NEW Department of Labor Overtime Pay Regulations: What Employers Need to Know

The US Department of Labor has announced a significant change to the Fair Labor Standards Act (FLSA), increasing the annual salary threshold for white-collar overtime exemption requirements. Starting July 1, 2024, the threshold will increase…

from $35,568 to $43,888, and by January 1, 2025, it will increase to $58,656. Under the new rule, the department will also implement automatic updates to the salary threshold every three years, starting in 2027.

Employers must decide whether to raise the salary of those employees who earn above the overtime threshold under the old standard (but below it under the new standard), so they remain exempt. Employers that choose not to raise these employees’ salaries above the salary threshold should be prepared to pay overtime to these employees when they work more than 40 hours in a workweek. Further, careful communication should be drafted and rolled out prior to each salary threshold increase to explain why employees formerly categorized as exempt are now nonexempt.

The new salary threshold of $1,128 per week, set to take effect on January 1, 2025, marks a significant shift in the methodology used to determine the minimum salary level for exemptions historically. According to the U.S. Bureau of Labor Statistics, this threshold represents the 35th percentile of weekly earnings for full-time salaried workers in the lowest-wage U.S. Census region, currently the South. The department’s decision to use the 35th percentile has raised concerns about the impact on employers and employees alike.

The new rule has been met with legal challenges from business groups, who claim that the department overstepped its authority and ignored precedent from prior rulings. The lawsuit argues that the rule violates the Administrative Procedure Act, and the rule focuses so much on a salary level to determine whether a worker is exempt from overtime, it eliminated the consideration of their job duties.

Under the Obama administration, the Department of Labor (DOL) attempted to set the standard minimum salary level for white-collar exemptions at the 40th percentile. However, this effort was ultimately unsuccessful. In contrast, the Trump administration opted for a more conservative approach in 2017, setting the standard minimum salary level at the 20th percentile. This resulted in a lower threshold of $684 per week ($35,568 a year) and served as the basis for the first update to $844 per week, effective July 1, 2024.

These changes have sparked debate among experts, with some arguing that the new threshold is too high and others claiming that it is too low. Regardless, employers must now navigate these changes and adapt their policies and practices to ensure compliance with the new regulations. Although pending legal challenges could overturn the ruling, employers should draft their plans and employee communications in preparation for each increase. 

Ultimately, employers must take a proactive and responsible approach to managing these changes and prioritize clear communication and transparency with their employees. By doing so, they can ensure legal compliance, minimize disruption in the workplace, and facilitate a smooth transition.

Recommended next steps for employers include but are not limited to the following:

• Get ready for big changes should the new regulation not be successfully challenged, particularly with the January 2025 salary threshold increase.

• Review current exempt pay practices for compliance.

• Work through your decision tree and fine tune your plan to prepare and execute the change.

• Consider the impact on employee morale and how you can minimize an employee’s impact if they move from an exempt to non-exempt status such as recording worked hours vs. staying in a salaried position.

• Plan to provide advance notice of changes to employees if their exempt status or pay is impacted by the new regulation.

• Review your policies on company equipment and personal devices that may differ for exempt and non-exempt employees to avoid off duty work.

• Develop a training and communication plan for managers and new non-exempt employees.

• Ensure exempt employees meet the “Duties Test” under the FLSA.

• Review applicable state laws that could override Federal Law.

• Stay updated on legal challenges.

If you’d like to collaborate with an HR professional with over 20 years of experience about your company’s approach to this upcoming change, contact Brenda Baker at bbaker@jfcglobal.com or 717-761-8095.