In April 2024, the U.S. Department of Labor (DOL) issued a new final rule that's slated to expand the number of workers who are eligible for overtime pay under the federal Fair Labor Standards Act (FLSA). It's expected to affect four million workers. The rule, which dramatically increases the salary threshold for so-called exempt workers, is scheduled to take effect on July 1, 2024. Employers may need to take prompt action to remain in compliance.
The FLSA generally requires employers to pay nonexempt workers at a rate of 1.5 times their regular pay rate for hours worked per week that exceed 40. But bona fide executive, administrative and professional employees are exempt.
The exemption applies when:
The final rule leaves the first and third prongs of the test intact, but it will increase the minimum salary threshold in a two-step process. On July 1, 2024, most salaried workers who earn less than $844 per week, or $43,888 per year, will become eligible for overtime pay. Six months later, on January 1, 2025, the standard threshold will increase further to $1,128 per week, or $58,656 per year.
The new rule also raises the threshold for highly compensated employees (HCEs). HCEs do office or nonmanual work and regularly perform one of the primary duties required for the executive, administrative and professional exemptions.
HCEs currently are exempt if they're paid annual compensation (including incentive payments and nondiscretionary bonuses) of at least $107,432 per year. Under the final rule, the threshold goes up to $132,964 per year on July 1, 2024. On January 1, 2025, the annual threshold rises to $151,164 per year (excluding nondiscretionary bonuses or incentive payments).
Important: Nondiscretionary bonuses and incentive payments paid on an annual or more frequent basis can be applied to account for up to 10% of the standard salary threshold.
In some ways, the latest final rule resembles a 2016 Obama-era final rule that sought to increase the salary threshold. That law was blocked by a court days before it was scheduled to take effect in 2017, and the Trump administration didn't appeal the ruling. The odds are good that this version also will face legal challenges. But employers should begin strategizing now for how they'll respond when and if the rule kicks in.
The first step is to identify the on-the-fence employees who are exempt under the current thresholds but won't be under the first or second increase. Employers have several alternatives for how to approach such employees. For example, they might:
A single sweeping approach isn't necessary. Employers can take a combination of these approaches, such as increasing one employee's salary over the new threshold and eliminating work beyond 40 hours for another employee.
Whatever the choice, additional adjustments will likely be necessary. For example, the addition of overtime pay or salary increases will affect a company's budget. And formerly exempt employees who will become nonexempt may require some training on how to track time and limit work hours. Employers also will need to explain the reason for the change to these employees, who might feel like they're being demoted.
Remember that meeting or beating the salary threshold alone doesn't make an employee exempt from overtime pay requirements. Employers should review their exempt employees' actual primary job duties against the applicable duties test. "Primary duty" means the principal, main, major or most important duty that the employee performs.
For the executive exemption, the employee's primary duty must be managing the business or one of its departments or subdivisions. The employee also must "customarily and regularly" direct the work of at least two full-time or full-time-equivalent employees and have some authority or input on the hiring, firing, advancement, promotion or other change of status of other employees.
Exempt administrative employees must primarily perform office or nonmanual work directly related to the management or general business operations of the employer or its customers. This must include the exercise of discretion and independent judgment on matters of significance.
"Learned professionals" must primarily perform work that requires advanced knowledge in a field of science or learning that's usually acquired through a prolonged course of specialized academic training. For the "creative professional" exemption, the employee's primary duty must be performing work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor, such as music, writing, acting and graphic arts.
As noted, litigation could bring the new salary thresholds to a halt, temporarily or permanently. Employers should continue to monitor developments, so they're not caught off guard and out of compliance.
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