Synopsis of This Legal Alert
The federal minimum salary threshold for exempt employees is now back to $35,568—the same rate in place prior to July 1 of this year. Employers who modified a manager’s pay to meet the July 1, 2024 increase can either maintain current pay structures or revert back to their previous salaries. Similarly, planned adjustments for the now canceled January 1, 2025 increase, are no longer necessary.
Not sure about the distinction between exempt and non-exempt employees? CEDR members can access our extensive guide on this topic here. Non-members can get a brief overview here.
What Just Happened?
One of the criteria for an employer to classify an employee as exempt (and not pay them overtime) is for the employee’s salary to be at least $35,568. Much like the federal minimum wage, this amount had remained unchanged for many years.
Earlier this year, the DOL increased the minimum salary amount to $43,888, effective July 1, 2024. The salary minimum was scheduled to increase again on January 1, 2025, to $58,656.
As of Friday, November 15, 2024, a single judge in Texas ruled against the salary increase and retroactively lowered the salary back to the previous $35,568 rate. This means the scheduled January 1st increase will not be happening, and the already-in-effect increase from earlier this year has been canceled.
Some major HR nerds will be experiencing deja vu because the same thing happened several years back when the DOL took its first swing at increasing the salary threshold. In that instance, a Texas judge squashed the law just days before it went into effect. This time around, the court’s decision was delayed and one of two threshold increases was already in place. In both cases, the judge determined the DOL lacked the authority to make the increases.
Given the impending change in federal administration, it’s unlikely the DOL will fight to reinstate the higher amounts. Any attempt to make a similar change is likely years away.
What This Means For You
For thousands across the country, this very late-in-the-game court ruling has put employers and employees in an awkward, and possibly difficult, position.
Employees had been closely monitoring updates across social media platforms for weeks. Some anticipated higher base salaries, while others hoped for increased earnings through overtime opportunities.
To meet the July 1st increase, many employers switched salaried exempt employees to non-exempt hourly pay earners. While other employers increased salaried managers’ pay to ensure they were making the federal minimum rate.
Those employers now have yet another decision to make: stick with the changes they made or revert to their previous pay structures and rates. Below is more on each of those options.
In the healthcare industry that CEDR serves, we anticipated the January 1 change would have the biggest impact. We’ve been collaborating with members to draft written notices for salaried exempt employees, outlining either an increase in salary or a conversion to non-exempt hourly pay.
Those employers now must decide whether to proceed with the change. In many cases, this choice depends on whether the employee has already anticipated a pay bump.
Keep in mind that if you are in any of the following states, you have already been subjected to a higher minimum salary threshold:
- Alaska
- California
- Colorado
- Maine
- New York
- Washington
Employers in these states need to continue complying with their state rules regarding minimum salary pay. Several states have salary rates that increase each year, vary by county, or vary by the size of the employer. CEDR members can access all of that detail here.
Because the federal government keeps failing to raise the minimum exempt salary, more states may be enacting their own rules. The same will likely continue to happen with minimum hourly wage rates.
What You Need To Do…
Whether you need to take any action now depends on what you have, or have not, already done. Some employers had to make pay changes for the July 1 change, while others have been waiting to make a change until we get closer to January 1. If you do not have any exempt salaried employees, or if those employees already earned more than the changed thresholds, no action has been or will now be necessary.
…If you changed someone to non-exempt
If you changed an exempt salaried manager’s pay to non-exempt status based on their salary not being high enough, you now have the option of changing them back to exempt – as long as that salary is at least $35,568 (or your state’s minimum rate, if higher).
It’s easiest to make that change effective at the start of a pay period so that you aren’t trying to pay them using competing methods on a single paycheck. We recommend giving at least one pay period’s notice to the employee before making this change. And, of course, be sure to check whether your state law requires any specific type or amount of notice for wage changes.
However, you do not have to change them back to exempt status. Even if an employee qualifies as exempt, you are not required to pay them a salary. You can continue to classify them as non-exempt hourly.
…If you gave someone a raise
Some employers decided to raise their manager’s salary to the July 1 and/or January 1 levels. Because those mandatory federal increases are no longer in effect, these employers are no longer obligated to pay those higher rates of pay.
However, anytime you decrease an employee’s pay you run the risk of losing that employee. Getting a pay cut is not only a financial hit, but a personal one. Their morale will surely go down, as will their trust in you. Assuming this individual is your manager, doing so may be a step in the wrong direction.
Keep in mind that when you previously considered your options in light of the expected law change, you decided this manager deserved the pay increase to maintain exempt status. Unless something has changed in their performance, and they are still operating at the level they were when you decided they were worth a pay increase, you may want to think hard about decreasing it now.
If you do choose to decrease their salary, you’ll need to justify it objectively. Be sure to put the change in writing and give at least one pay period’s advance notice – longer if required by state law. And be ready for their relationship and employment with you to possibly change.
…If you told someone their pay will be changing
If you informed an employee that you will be changing their pay in January (or sooner) due to the expected law change, it is up to you whether to proceed. We recommend that you notify them of any additional changes as soon as possible.
If you told an employee that they would be getting a raise, reversing course is going to cause turmoil because, even if the pay increase has not gone into effect yet, the employee has surely come to expect that pay increase. Being told they are not receiving it anymore could cause a morale issue with your manager.
When to Contact CEDR
As always, CEDR is here to help its members. We have been working with many of you in response to the federal salary increases. We’re now here to help you change things around again, if necessary.
Be sure to be in touch if you are unsure about an employee’s exempt status or what exempt status even means. We can also help you evaluate your options regarding individual employee pay and draft written communication to inform an employee about changes in their pay.
Finally, if any of this has already caused or starts problems with an employee, be sure to be in touch. Employees have some legal protections around discussing their pay and raising pay concerns. At the same time, as the employer the ultimate decision about how you pay them rests in your hands. Balancing these competing interests isn’t easy, and the government certainly hasn’t made things easier with all these changes.
