Key Factors to Consider in Return-to-Exempt Status Decisions

Some employers are on the fence about returning to exempt status those employees who became nonexempt following the 2024 U.S. Department of Labor (DOL) overtime rule, which was vacated on Nov. 15 and again by a separate district court in a Dec. 30, 2024, order. Here are some factors to consider in making that decision.

Background

“Two federal courts have now struck down the department’s one-size-fits-all salary rule, which would have forced small businesses nationwide to reclassify white-collar employees and take away their flexible work arrangements,” said Sheng Li, litigation counsel for the New Civil Liberties Alliance in Washington, D.C., which argued on behalf of the plaintiff, Flint Avenue LLC, in the December ruling against the DOL. 

The U.S. District Court for the Northern District of Texas in December agreed with the reasoning of the U.S. District Court for the Eastern District of Texas, which in November spared HR professionals from having to comply with an increase in the salary threshold for white-collar exemptions from overtime; the threshold had been set to rise to $58,656 annually as of Jan. 1, 2025. The July 1, 2024, increase of the salary threshold from $35,568 to $43,880 per year was also struck down. 

2024 Rule ‘Will Remain Dead’

“The 2024 regulation is and will remain dead, and the applicable salary thresholds going forward, until further notice, are those of 2019, with the white-collar exemptions at $684 per week—$35,568 per year—and the highly compensated employee exemption at $107,432 per year,” said Andrew Bagley, an attorney with Crowell & Moring in Washington, D.C.

Under the 2024 rule, the total annual compensation requirement for highly compensated employees was to increase from $107,432 per year to $132,964 per year on July 1; then, it was to rise to $151,164 per year on Jan. 1, 2025. Earnings thresholds were to have been updated every three years starting July 1, 2027.

The vacated rule “significantly increased the highly compensated exemption such that it may have been out of reach for most employers—especially those outside major markets,” such as New York City and San Francisco, said Lisa Charbonneau, an attorney with Liebert Cassidy Whitmore in San Francisco. “Since many employers rely on the highly compensated employee exemption to exempt their employees from overtime, this would have had a major impact on overtime costs nationwide.”

Although the Biden administration appealed the November decision vacating the 2024 overtime rule, “history strongly suggests that the appeal will be withdrawn,” said Chris Coyne, an attorney with Epstein Becker Green in New York City. After the Obama administration’s 2016 overtime rule was blocked, the Trump administration said that implementing a salary level set that high did not further the purpose of the Fair Labor Standards Act and was inconsistent with the salary level test’s useful but limited role in defining the executive, administrative, and professional exemption—otherwise known as the white-collar exemptions. There are “no reasons why the new Trump administration will take a different approach to the 2024 rule,” which used a similar large increase in the salary threshold, Coyne said.

It’s reasonable for employers to make decisions now and not wait to see how the Trump administration handles the appeal, said Brett Coburn, an attorney with Alston & Bird in Atlanta. “This rule has a steep uphill climb to ever going into effect, so I don’t think employers need to act as if the rule is in effect at this point when there is very, very little chance that it will ever go into effect,” he said. “But, of course, they should keep their eyes on this issue, in case there are any unexpected developments in the courts as things play out.”

Change in Status

If a current nonexempt employee makes less than $43,888 annually (but at least $35,568 annually) and otherwise meets the test of a white-collar exemption, they can be reclassified as exempt in states where the federal threshold controls, noted Nisha Verma, an attorney with Dorsey & Whitney in Costa Mesa, Calif., and Palo Alto, Calif.

“However, this may result in a pay cut for employees who were regularly receiving overtime pay and have come to rely on that income,” she said. If that is the case, employers should evaluate how much money they would be saving by returning the employee to exempt status, Verma added. “If the effect on the budget is not significant, it may be more valuable to leave the employee as nonexempt in order to retain the talent—and in a show of goodwill to the workforce.”

Employers should think through whether to change their course on previously announced reclassifications from exempt to nonexempt status due to the 2024 overtime rule, Coburn said. 

Employees earning a salary between the 2019 and the 2024 overtime thresholds “are some of the ones who are most likely to be in a gray area regarding whether their duties actually meet the requirements of one or more exemptions,” he said. 

If impacted employees liked receiving overtime pay as a result of the initial reclassification last summer, taking that away from them could prompt them to challenge their exempt status by arguing their duties don’t meet one of the exemptions, Coburn noted. 

“On the other hand, I’ve heard from employers about many employees who take offense at having to punch a clock and derive significant self-worth from being a salaried employee,” he said. “For groups like that, moving people back to being exempt might make sense, particularly if the employer feels confident that the employees’ duties comfortably meet the requirements of one or more of the exemptions.”

According to Coyne, the primary factors for employers in evaluating whether to reclassify will be:

• Costs to the business reflected by the past months of nonexempt work by those employees reclassified as a result of the 2024 overtime rule (e.g., what types of functional costs for training and tracking systems have already been incurred).
• How labor costs have been impacted by reclassification (e.g., whether substantial overtime for workers reclassified as a result of the 2024 rule has been necessary).
• Whether supervisors effectively managed these newly nonexempt workers to minimize overtime costs.
• Whether the company has already taken measures to minimize overtime-related costs (e.g., increases to staffing or redistribution of workloads among current staff).

He added that nontangible factors are relevant, too, including:

• Whether the lives of newly nonexempt workers changed based on reclassification due to the 2024 rule (e.g., whether they are working fewer hours).
• Whether employees are earning substantially more overtime as a result of the reclassification due to the rule.
• How returning them to exempt status would affect morale.

“Critical to this question is also an evaluation of how competitors are addressing similar classification questions, and whether this classification decision could impact how competitive the company is in recruiting talented staff,” Coyne said.

Making the Change

If an employer decides to change an employee’s status back to exempt, it should provide at least one pay period’s notice, Verma said. 

When appropriate, sell the change as a “good news story,” Bagley said. “Explain how a change in the law has authorized the company to return the position to exempt status, thus freeing incumbents from the burdens associated with nonexempt status, including time reporting [and] timesheets.”