On April 23, 2024, the U.S. Department of Labor (DOL) released its much-anticipated final rule related to federal overtime guidelines under the Fair Labor Standards Act (FLSA), marking a significant shift in the landscape of employee compensation.
How Overtime Rules Work Under the FLSA
The FLSA is the federal labor law that guarantees workers at least the federal minimum wage for every hour they work, and overtime, at not less than one-and-one-half times their regular rates of pay, for hours they work beyond 40 in a workweek. However, the law allows employers to claim exemptions from its wage and hour requirements for certain employees whose jobs meet specific criteria.
For an employer to claim an exemption for a particular employee, three tests generally need to be satisfied:
- Payment on a Salary Basis: The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
- Payment of a Minimum Salary Level: The amount of salary paid must meet a specified minimum amount (as set forth below).
- A Duties Test: The employee’s job duties must primarily involve those associated with exempt executive, administrative, professional, outside sales, or computer employees.
The final rule will increase the standard salary level and the highly compensated employee total annual compensation threshold on the rule’s effective date—leading to significantly more employees being eligible for overtime. It is important to note that the FLSA does not provide an exemption from these requirements specifically for small businesses. Generally, the FLSA applies to employees of enterprises that have an annual gross volume of sales made or business done totaling $500,000 or more.
The New Compensation Thresholds
Effective July 1, 2024, the minimum salary for exemption from overtime as an executive, administrative, or professional (EAP) employee will increase from $684 per week ($35,568 annualized) to $844 per week ($43,888 annualized). On January 1, 2025, this threshold will further increase to $1,128 per week ($58,656 annualized).
The rule also raises the minimum total annual compensation level for exemption as a “highly compensated employee” from $107,432 to $132,964 effective July 1, 2024, and to $151,164 effective January 1, 2025. These thresholds will continue to be adjusted every three years starting July 1, 2027, based on current earnings data.
The impact of these changes is significant. The DOL projects that the 2025 increase alone will impact three million workers. Millions of employees who were previously exempt from overtime pay will now be eligible, forcing employers to reevaluate their compensation structures and make difficult decisions about whether to increase salaries or reclassify employees as overtime-eligible.
While the salary thresholds are crucial in determining exempt status, employers must also ensure that employees meet the duties tests for their respective exemptions (executive, administrative, professional, outside sales, or computer employees). Simply raising salaries may not be sufficient to maintain exempt status.
Employers should begin by identifying which employees will be affected by the new thresholds and determining whether to raise their salaries to meet the new minimums or reclassify them as overtime-eligible. If salaries are increased, employers must still ensure that employees meet the duties tests for exemption. If employees are reclassified, supervisors must be prepared to manage overtime costs and understand what constitutes “hours worked” and what types of compensation are included in the regular rate for calculating overtime pay.
In addition to these steps, employers should review job descriptions to ensure they accurately reflect the duties performed by each employee. This will be crucial in determining whether employees meet the duties tests for their respective exemptions.
While the rule is likely to face legal challenges, employers cannot afford to wait for the outcome of such challenges given the July 1, 2024 effective date. If you have any questions or require assistance, please contact Zana Tomich.
