In November, the April 2024 Department of Labor’s (DOL) final rule raising the salary thresholds for being exempt from overtime under the Fair Labor Standards Act was vacated by the U.S. District Court for the Eastern District of Texas. The ruling applies nationwide and means that employers do not currently need to increase employee salaries on January 1, 2025 to maintain their exempt status. It also vacates the July 1, 2024 increase. For additional context about the final rules that have now been vacated by the court and historical FLSA rates and increases, see BDO’s prior article DOL Releases Final Rule to Increase Salary Thresholds for FSLA White-Collar Exemptions.
What does the court ruling mean for your company? The July 1, 2024 increase was significant (a 23% increase in the weekly standard salary which translates to a $160 increase, from $684 to $844). For companies that implemented this pay raise, the court’s decision may have potential financial implications for the employees and the employer, and it may also impact future hiring decisions. The table below summarizes some implications and considerations under various scenarios.
| Scenario and Implications | Considerations |
| If the company planned to increase pay on January 1, 2025 to be above the FLSA threshold, that is no longer necessary. | Communications: If you communicated future pay updates to employees and do not plan to implement them, it is important to carefully walk this back in a sensitive and timely manner. Turnover risk: While the labor market has cooled, employees continue to look for opportunities to earn more money. The cost of living is still high, inflation continues. Take steps to ensure your best performers are paid commensurately with their contribution. |
| If the company implemented an increase on July 1, 2024 to be above the revised FLSA threshold, the potential solutions for current employees are highly dependent on cost structure and labor needs. | No change to pay: We anticipate that most employers will not walk back the increase made in July. This is the best outcome for employees. Walk back pay: If the July 2024 pay increase is causing the company significant financial hardship, it may be prudent to walk back the increase in future paychecks. However, this might adversely impact employee morale and potentially increase turnover. Hold pay levels going forward: An interim approach is to give no pay increase or minimal increases to those who received the pay bump in July. This would continue until pay levels eventually align with those for the rest of the organization and market. However, this may still impact morale and fuel turnover. |
| If the company implemented an increase on July 1, 2024 to be above the FLSA threshold, how does it pay future hires? | If the company wants to pay new hires at the pre-July level, there are two considerations: Internal equity: the July 2024 increase was significant (23%); thus, if you hire (either an internal promotion or external hire) at the previous threshold and if the roles and experience are comparable to those of individuals paid the higher wage, then the company may risk a claim of unequal pay or disparate treatment. If the company “red circles” the incumbents at the higher pay rates and states a policy of limiting or withholding future raises until pay is aligned, this may protect the employer – but it is important to seek advice from a knowledgeable labor lawyer. External market: It has been several months since the first threshold was established, and employers may find that, due to the DOL’s FLSA final rules (which have now been vacated by the court) , local market pay rates may have increased for the positions that are on the edge between non-exempt and exempt. |
It is also important to remember that the salary test is only one of several tests. Employees are exempt only if they meet the salary threshold and are bona fide executive, administrative, or professional employees.
Unless the company decides to retain the current pay levels for current and future employees, we encourage consultation with a knowledgeable labor lawyer prior to implementing any changes. and to vet any communication about this issue.
How BDO Can Help
BDO USA’s Global Employer Services practice is equipped to assist in analyzing the impact these options may have on your organization’s current compensation structure.