Are you debating whether some of your employees should receive exempt status? Then you may want to follow the recent proposed changes to the minimum salary for exempt employees.
Currently, the minimum salary an employee needs to receive to be exempt from overtime pay is $35,568 a year. The Department of Labor is trying to raise this minimum salary. If this change becomes law, it could mean that fewer of your employees are eligible to receive exempt status.
But just because the Department of Labor proposes a change, doesn’t mean it will happen. In fact, in 2016 there was a similar proposal to raise the minimum salary for exempt employees. A last minute court decision vetoed the change one week before it was supposed to take effect.
Read on to learn about the current proposed changes, where the law stands today, and how a change to the minimum salary for exempt employees would affect your business.
The Department of Labor’s Proposed Changes
The Department of Labor is proposing to increase the minimum salary for exempt employees to $1,059 per week, or $55,068 per year.
Currently, the minimum salary an employee must receive to be eligible for exempt status is $648 per week, or $35,568 per year.
According to the Department of Labor’s frequently asked questions, this change could affect up to 2.4 million employees – employees that previously received the minimum salary for exempt status, but would not meet the criteria for the proposed increase in minimum salary.
In addition to this one-time increase of the minimum exempt employee salary, the Department of Labor is proposing to automatically update the minimum salary every 3 years. These updates would be based on earning data for the previous years.
The Department of Labor is also proposing a change to the minimum compensation requirements for “Highly Compensated Employees” (HCE). Currently, the minimum salary for an HCE is $107,432. The proposal would increase this minimum to $143,988.
Keep in mind that if your state has a higher exempt floor than that federal one, employers must honor the state minimum. For example, Maine just increased its minimum salary for exempt employees to $813.35 a week ($42,294 a year), effective January 1st, 2024.
Has The Minimum Salary For Exempt Employees Been Increased Yet?
As of January 2024, the minimum salary for exempt employees has not yet been increased.
The Department of Labor opened the proposed change for public comment on November 7th, 2023. The next step is for the Department of Labor to review the comments before deciding on a final rule some time in 2024.
However, a Department of Labor ruling does not automatically pass into law, as there is always a chance for the courts to challenge the ruling. That’s exactly what happened in 2016, the last time there was an attempt to raise the minimum salary for exempt employees.
We will update this page with any new developments.
How Would This Change Affect Employers?
If you have any employees that receive exempt status, this proposed change may affect how your employees are classified.
If this change passes, no employee with a salary of less than $55,068 per year can receive exempt status.
When an employee has exempt status, it means that the employer does not need to pay overtime for any hours that employee works beyond 40 hours a week. If you have exempt employees that earn less than $55,068 per year but often put in more than 40 hours a week, this proposed change could lead to more overtime expenses.
In addition to paying overtime, non-exempt employees need a way to log their time and request overtime. This means that you may need to make some administrative changes like setting up time tracking and an overtime approval process.
What Should Employers Do to Prepare for a Change to The Minimum Exempt Salary?
Although the minimum exempt salary hasn’t been increased yet, it will likely happen at some point in the next few years.
Now is a good time to assess exempt status for your employees, especially those that currently earn less than the new proposed minimum. Start by calculating their hourly wage by dividing their yearly salary by 40 hours a week. Then, get an idea of how many hours they currently work beyond 40 hours a week. This may not be exact, because exempt employees may not log time.
Once you have an idea of how many overtime hours you would need to pay this employee if they were not exempt, you can calculate how much overtime would cost you. Overtime pay is 150% the hourly rate. For example, if an employee makes $20 an hour, then you need to pay them $30 an hour for every hour beyond 40 hours a week.
Calculate how much this will cost you per year for that employee. If you want to keep your employee at exempt status, they will need to get a raise to meet the new proposed minimum salary. If that raise is less than the amount of money you’d have to pay them in overtime, it may be worth it to keep them exempt by giving them a raise to meet the new minimum. If, on the other hand, the employee does not typically work overtime, you may want to reclassify them as non-exempt.
If you’re anticipating that some of your currently exempt employees will be reclassified, you can also start looking into increasing efficiency in an attempt to reduce overtime hours.
Reclassifying an employee from exempt to non-exempt can feel like a demotion for some. Employees may chafe at the need to log hours, viewing this as an aspect of control or monitoring. Good communication can go a long way in minimizing low morale. After all, raising the minimum salary for exempt employees is a benefit to workers because they can be better compensated for their overtime hours. Communicate that your trust in the employee has not changed, rather logging hours is needed to stay compliant with new rules.
The minimum salary for exempt employees has not changed yet, but it’s just a matter of time before salary minimums catch up to inflation. You can prepare for these potential future changes by reassessing which of your employees are considered exempt, and reviewing your overtime processes.
Commonwealth Payroll & HR
Commonwealth Payroll and HR makes it easy to transition employees to non-exempt status, with comprehensive time tracking capabilities built right into our Payroll and Human Resources solutions. Contact us to learn more about our Human Capital Management system and customizable plans.
*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article may contain links to other third-party websites provided only for the convenience of the reader.