FLSA Minimum Salary Increases – What Do I Do?

As of July 1, 2024, exempt white collar employees must earn at least $844.00 per week ($43,888.00 annually). As of January 1, 2025, the salary threshold rises to $1,128.00 per week ($58,656.00 annually). Thereafter, there will be automatic increases to the salary threshold every three (3) years based on cost-of-living increases.

Employers are left with two options to ensure compliance with the FLSA’s salary thresholds for exempt employees: (1) raise the salaries of exempt employees if they are currently below the new minimum; or (2) convert these employees to non-exempt employees and pay overtime for hours worked beyond 40 in any workweek.

There are a number of considerations for employers in making this decision. First, does the employee in question often work overtime? If “yes” and the employee is reclassified as non-exempt, the employee’s total compensation will likely increase. In that case, increasing the salary may be a better and more economical option than reclassifying the employee as non-exempt. Conversely, if the employee rarely works overtime, it might make more sense to reclassify the employee as non-exempt.

Second, employee morale must be considered. Many employees view their exempt status as recognition that they are performing more significant duties than their non-exempt peers. Even if their total compensation does not change, many employees may view reclassification to non-exempt status as a demotion. This may adversely affect their morale and perception of their value in the organization.

Third, if employees are reclassified as non-exempt and work overtime, the employer must decide whether to reduce the number of hours they work or how to otherwise limit working overtime. Disciplining employees who continue to work overtime, without authorization, seems harsh. Unfortunately, DOL regards this measure as necessary if the employer wishes to avoid paying unauthorized overtime. Once overtime is worked, it must be paid, even if it is unauthorized. While an employer may discipline an employee for failing to obtain prior authorization before working overtime, that may further adversely affect employee morale. Similarly, if previously exempt employees were not previously required to record their time and are reclassified as non-exempt, those employees may resent this new timekeeping requirement. This consequence of negative morale may lead to other unforeseen factors which, while difficult to quantify, may adversely affect the workplace, e.g., loss of productivity, less employee engagement, changing of company culture, turnover, etc.

Employers who have decided to reclassify exempt employees should strategically think about how to communicate and implement that change to avoid possible morale problems. If an employer’s communication hints that the reclassification is, in any way, due to the employees’ job duties, employees may wonder whether they were properly classified in the first place. Employers who raise the minimum salaries may also have to deal with internal salary compression. This may impact those workers who are already paid above minimum salary but who may perceive that their pay difference level is shrinking because their pay advantage is no longer as great in relation to the newly reclassified employee.

Remember, a non-exempt employee does not have to be paid on an hourly basis. Employers may continue to pay employees their salary and pay overtime. That salary will provide the basis for determining the regular rate in calculating overtime pay of one and one-half times (1 ½) for all hours worked over forty (40) hours.

While the DOL’s Final Rule may be challenged in court, July 1, 2024, will be here very soon, and employers should decide whether to raise salaries or reclassify employees.

If you have questions regarding this or other labor and employment-related legal issues, reach out to our Labor and Employment Law team for assistance.