New overtime rules to affect millions of employees and their employers
Overtime rule changes are on the horizon, and new Fair Labor Standards Act (FLSA) salary thresholds could significantly impact employers. Review the rules and take necessary steps to stay in compliance, navigate payroll expenses, and communicate any changes needed in your organization.
Background on DOL changes
On April 23, 2024, the Department of Labor (DOL) issued the highly anticipated final rule to substantially change the minimum salary threshold and highly compensated employee (HCE) threshold under the FLSA.
On July 1, 2024, the minimum salary threshold will increase 23.4% over the current threshold. Then, on January 1, 2025, another increase is set to take place resulting in a 64.9% increase over present day.
The HCE threshold increases from $107,432 to $132,964 on July 1, 2024, and then to $151,164 on January 1, 2025. The final rule also implements a virtually automatic update to each threshold that will occur every three years beginning July 1, 2027.
The final rule follows the proposed rule published by the DOL on September 8, 2023, and has been submitted to the federal register (not yet published).
Consider new overtime rules and historical context
The FLSA sets rules that determine if an employee is eligible to receive overtime (non-exempt) or not required (exempt). The salary thresholds set by the FLSA are the minimum salary amounts at which point a covered employee becomes exempt from receiving overtime.
In order to classify as exempt most employees have to pass three tests: (1) paid on a salary or fee basis; (2) the salary or fee basis exceeds the minimum, currently $684 weekly; and (3) job duties test. When employees are paid a total compensation that meets or exceeds the HCE threshold, the HCE does not have to pass the, often rigorous, duties test. The tests they will need to pass include: (1) paid on a salary or fee basis; (2) the salary or fee basis exceeds the minimum, currently $684 weekly; (3) some exempt office work included. In addition to salary, total compensation may include bonuses, commissions, and/or incentives.
To fully understand the final rule’s meaning and impact, review the definitions for both salaried exemptions and highly compensated employees. The DOL has laid out these definitions clearly for precise application. An employee must meet the strict definitions to qualify for exemption from overtime.
A significant exception to the salary requirements
The salary requirements do not apply to outside sales employees, teachers, clergy, and employees practicing law or medicine. Under the FLSA, there are select others that would be impacted, as well.
Watch for potential legal challenges
In 2016, a similar rule updating salary thresholds was finalized. Ultimately, the 2016 FLSA changes were legally challenged, which resulted in the dampening or removing of updated elements.
This 2024 final rule contains similar elements to those that were challenged in 2016, and therefore a legal challenge of this rule is anticipated.
Review the salary threshold timeline and impact
The table below shows the existing rule in effect since 2019, and the upcoming changes by year under the final rule update.
Implementation Timeline
| Current | July 1, 2024 | January 1, 2025 | July 1, 2027 | |
| Salary threshold weekly/annualized | $684/$35,568 | $844/$43,888 | $1,128/$58,656 | 35th percentile of lowest region** |
| Estimated impacted employees* | Those not currently in compliance | 1,806,000 employees | 4,045,000 employees | To be determined |
| HCE threshold weekly/total annual compensation | $684/$107,432 | $844/$132,964 | $1,128/$151,164 | 85th percentile of lowest region** |
| Estimated impacted employees* | Those not currently in compliance | 223,000 HCE employees | 293,000 HCE employees | To be determined |
*Estimates are quoted from the DOL’s research, analysis, and assumptions.
** These percentiles are applied to the exempt population in the most current census report at the time of threshold increase determination. The current lowest region of the census is the South as defined by the Current Population Survey.
Take steps toward FLSA compliance
- Review your FLSA pay practices and classifications in whole and with consideration to state and local labor laws.
- Identify your impacted employees. Model potential costs and consider allowable alternative methods for lowering the salary burden below the new thresholds.
- Develop a communication plan and training strategy considering all parties, such as stakeholders, managers, and impacted employees.
- Plan to implement the payroll changes closer to July 1, 2024. A legal challenge to this rule is likely imminent.
Originally published by CliftonLarsonAllen
