Key Takeaways
- On April 23, 2024, the DOL announced a new overtime rule, revising the Fair Labor Standards Act’s (FLSA) regulations that govern exemptions from minimum wage and overtime payments.
- In updating the FLSA’s overtime rules, the DOL increased the minimum salary limits for employees to fall into one of the many exemptions, so that more employees can enjoy overtime protections.
- Specifically, the salary threshold for “white-collar” worker exemption will increase from USD 35,000 to USD 44,000 on July 1, 2024, and will jump again to almost USD 59,000 in 2025, meaning that workers must earn at least these amounts to continue being exempt under the FLSA overtime rules.
- These significant increases will require employers to do significant planning, not only for the overtime rules but also for payroll recordkeeping, tax reporting, and employee benefit plan designs.
Beginning in July 2024, four million employees will become entitled to overtime pay, thanks to the U.S. Department of Labor’s (DOL) new overtime rules. On April 23, 2024, the DOL announced a new overtime rule, revising the Fair Labor Standards Act’s (FLSA) regulations that govern exemptions from minimum wage and overtime payments.
Phase one of these new rules becomes effective on July 1, 2024, and the second phase kicks in on January 1, 2025. Specifically, the salary threshold for “white-collar” worker exemption will increase from USD 35,000 to USD 44,000 on July 1, 2024, and will jump again to almost USD 59,000 in 2025, meaning that workers must earn at least these amounts to continue being exempt under the FLSA overtime rules.
What do these new DOL rules mean for your business? In this article, we outline the new overtime rules as well as eight best practices you should consider implementing as these rules become effective.
A Refresher on the FLSA’s Current Overtime Rules
The FLSA requires that workers be paid overtime of 1.5 times their regular rate of pay if they work more than 40 hours per workweek. However, there are exemptions to this general rule, permitting employers to forgo paying certain employees overtime.
These exemptions are commonly referred to as the “white collar” exemptions, which includes executive, administrative, professional, outside sales, and computer employees who receive a certain level of compensation. Additionally, certain highly compensated employees (HCEs) are exempted.
Executive, Administrative, Professional, Outside Sales, and Computer Employees
Executive Employees
The following tests must be satisfied to qualify for the executive exemption from overtime:
- The employee must be salaried, as opposed to hourly, at a rate of not less than USD 684 per week (which is an equivalent annual salary of USD 35,568);
- The employee’s primary duties must include managing the organization, a department, or subdivision;
- The employee must regularly oversee and direct at least two full-time employees; and
- The employee must have authority to hire and fire employees as well as influencing decisions as to the hiring, firing, and promotion of other employees.
Administrative Employees
The following tests must be satisfied to qualify for the administrative exemption from overtime:
- The employee must be salaried, as opposed to hourly, at a rate of not less than USD 684 per week (which is an equivalent annual salary of USD 35,568);
- The employee’s primary duties must include the performance of office (i.e., non-manual) work related to the management or general business operations of the organization; and
- The employee’s primary duties must include the exercise of independent judgment and discretion related to significant matters.
Professional Employees
The following tests must be satisfied to qualify for the professional exemption from overtime:
- The employee must be salaried, as opposed to hourly, at a rate of not less than USD 684 per week (which is an equivalent annual salary of USD 35,568);
- The employee’s primary duties must include the performance of work that required advanced knowledge requiring the consistent exercise of judgment and discretion, such as medical or legal work;
- The required advanced knowledge must be in the field of learning or science; and
- The required advanced knowledge must be customarily acquired through prolonged coursework of specialized intellectual instruction.
If the employee is a creative professional, then the following tests must be met to satisfy the professional exemption:
- The employee must be salaried, as opposed to hourly, at a rate of not less than USD 684 per week (which is an equivalent annual salary of USD 35,568); and
- The employee’s primary duties must include the performance of work requiring imagination, originality, talent, or invention in a recognized artistic or creative field.
Outside Sales Employees
If the employee is in outside sales, then the following tests must be met to satisfy the outside sales exemption:
- The employee’s primary duties must include making sales or obtaining orders for services or for the use of facilities for which the client shall pay; and
- The employee must be regularly and customarily engaged in sales away from the employer’s primary place of business.
Computer Employees
The following tests must be satisfied to qualify for the computer employee exemption from overtime:
- The employee must be salaried, as opposed to hourly, at a rate of not less than USD 684 per week, or if compensated on an hourly basis, at a rate not less than USD 27.63 per hour (both of which are equivalent annual salaries of USD 35,568);
- The employee must be employed as a computer systems analyst, software engineer, computer programmer, or other similar job in the computer field; and
- The employee’s primary duties must include:
- The application of systems analysis techniques and procedures, including determining software, hardware, and systems specifications;
- The design, development, analysis, creation, documentation, modification, or testing of computer programs or systems related to system and user design;
- The design, creation, documentation, modification, or testing related to machine operating systems; or
- A combination of any of the above, which required the same level of computer skills.
Highly Compensated Employees
If highly compensated employees earn at least USD 108,432 annually (and includes at least USD 684 per week on salary or on a fee basis), then they are also exempt from the FLSA’s overtime rules. To qualify for this exemption, these HCEs must perform non-manual office work while performing at least one duty from the executive, administrative, professional, outside sales, or computer categories mentioned above.
The 2024 Final Overtime Rules
In updating the FLSA’s overtime rules, the DOL increased the minimum salary limits for employees to fall into one of the many exemptions, so that more employees can enjoy overtime protections. Other than changing the minimum salary limits, the FLSA rules stay the same.
The final overtime rules revise the DOL’s regulations in three ways:
For executive, administrative, professional, outside sales, and computer employees, the new salary threshold will increase to USD 844 per week effective July 1, 2024 (which is an equivalent annual salary of USD 43,888). On January 1, 2025, this threshold will again increase to USD 1,128 per week (which is an equivalent salary of USD 58,656).
For highly compensated employees, the new salary threshold will increase to USD 132,964 effective July 1, 2024, and will increase again to USD 151,164 effective January 1, 2025.
These salary thresholds will automatically increase every three years, starting on July 1, 2027, and every three years thereafter.
Employers should keep in mind that these salary thresholds include all types of compensation, including non-discretionary bonuses, commissions, and incentive pay. If you’re unsure about the compensation that must be considered for these overtime rules, contact your payroll provider or employment law attorney for further guidance.
8 Best Practices for Employers
These significant increases will require employers to do significant planning, not only for the overtime rules but also for payroll recordkeeping, tax reporting, and employee benefit plan designs.
Here are eight best practices that employers should consider when implementing these new overtime rules, should these rules withstand any legal challenges:
1. Review your current workforce
Evaluate your team to determine who is exempt and non-exempt under the current overtime rules so you can understand how your employees are currently classified. This may also help you determine if you have any employees who are misclassified under the current regulations.
2. Check timing
Understand which employees are impacted by the new regulations effective July 1, 2024.
3. Develop a strategy
Create a plan to comply with the new regulations. For example, you may need to increase impacted employees’ salaries to keep them within the FLSA overtime exemptions. Employers may also need to reclassify previously exempt employees as non-exempt. Further, you may want to limit your overtime hours. Finally, you may be able to reclassify employees under the outside sales exemption, which does not include a salary threshold.
4. Monitor state laws
Don’t forget to review any state laws that may impact compensation or overtime rules. For example, as of January 1, 2024, California has a minimum salary threshold of USD 1,280 weekly (or USD 66,560 annually) for certain exempt positions, has different thresholds for certain computer positions, and does not recognize the highly compensated employee exemption. Additionally, Alaska, Colorado, Maine, New York, and Washington have differing salary thresholds as well.
5. Analyze impact on benefits
Determine if these changes impact your employee benefits plans and other perks (such as retirement plans, health plans, sick time, and vacation time), as these benefits are often based on exempt versus non-exempt employee statuses.
6. Update Software
Review and update any time tracking or payroll systems, ensuring that they can correctly track time and compensation under these new regulations. Additionally, employers may also need to update their timekeeping and payroll policies for their employees, helping to ensure both federal and state law compliance. Provide necessary training on new timekeeping systems, as needed.
7. Proactively communicate
Talk with your employees about any compensation changes. Be sure to be available for any questions, especially if previously non-exempt employees become exempt or exempt employees become non-exempt. Some states require advance notice of any wage changes, so ensure that you’re compliant with these notifications. Explain that the salary threshold changes are mandatory; however, promote these changes in a positive light. You don’t want to catch your employees by surprise, which could damage your employee’s loyalty, morale, and engagement.
8. Keep up-to-date
Stay updated on any legal challenges to these new overtime rules, as they can impact the timing of these rules or the salary thresholds themselves. However, employers cannot rely on the possibility that these rules will be halted. Companies must start planning now as if these rules will become effective on July 1, 2024.
Complying with the new overtime rules
Failure to pay overtime can be costly for employers. Noncompliance can result in penalties, attorney fees, and back pay. Understanding the new FLSA rules is imperative to pay your employees compliantly.
Want to learn more about overtime pay in the U.S.? Check out services at Remote People.
FAQ
Phase one of these new rules becomes effective on July 1, 2024, and the second phase kicks in on January 1, 2025. Specifically, the salary threshold for “white-collar” worker exemption will increase from USD 35,000 to USD 44,000 on July 1, 2024, and will jump again to almost USD 59,000 in 2025, meaning that workers must earn at least these amounts to continue being exempt under the FLSA overtime rules.
Phase one of these new rules becomes effective on July 1, 2024, and the second phase kicks in on January 1, 2025.
Author: Jennifer Kiesewetter
Jennifer is an HR and employment compliance specialist with more than 20 years experience as a transactional attorney, focused on employee benefits, retirement plans and health plans.
