As of July 1, 2024, millions of salaried U.S. workers are now eligible for overtime pay, thanks to the new overtime rule that went into effect. Salaried workers earning less than $43,888 a year qualify for 1.5 times pay if they work more than 40 hours a week. These changes may impact your payroll processes and employee compensation structures, so employers should prepare accordingly.

Under the new overtime rule, the annual salary threshold of $35,568 is increased to $43,888. The threshold will increase again on Jan. 1, 2025, to $58,656. The final rule which will hit its top-level threshold in 2025, will be an increase of nearly 65%. Starting July 1, 2027, salary thresholds will update every three years, by applying up-to-date wage data to determine new salary levels. This protects against future erosion of overtime protections, so they do not become less effective over time.

The new rule also expands overtime eligibility for some highly compensated employees (HCEs) with wages from $107,432 to $132,964 per year, which took effect on July 1, 2024. The threshold will increase again on Jan. 1, 2025, from $132,964 to $151,164 per year. The HCE level also will be adjusted every three years at the same time as the salary threshold. Employers can use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary level.

Regulation Challenges Across the Country

Dozens of businesses and industry lobbying groups have challenged the new rule since it was finalized by the U.S. Department of Labor (DOL) on April 22, 2024. A lawsuit in Texas successfully won an injunction against the rule, indefinitely delaying all aspects of the new overtime regulations in Texas as the court challenge plays out. The court determined the rule incorrectly determines eligibility for overtime pay based on workers’ wages rather than their job responsibilities. The emergency relief is limited to the state of Texas as an employer only. As additional lawsuits play out across the country, the future of this regulation is uncertain.

Background

The Fair Labor Standards Act (FLSA) is the federal law that regulates when employees must be paid minimum wage and overtime. Under the FLSA, overtime pay is one and one-half times an employee’s regular pay rate for every hour worked beyond 40 hours in a week.

To determine these new amounts, the Biden-Harris administration conducted extensive engagement with employers, workers, unions and other stakeholders before issuing its proposed rule in September 2023, and considered more than 33,000 comments in developing its final rule. The updated rule defines and delimits who is a bona fide executive, administrative and professional employee exempt from the FLSA’s overtime protections.

Most hourly workers are already entitled to overtime pay, but non-hourly workers in executive, administrative and professional roles – including some supervisors – are exempt unless they earn less than the threshold set by the DOL.

Understanding the EAP Exemption

The FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. To qualify for the exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $844 per week until July 1, 2024, and $1,128 per week starting Jan. 1, 2025. To be eligible for the EAP exemption, employees must meet the following requirements. 

• Be paid a salary, meaning they are paid a predetermined and fixed amount not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”);
• Be paid at least a specified weekly salary level (the “salary level test”); and
• Primarily perform executive, administrative or professional duties, as provided in the Department’s regulations (the “duties test”).

Certain employees are not subject to either the salary basis or level tests; employees in certain occupations may fall within the EAP exemption regardless of how and what they are paid. Regulations also provide an alternative test for certain HCEs who are paid a salary, earn at least a higher total annual compensation level and satisfy a minimal duties test. To learn more about the certain exemption requirements, visit the DOL Fact Sheet on Exemptions for Employees under the FLSA. 

Next Steps

Employers should take the following steps to prepare:

• Review employee classifications to confirm compliance with the new salary basis to remain exempt.
• Review employee classifications to determine whether employees should be reclassified as nonexempt.
• Plan for how to roll out reclassification decisions. This will include training reclassified employees on timekeeping requirements and rules against off-the-clock work, and managing employee relations concerns employees might raise if they are upset about losing their salaried status.

Decide, given the interim and 2025 salary-level thresholds, whether employers will accomplish this in two steps or jump straight to the 2025 threshold.

To learn more about this rule and how it will impact your workforce, the DOL created a FAQs page.

Employers may want to prepare plans on how to comply and also be mindful of state and local wage and hour laws that may impose additional requirements for exempt status beyond federal requirements under the FLSA. 

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