Significant Changes to Overtime Rules

Significant Changes to Overtime Rules

The U.S. Department of Labor (DOL) will implement a new rule on July 1, 2024, that will significantly alter the salary thresholds for overtime exemptions under the Fair Labor Standards Act (FLSA). You need to know here to stay compliant and prepared for these changes.

Key Salary Threshold Increases

 “White Collar” Exemptions (EAP Exemptions)

The new rule impacts the Executive, Administrative, and Professional (EAP) exemptions, commonly called the “white collar” exemptions. Here are the crucial updates:

  • Starting July 1, 2024, The salary threshold will increase to $43,888 annually ($844 per week).
  • Beginning January 1, 2025: The threshold will rise to $58,656 annually ($1,128 weekly).

Employers can satisfy up to 10% of these salary requirements through nondiscretionary bonuses, incentive payments, and commissions, as long as these are paid at least annually.

To qualify for exempt status under the EAP exemption, employees must meet three criteria:

  1. They must be paid on a salary basis, meaning their salary does not vary based on work quality or quantity.
  2. Their earnings must meet the new standard thresholds.
  3. Their primary duties must involve executive, administrative, or professional tasks as defined by the DOL.

Highly Compensated Employees (HCE)

The rule also revises the salary thresholds for Highly Compensated Employees (HCE):

  • Starting July 1, 2024: The HCE salary threshold will be $132,964 yearly.
  • Beginning January 1, 2025: The threshold will increase to $151,164 annually.

Nondiscretionary Compensation

Employers can use nondiscretionary bonuses, incentive payments, and commissions to meet up to 10% of the new salary thresholds, provided these are paid annually.

Automatic Updates

Beginning July 1, 2027, the salary thresholds will be updated annually based on current earnings data. These updates will be announced in at least 150 days to help employers stay informed and compliant.

Impact on Employers

This rule is expected to extend overtime protections to approximately 4 million workers by 2025. Employers will need to:

  • Review current employee salaries to determine which positions will be affected.
  • Decide whether to increase salaries to maintain exempt status or reclassify employees to non-exempt status, making them eligible for overtime pay.
  • Stay mindful of state-specific salary thresholds, such as those in California, Washington, and New York, which may exceed federal thresholds.

Next Steps for Employers

To prepare for these changes, employers should:

  1. Conduct a thorough review of employees’ current salaries.
  2. Decide whether to adjust salaries or reclassify employees.
  3. Prepare for potential increases in both direct and indirect costs.

Ongoing Legal Challenges

Business associations have filed litigation to prevent the adoption of these changes. A similar rule in 2016 was struck down, and the 2019 rule is still part of a lawsuit in the U.S. Court of Appeals for the Fifth Circuit. Employers should closely monitor these legal developments.

For more detailed information, refer to the full DOL announcement here.

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