In April 2024, the Department of Labor issued a new rule raising the salary threshold for US employees to be considered “exempt” from overtime pay requirements. While the new rule is expected to result in an estimated four million workers becoming newly eligible for overtime, it poses several challenges for employers, not least of which is potentially higher labor costs.
In this blog, discover what the new DOL rule entails and how it will impact your business.
New Overtime Rule Highlights
It’s been almost 100 years since the Fair Labor Standards Act (FLSA) became law, creating a minimum wage and the right to overtime pay for US employees. Since then, the Department of Labor (DOL), which enforces the FLSA, has added new rules that make increasingly more employees eligible for overtime.
The latest rule increases the salary threshold for employees to be exempt from FLSA overtime pay requirements. In essence, employees performing executive, administrative, or professional duties must earn above a specific salary amount to be exempt from overtime. Otherwise, they must be paid overtime for any hours worked over 40 per week.
Known as the “EAP” or “White Collar Rule,” the rule will be implemented in phases, as follows:
- July 1, 2024: The minimum salary threshold will increase from $684/week ($35,568/year) to $844/week ($43,888/year).
- January 1, 2025: The minimum salary threshold will increase again to $1,128/week ($58,656/year).
- July 1, 2027, and every three years thereafter: The salary thresholds will update automatically based on US census and national wage data.
The rule also increases the salary threshold for “highly compensated employees.” On July 1, 2024, the annual threshold for these employees will increase from $107,432 to $132,964/year (must include at least $844/week). On January 1, 2025, the threshold will increase to $151,164/year (must include at least $1,128/week), and will be updated every three years.
Actions You Can Take to Prepare
The size of the salary threshold increase—a nearly 65% increase by 2025—has profound financial implications and leaves you with two main options: either increase employee salaries above the threshold, or reclassify employees to non-exempt status and begin paying them overtime.
Though there are legal challenges to the new rule (in 2016, a similar rule with automatic threshold increases was struck down), you should determine the potential impact on your business and be ready to act before the effective date. If you misclassify employees or fail to pay overtime per the new rule, you could incur financial penalties in addition to owed back pay.
To build an effective strategy for ongoing compliance, be sure to take the following actions:
1. Audit employee classifications
As mentioned in our recent webinar, the overtime rule focuses on the minimum salary threshold for overtime eligibility, but there are actually three “tests” that determine whether an employee is non-exempt or exempt from overtime requirements. An employee can only be considered exempt if all of the following are true:
- The employee is compensated on a salary basis vs. hourly
- The employee earns above the applicable salary threshold
- The employee performs exempt job duties
Therefore, before you contemplate making any reclassifications or salary adjustments, you’ll need to understand which employees are non-exempt and exempt. Conducting a thorough workforce audit is a great way to accomplish this, as you can apply the three tests to each employee and be sure of exactly where you need to make changes.
2. Model different pay scenarios
Compliance with the new overtime rule is about much more than salary. You’ll also need to consider how any changes you make will affect existing policies and other elements of employee compensation. Therefore, it’s a good idea to model different scenarios and consider the following factors:
- Overtime expense: Calculate your potential overtime expense based on the anticipated work hours of employees who will be reclassified as non-exempt.
- Employee benefit premiums: If employee benefit premiums are based on salary level, determine the impact of a salary increase on employees’ annual premium payments.
The role of incentive pay: Consider how you might adjust performance bonuses and other incentives to offset the new overtime pay or higher salary employees will receive. Keep in mind that the FLSA allows employers to use “nondiscretionary bonuses and incentive payments (including commissions)” to satisfy up to 10% of the salary requirement. After applying the allowance, you may not need to raise salaries as high as you initially thought.
3. Develop an employee communication plan
For a smooth rollout, it’s critical to ensure employee notifications are ready to go before July 1st. As you craft your communication plan, keep in mind the following:
- Employee training: Inform newly reclassified non-exempt employees of your policies for requesting overtime and recording overtime hours.
- State-specific requirements: Align employee communications with applicable state laws. For example, if you have employees in states where the minimum salary threshold exceeds the federal threshold (e.g., California, New York, and Washington), you’ll need to adhere to the state requirement.
Impact on employee morale and engagement: Proactively address concerns about upcoming changes, as employees reclassified from exempt to non-exempt may view it as a “demotion” despite being eligible for overtime pay.
Let Aspen HR Help You Navigate the New Overtime Rule
As with many government regulations, the overtime rule can be challenging for any employer to navigate. The final rule is over 300 pages long, and correctly classifying employees as exempt, non-exempt, or highly compensated isn’t always straightforward. However, Aspen HR clients can rest easy knowing we’re here to help you get it right.
We’re unique among PEOs in having a full-time employment attorney on our team to help guide you in all HR compliance matters, including FLSA classifications and employee notifications. Additionally, within our HR, payroll, and benefits services suite, we offer comprehensive employer liability management solutions to help you maintain labor law compliance in every US location.
Connect with an Aspen HR expert to learn more.
