Salary thresholds for overtime pay exemption increased

The Department of Labor (DOL) issued final regulations — along with Frequently Asked Questions and a related Fact Sheet — on the Fair Labor Standards Act (FLSA) salary thresholds associated with the overtime pay exemption for executive, administrative and professional (EAP) employees and highly compensated employees (HCEs).

Following are key provisions of the final rules:

• The minimum standard salary required for an EAP employee to qualify for exemption is increased to $844 per week (equivalent to $43,888 per year) effective July 1, 2024, and then to $1,128 per week (equivalent to $58,656 per year) effective January 1, 2025. The current limit is $684 per week ($35,568 per year).
• The total annual compensation requirement for the special overtime exemption for HCEs is increased to $132,964 per year effective July 1, 2024, and then to $151,164 per year effective January 1, 2025. The current HCE limit is $107,432 per year.
• The salary thresholds will be updated every three years starting July 1, 2027.
• The DOL proposal in 2023 to update the standard salary level that is applied to the four U.S. territories subject to the federal minimum wage — Puerto Rico, Guam, the U.S. Virgin Islands and the Commonwealth of the Northern Mariana Islands — will be addressed in a future rule, as will the special salary levels for American Samoa and the motion picture industry.
• The “duties” tests for the exemptions will remain unchanged.

Back in 2016, a U.S. district court issued a nationwide injunction to stop fairly extensive DOL changes to the overtime rules. The U.S. Court of Appeals for the Fifth Circuit placed a hold on an appeal while the DOL narrowed its rulemaking to focus on updating the salary thresholds that are part of the overtime exemption analysis. The DOL eventually finalized these new thresholds in 2019, and the recent regulations update those 2019 thresholds.

As in the past, these latest regulations may face challenges in the courts and by a new presidential administration if one is elected in November.

Note that the higher salary thresholds may not affect employers in states where the thresholds already exceed the new federal thresholds. For example, the current California salary threshold is $1,280 per week ($66,560 per year). The salary thresholds in New York currently range from $58,458 to $62,400, depending on location. If a state establishes a higher standard than that established under the FLSA to qualify for an overtime pay exemption, the higher standard applies in that state.

Employer implications

Employers will need to ensure compliance with the latest regulations. While increasing pay to meet the new minimums will directly affect payroll costs, these new rules may indirectly impact the cost of employee benefits, such as by reassigning employees to different health coverage programs based on exemption status and increasing retirement plan contributions. Moreover, broader implications may affect other reward programs, such as incentive plans, paid time off and premium pay offered to non-exempt employees.

Employers will also need to prepare for potential process changes, including timekeeping, budgeting and manager training.

In addition, remote work arrangements need to consider the need for accurate recording of meal and rest periods. Importantly, communication to employees and managers regarding timing and process should be included in an employer’s compliance plan.

For many employees, a reclassification from exempt to nonexempt may be perceived as a step backward in their careers. Employers should consider helping them understand it is a compliance exercise with no bearing on the value of their work to the organization.

Preparation for compliance also provides employers an opportunity to enhance the overall governance of FLSA classification decisions, mitigating compliance risk by having 1) well-documented processes; 2) periodic audits and consultation with legal counsel; and 3) regular training for human resources partners, payroll professionals and line managers.

Going forward

Despite the uncertain future of these regulations, employers might want to consider a three-step compliance process:

1. Identify currently exempt jobs in which employees earn less than the new minimum salary threshold and programs specific to non-exempt employees.
2. Analyze and select the best approach for FLSA compliance for each job, reflecting the law, the organization’s HR and reward strategies, and its business goals.
3. Prepare for possible changes to pay, job responsibilities, affected programs and operations.