On April 23, 2024, the U.S. Department of Labor announced a final rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, raising the Fair Labor Standards Act’s minimum annual salary threshold for overtime pay eligibility in a two-step process. Starting July 1, 2024, the threshold will increase from $35,568 to $43,888 per year. It will then increase to $58,656 on January 1, 2025.
Only certain employees are exempt from the Fair Labor Standards Act’s (FLSA) minimum wage and overtime protections if they are employed in a bona fide executive, administrative, or professional capacity, as those terms are defined in the Department’s regulations.
Standard salary level:
Before July 1, 2024 $684 per week (equivalent to $35,568 per year)
July 1, 2024 $844 per week (equivalent to $43,888 per year)
January 1, 2025 $1,128 per week (equivalent to $58,656 per year)
In addition to increases to the standard salary level, the highly compensated employee threshold increases from $107,432 to $132,964 per year on July 1st and $151,164 per year on January 1st.
The final rule also provides for future updates of these levels every three years to reflect current earnings data.
Challenges to the rule are expected in federal courts and the legal fight may carry over to Congress. Even so, employers should begin to prepare.
Employers can start getting ready by performing a compliance review. Some common and costly mistakes employers can make with the FLSA are misclassifying employees, withholding pay, and miscalculating overtime. Penalties for such errors are significant!
- Misclassifying employees: Incorrectly classifying an employee as exempt instead of non-exempt
- Withholding pay: Failing to compensate for activities considered work time or making improper deductions from a paycheck, for example
- Miscalculating overtime: Failing to base overtime pay on the regular rate of pay, which is defined as total compensation divided by total hours worked
Make sure employees are properly classified, and since responsibilities can change, regularly review exempt employees to make sure they continue to meet the duties and salary basis tests that apply to their position. Comply with the FLSA and state and local labor laws and pay employees correctly.
After reviewing practices for compliance, employers will then want to conduct an analysis of the impact that the overtime rule would have to their business.
1. Evaluate each exempt employee’s salary level.
2. If the salary is less than the new minimum, evaluate the employee’s average work hours. How many hours does the job entail based on the current duties?
3. Consider changing the employee to non-exempt, look at re-assigning some duties, if needed, to minimize overtime, and pay overtime if that option is less expensive than changing their wages to meet the new threshold.
4. If paying overtime would be more expensive than changing their wage, then consider keeping them exempt.
5. If utilizing a list or schedule of pay ranges for employees, be sure the minimum salary paid is updated to at least the new salary threshold minimum and examine potential salary compression.
Employers should look beyond the financial impact and contemplate other considerations. Changing an employee from exempt to non-exempt will require training the employee and their manager about timekeeping requirements and meal/rest breaks. Employers must track all hours worked, retain time and attendance records, and begin paying overtime for hours worked beyond 40 in a workweek. Consider perceptions of fairness and the effect on morale as you decide on your plan to comply with the final rule.
Clients of FrankCrum have already been receiving tips and best practices this year to get ready for this overtime rule and have access to a team of experts. See what FrankCrum can do for you.
