re here to unpack what this means for our small business clients.
So What is the White Collar Exception?
The FLSA establishes standards for minimum wage, overtime pay, recordkeeping, and youth employment. The White Collar exemption pertains to executive, administrative, and professional employees who meet specific criteria related to their job duties and salary.
Historically, to qualify for the White Collar exemption, employees must meet three conditions:
Salary Basis Test: Employees must receive a predetermined and fixed salary that is not subject to reduction based on work quality or quantity.
Salary Level Test: Employees must earn at least the specified minimum salary.
Duties Test: Employees’ job duties must primarily involve executive, administrative, or professional tasks as defined by the FLSA.
If a business is paying salaried employees below the new limits, the increased salary threshold and scheduled increases present several challenges:
Increased Payroll Costs: The new thresholds mean that employees that qualify under the Duties Test of the White Collar exemption, but who aren’t paid higher than the new minimum salary thresholds, will be eligible for overtime pay. Without careful management of these positions, this increase can strain employers’ financial resources and significantly impact payroll budgets.
Reclassification of Employees: Employees who no longer meet the new salary threshold must be reclassified as non-exempt, making them eligible for overtime pay. This reclassification can complicate payroll management and necessitate adjustments to work schedules to control overtime costs.
Operational Adjustments: To manage the increased labor costs, businesses might need to redistribute workloads, alter staffing levels, or implement more stringent time-tracking measures to minimize overtime expenses.
Budgetary Constraints: The increased salary threshold may necessitate reallocating budgets, potentially impacting other business areas such as marketing, research and development, or capital investments.
Strategies for Compliance
If this change will impact your business you can adopt several strategies to ensure compliance with the new regulations while maintaining operational efficiency:
Conduct a Salary Audit: Review current employee salaries and job classifications to identify those affected by the new threshold. This audit will help determine which employees need salary adjustments or reclassification.
Implement Time-Tracking Systems: For employees who are reclassified as non-exempt, establish robust time-tracking systems to monitor hours worked and manage overtime effectively.
Adjust Workloads: Consider redistributing tasks among employees to minimize the need for overtime. This can involve cross-training employees to handle multiple roles or hiring part-time workers to share the workload.
Consult Legal and HR Experts: Engage with legal and human resources professionals to navigate the complexities of the new regulations. These experts can provide valuable guidance on compliance and help mitigate potential legal risks.
There is also a good chance that this change will be struck down by the courts. Similar measures to change the exemption have been blocked by the courts and multiple lawsuits have already been filed, so it’s possible that this law will not be implemented – we’ll be tracking those developments.
A final note worth mentioning again – this proposed rule change doesn’t prohibit small business owners from having salaried employees under the new thresholds. It just means that you would have to track those employees' time and pay them overtime.
We're here at Harmony Group to advise our clients on best practices regarding this change.