As of July this year, millions of salaried workers will be entitled to overtime pay under a new rule from the U.S. Department of Labor (DOL).
On July 1, 2024 — and again on January 1, 2025 — the DOL will substantially increase the minimum salary an employer must pay certain employees to classify them as exempt from overtime pay under the federal Fair Labor Standards Act (FLSA).
This means that many employers have to make a tough choice: either increase salaries (in some cases by up to 64%) to meet the new threshold or start paying affected employees overtime when they work more than 40 hours per week.
The new rule, of course, introduces new compliance challenges: more employers will need to record the hours of salaried employees, calculate the correct overtime rates, and keep a record of compliance if audited.
But that’s getting a bit ahead of ourselves. There are a few things to unpack here. In this article, we’ll answer some of the most common questions we’re hearing from businesses about the DOL’s new overtime rule. Read on for the essential, need-to-know details.
What is the new overtime rule in the U.S.?
The Department of Labor’s new overtime rule introduces three significant changes to federal overtime laws:
Starting on July 1, 2024, an exempt executive, administrative, or professional employee must receive a salary of at least $43,888 per year in order to be classified as exempt from FLSA overtime pay. On January 1, 2025, that salary threshold will increase again to $58,656 under the new rule. This is a significant increase on the current minimum salary, which is a substantially lower $35,568 per year.
If you have employees in states that recognize the highly compensated employee (HCE) exemption, those employees will also need to receive a higher salary to continue to qualify for the exemption: at least $132,964 starting on July 1, 2024, and $151,164 as of January 1, 2025. The current minimum salary for HCEs under federal law is $107,432.
These increases are not the end, though. Under the new rule, the minimum salary thresholds will increase like clockwork every three years, starting on July 1, 2027, to keep up with inflation and market shifts in employee salaries.
Which employees are affected by the new overtime rule?
The new overtime rule affects employees often referred to as ‘white collar’ exempt workers. This includes salaried executive, administrative, professional, and highly compensated employees.
Although employers need to make a case-by-case assessment of whether their employees qualify for one of the white collar exemptions or not (based on their primary job duties and salary amount), some common jobs that can fall under these categories include:
Managers and some shift leads.
Office staff including finance, accounting, tax, quality control, purchasing, marketing, public relations, internet and database admin, human resources, compliance, and others.
Professionals including doctors, lawyers, CPAs, registered nurses, dentists, architects, pharmacists, professors, physician assistants, and engineers.
To get more technical, white collar exempt employees must meet the following criteria:
They are paid on a salary basis and earn at or above the salary threshold; and
Their primary job duties are exempt job duties. More on that below.
Each white collar exemption has its own requirements relating to the specific duties the employee must perform to qualify. For example, the ‘executive’ white collar exemption requires the employee’s primary duties to relate to managing the business or a department, the employee must manage at least 2 FTEs or equivalent part-time employees, and the employee must have authority to hire or fire employees — or their recommendations are given significant weight.
For more details on the different exemptions, be sure to consult the resources provided by the DOL.
My employees will be below the new salary threshold. What does that mean for us?
For employers with eligible workers below the salary threshold, they will need to take one of the below actions before July 1:
Increase the salaries of affected employees so they meet the new threshold and don’t forfeit the exempt status.
Convert the employees to non-exempt status, which would make them eligible for overtime pay.
If an employer chooses to convert employees to non-exempt status, they can continue to pay them on a salary basis plus overtime or pay them an hourly wage plus overtime.
In either case, they’ll need to track all their work hours and make sure they pay overtime when they work over 40 hours in a week — in addition to their salary or hourly wage.
Properly calculating overtime pay for salaried nonexempt workers can be tricky, so in most cases it’s simplest to convert these employees to an hourly wage.
How can businesses simplify compliance?
The first and most important step businesses need to take is to clearly understand and identify which of their employees will be eligible for overtime under the new rule and which will be exempt.
This will mean a thorough review of their payroll records to identify employees who will fall under the salary threshold. And, of course, it’s always worth partnering with attorneys internally and externally to ensure you’re classifying employees correctly and understand the full impact of the new overtime rule.
If an employer decides to convert employees to non-exempt status and pay them overtime, it’s essential to have a secure, digital tool that can accurately track employee hours, flag when overtime applies, and calculate the correct overtime rate seamlessly.
To learn how Deputy can help you manage compliance with the new overtime rule, get in touch with one of our experts today.
