A recent rule will significantly raise the Fair Labor Standards Act’s (“FLSA”) salary thresholds for the highly compensated employee (HCE) exemption from overtime pay, posing challenges for employers. The new rule increases the annual compensation requirement for HCE’s from $107,432 to $132,964 on July 1, and to $151,164 on January 1, 2025. These thresholds will update every three years starting July 1, 2027.

The HCE exemption, part of the FLSA’s “white-collar” executive, administrative, and professional exemptions, allows certain employees performing office or nonmanual work to be exempt from overtime if they meet the salary threshold and perform at least one duty of an exempt executive or administrative employee. The upcoming salary increases will impact many employees who currently qualify under the relaxed duties test for HCE’s.

To qualify as an HCE, employees must meet several criteria:

1. Earn at least $132,964 annually (increasing to $151,164 in 2025), with a minimum weekly salary.
2. Perform office or nonmanual work.
3. Regularly perform at least one exempt duty or responsibility of an executive, administrative, or professional employee.

For example, an employee may qualify as an exempt HCE if the employee customarily and regularly directs the work of two or more other employees, even though the employee does not meet all of the other requirements in the standard test for exemption as an executive.

Employers face options like reclassifying HCE’s as nonexempt, increasing compensation to maintain HCE status, or adjusting job responsibilities to meet full executive, administrative, and professional (EAP) duties. Each option has its challenges, such as employee dissatisfaction with reclassification or the complexity of restructuring roles.

The following strategies could be considered by employers in light of the new increases, including:

1. Identifying affected positions for both the initial and second increases,
2. Evaluating the impact of raising salaries and determine if there is a benefit in reclassifying employees, or
3. Developing a strategy to implement changes, including employee communication and updating job descriptions.

Employers must be in compliance with the salary basis test and the duties test for exempt status, as salary level is only one prong of the eligibility test.

This rule change is an opportunity for employers to review and confirm the exempt status of their workforce under both federal and state laws. It is also an opportunity for employees to confirm that their status is appropriate.