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Key Upcoming Changes to United States Wage: What Steps Should Employers with US Employees Take?
In April 2024, two United States agencies with authority to regulate employment and competition announced major changes to how most employers must operate in the US. The US Department of Labor (DOL) announced a significant increase in the amount of salary an employee must receive before they can lawfully be paid on a salaried, rather than hourly, basis. The US Federal Trade Administration (FTC) announced a long-anticipated rule banning all non-compete agreements with workers, subject to few narrow exceptions. Although the fate of each of the announced rules is in question, with both rules under challenge in courts, employers would be wise to prepare now for potential enforcement later this summer. In part one of this blog we discuss the DOL Salary Level Increase.
DOL Salary Level Increase – Anticipated to be Effective 1 July 2024
In the US, federal law requires that each employee is paid an hourly rate for all hours worked unless the employee is exempt from those rules. Those who fall within the rules (known as “non-exempt employees”) must receive their hourly rate for the first 40 hours worked per week plus 1.5 times their hourly rate for each hour in excess of 40 in a week. In contrast, those who are not
subject to the rules (known as “exempt employees”) can be paid a static salary regardless of how many hours are worked each week, provided they meet the applicable tests.
To lawfully classify an employee as “exempt” and therefore one who can be paid on a salary basis and without any obligation to pay overtime, the first step is to determine if the proposed salary is sufficiently high to pass the “salary level” test. It is this test that the DOL has announced will change, effective 1 July 2024. Currently, employees must receive at least $684/week (annualized to $35,568 per year) to pass the salary level test at the federal level. The new DOL rule will increase the minimum required annualized salary, first to $43,888 on 1 July 2024 and then to $58,656 on 1 January 2025, with updates to the threshold every three years thereafter. This is a dramatic jump that, over a 6-month period, will significantly increase the number of employees who are entitled to overtime in the US.
However, the fate of the rule is in question because business groups recently filed a lawsuit challenging the authority of the DOL to raise the salary threshold, which arguments were successful at halting a similar effort by the DOL in 2016 and could result in changes to the implementation or content of the DOL rule. Given this uncertain landscape, what should employers with US employees do?
- Review Existing Salaries: identify all US employees classified as “exempt” to determine if their salaries will meet the new federal thresholds in July 2024 and January 2025.
- Confirm Applicable State Law: identify whether there is an applicable state salary threshold that is higher than the new federal threshold. Some states, such as New York and California, impose a higher threshold than the federal salary level.
- Determine Approach: determine whether to reclassify employees whose salaries fall below the new federal or applicable state threshold as “non-exempt” and eligible for overtime or whether, instead, to raise salaries to keep aligned with the increased salary level.
- Monitor Enforcement: be prepared to implement changes to salary or classification, mindful, however, that the rule could be overturned or delayed at the last minute.
The application of the exempt/non-exempt rules is complicated; in addition to the salary level test, there are tests requiring that exempt employees perform certain types of duties and special rules for those working in outside sales or with computers. For further guidance on this or other US employment law questions, contact Michelle Bush.
