New overtime rules were recently finalized by the U.S. Department of Labor (DOL) and are set to go into effect on July 1, 2024. It’s estimated that these new rules will impact more than four million employees, so it’s imperative that businesses review what changes are on the horizon and what they’ll mean for their employees and payroll processes. We’re breaking down what your business needs to know about these overtime rule updates and what you may need to do to prepare in the meantime.
What’s Happening?
On April 23, 2024, the DOL announced its final rule that will increase the salary threshold employers must pay to certain categories of employees for them to be exempt from the overtime requirements of the Fair Labor Standards Act (FLSA). The minimum salary required for executive, administrative and professional employee exemptions (EAP or white-collar exemptions) will increase as of July 1, 2024. The final rule also includes additional increases for the highly compensated employee (HCE) exemption.
How Will Rates Change?
EAP Exemption Updates
Under the FLSA, most employers must pay their employees 1.5 times their regular rate of pay for all overtime hours worked unless an employee satisfies an exemption, such as the commonly used EAP exemption.
To qualify for exempt status under the EAP exemption, an employee must satisfy three tests:
- They’re paid on a salary basis (salary is not reduced based on the quality or quantity of their work)
- Their earning level meets the standard threshold
- Their job duties primarily involve executive, administrative or professional duties as defined by the DOL
On July 1, 2024, the earning level threshold for the EAP exemption will change from its current level of $684 per week ($35,568 annually) to $844 per week ($43,888 annually). Then, effective January 1, 2025, the threshold will increase again to $1,128 per week ($58,656 annually).
HCE Exemption Updates
An HCE exemption applies to employees who are paid a minimum salary, receive total compensation that meets or exceeds a set amount and customarily and regularly perform at least one of the exempt duties of an exempt EAP employee.
Currently, the minimum salary needed for an employee to meet the HCE exemption is $107,432 in total compensation per year. Beginning on July 1, 2024, an employee must be paid at least $132,964 in total compensation, and effective January 1, 2025, an employee must be paid at least $151,164 per year to satisfy the requirements of the HCE exemption.
For both EAP and HCE exemptions, the final rule calls for automatic salary increases every three years thereafter starting on July 1, 2027. Those increases will be based on earnings data in the U.S. available at the time of the increase. The rule also allows the DOL to delay a scheduled update, should they deem it necessary.
The DOL’s new rule doesn’t include any changes for nonexempt employees. Any business covered under the FLSA is required to pay nonexempt employees overtime pay. If a business has two or more employees, they’re covered by the FLSA so long as they meet any of these conditions:
- Annual sales are at least $500,000
- They engage in running a hospital or facility that cares for the sick, aging and mentally ill
- They provide education (preschool through higher learning institutions)
How Your Business Should Prepare
Businesses should consider the following steps around the new final rule before it goes into effect on July 1:
- Take this time to review each employee’s classification as exempt or nonexempt. Determine whether salaries need to be increased to meet the new thresholds or if an employee should instead be reclassified as nonexempt and comply with overtime pay requirements. Even though the final rule didn’t alter the job duty tests for any of the exemptions, you can still confirm whether currently exempt employees truly meet the job duty test requirements.
- Assess your organization’s policies on use of company equipment and hours worked. If previously exempt employees are now going to be nonexempt, a clear set of expectations on work hours will be needed for a smooth transition.
- Advance notice and proper training may be needed for employees, especially for those reclassified as nonexempt. Consider rolling out training on timekeeping, approval for overtime work and other overtime-related procedures to assist your employees and prepare them for upcoming role changes.
It’s important to keep in mind that your state may have other overtime rules you need to consider in addition to the DOL’s rule change. Depending on where your organization is located, your state may already have higher salary thresholds or different job duty tests — or it could not recognize certain exemptions. Simply increasing an exempt employee’s wages to comply with the new DOL rule doesn’t necessarily mean you’ll remain compliant; you need to review and consider your state’s current labor laws too.
As July 1 approaches, the DOL’s final rule is certain to face its fair share of legal challenges, with two pending lawsuits already in motion. Because there will most likely be new changes to the final rule, it’s recommended that organizations hold off on making any major payroll updates until closer to the July 1 effective date.
If you have any questions regarding the DOL’s new overtime changes and how they may impact your business, Creative Planning Business Services can help. We offer a range of services from payroll to outsourced accounting and can help your business navigate new legal changes so that you can stay compliant and focus on other business matters. Contact us today to learn more about our services.
