Employers need to make sure they are paying exempt (salaried) employees enough under federal law, because the Department of Labor (DOL) released its final rule raising the salary level threshold for exempt employees.

Effective July 1, 2024, the federal salary threshold will increase to the equivalent of an annual salary of $43,888 ($684/week), with a further increase to $58,656 ($844/week) on Jan. 1, 2025. The July 1 increase updates the current annual salary threshold of $35,568 ($684/week). 

The annual compensation threshold for “highly compensated employees” (HCE) will also increase. Salary thresholds will update every three years based on the latest earnings data.

Why does this matter? The Fair Labor Standards Act provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional, and outside sales employees. The statute also exempts certain computer employees. To qualify for exemption, employees must meet certain tests regarding their job duties and be paid on a salary basis at not less than the applicable threshold.

Employers need to consider taking action: If salaried employees will earn less than the new overtime thresholds, employers need to give them raises to take them above the applicable threshold or pay overtime when these employees work more than 40 hours in a workweek. The clock is ticking, as the first salary threshold increase goes into effect July 1.

The final rule differs from the DOL's proposal published last year, which set forth lower standard and highly compensated employee thresholds and did not include the incremental increase that will start July 1.

The Jan. 1, 2025, threshold increase was calculated using the methodology that will be used every three years. The standard salary threshold will increase every three years to the 35th percentile of weekly earnings for full-time non-hourly employees in the lowest rate Census Region. HCE thresholds will increase on the same schedule based on the 85th percentile of full-time non-hourly employees nationally. Increases will be subject to a comment period and could be delayed where “economic or other conditions merit.”

The scheduled threshold increase to $58,656 is based on the 35th percentile in the lowest wage region (currently the South), and $151,164 is the 85th percentile nationally. The first automatic increase will occur on July 1, 2027, with notice published 150 days in advance.

Industry groups have begun laying groundwork to challenge the new rule (similar to the challenges made in response to an Obama-era rule to increase salary thresholds), but employers should start planning by identifying affected currently exempt (salaried) employees and making strategic decisions on whether to increase their salaries or convert them to nonexempt (hourly) status.