On Tuesday, the U.S. Department of Labor (DOL) released its highly anticipated final rule that makes approximately 4 million more employees across the country eligible for overtime pay.

Employees are either exempt or non-exempt from overtime pay under the Fair Labor Standards Act (FLSA). Determining whether an employee should be classified as exempt or non-exempt from overtime involves application of two tests. The employee must meet the salary threshold set by the DOL and the employee’s duties must meet the requirements of the specific exemption (i.e., executive, professional, administrative, etc.).

The new rule from the DOL significantly increases the salary threshold for employees, thereby making it so many more employees in the United States will be eligible for overtime.

What do the Existing Regulations Provide and What is the Change?

Under the current regulations, the salary threshold for exempt employees is $684 a week ($35,568 per year). The DOL’s new rule increases the threshold in two phases.

• On July 1, 2024, the salary threshold will increase to $844 a week ($43,888 per year).
   
• On January 1, 2025, the salary threshold will increase to $1,128 a week ($58,656 per year).

In addition, the salary level required to claim the “highly compensated employee” exemption will increase to $132,964 on July 1, and $151,164 on January 1, 2025. The duties tests are not affected by the new changes.

What Does This Mean for Your Business?

• Employers should immediately review their exempt employees who are in the “hot zone.” These are employees who are currently between the current salary threshold and the upcoming thresholds or employees who are currently paid a salary between $35,568 and $58,656 a year. Employers need to decide whether to convert these employees to non-exempt or increase their salary to meet the new threshold. Nonprofits could be significantly impacted by the rule given that their salaries often lag behind those paid by for-profit businesses.
   
• If employers have different policies for exempt and non-exempt employees (like usage of equipment or company-provided cars or phones), the employer should review those policies to ensure that there are no unintended consequences if employees change their exemption status.
   
• One option for employers who may be faced with a large reclassification project and are looking for ways to mitigate unintended overtime exposure would be to impose administrative controls on employees working overtime. Another option for some workers would be to use the FLSA’s “fluctuating workweek” method to calculate overtime. This method keeps the non-exempt employee on a weekly salary, and when the employee works more than 40 hours in a given workweek, the employee then receives the additional overtime pay at a rate of 1.5 times their regular pay. Overtime pay under this method is based on the average hourly rate produced by dividing the employee’s fixed salary and any non-excludable additional pay — such as commissions, bonuses, or hazard pay — by the number of hours actually worked in a specific workweek. The average hourly rate will change from week to week depending on how many hours the employee actually worked.
   
• Employers should expect to see litigation from business groups or states opposing the final rule, and federal courts could issue injunctions that prevent the rule from taking effect as scheduled. However, in the event that the rules are not stayed, employers should take steps now to determine how they will respond to these elevated salary requirements.

You can subscribe to our latest alerts and insights here.