5 options for addressing the increased exempt salary threshold
The U.S. Department of Labor’s (DOL) final rule that increases the minimum salary threshold for exempt employees goes into effect July 1, 2024. On that date, the amount employers must pay employees to maintain their exempt status increases from $684 per week ($35,568 per year) to $844 per week ($43,888 per year).
Employees classified as exempt under the federal Fair Labor Standards Act (FLSA) do not receive overtime pay regardless of how many hours they work each week.
More salary increases to come
On January 1, 2025, the federal minimum salary threshold will rise again to $1,128 per week ($58,656 per year). After that, the threshold will increase every three years. Employers might want to avoid paying exempt employees these higher salaries.
These increases will likely result in many employees being reclassified as nonexempt (“hourly”) workers, thus losing their exempt status, which is often seen as a demotion. If they’re reclassified, they would be subject to minimum wage laws, including being paid overtime for hours worked over 40 in a workweek.
Employers will need to assess their workforce and determine the best way to deal with the changes.
To stay in compliance with the FLSA, employers have some options on how to deal with the increases.
5 options for employers to consider
The best option will vary from company to company. Some factors to consider are:
- Exempt employee salaries,
- How many hours they generally work, and
- The type of work or industry.
Employers might have to crunch some numbers to see which option works best for their situation. Here are five considerations:
- Increase employee pay to keep them exempt — increase exempt employee’s salaries to the new federal levels and continue to not pay them overtime. This might be a choice for employees whose salaries are not that far below the new levels and who usually work more than 40 hours per week.
- Reclassify exempt employees to nonexempt and pay overtime — don’t increase employees’ pay and lose the exempt status. This might be a choice for employees whose salaries are lower, and don’t usually work more than 40 hours per week. Employers might have to look to the future to decide if this would continue to be the best option.
- Reclassify exempt employees to nonexempt but limit/eliminate overtime — don’t increase employees’ pay and lose the exempt status but eliminate or put strict limits on overtime. This might be an option for employees whose salaries are lower and sometimes work more than 40 hours per week. Employees would need to be able to get the work done within the 40-hour limit.
- Reduce pay allocated to employees’ base salary to offset overtime — decrease employee base pay, lose the exempt status, allow the overtime, but use the decreased pay to offset the cost of the overtime. This option might have a negative effect on employee morale, as employees seldom view pay decreases as positive unless carefully communicated.
- Use a combination of these — use one or more of these on different employee groups, if the determination of who falls under which treatment is not based on employees’ membership in a protected class.
Whichever option employers use, they should clearly communicate the change to help ease employees’ concerns, as well as consider the future changes.
Key to remember: Employers have some options when addressing the salary threshold increases for exempt employees, but employers must consider the options carefully.