Additional millions of salaried workers will now be eligible for overtime pay

On April 23, 2024, the U.S. Department of Labor (DOL) announced its final rule to revise the “white-collar” overtime exemption rules for executive, administrative, professional, computer, and outside sales employees. This rule, which will become effective on July 1, 2024, increases the salary thresholds for these exemptions and includes a process for adjusting them every three years.

A notable departure from the proposed rule is that the final rule does not apply to United States territories — Puerto Rico, Guam, Virgin Islands, and the Northern Marianna Islands. The DOL has indicated that they will address United States territories in a future rule.

Many employers have asked the DOL to postpone any changes to overtime pay regulations, arguing that inflation, supply-chain disruptions, and global workforce shortages have increased operating costs. While the rule is expected to face court challenges, employers are advised to prepare for compliance.

New Overtime Thresholds

The Fair Labor Standards Act (FLSA) requires that employers pay employees time and a half for all hours worked beyond 40 hours in a workweek unless the employer can show that the employee fits an overtime exemption. The most common exemptions are the white-collar exemptions for employees who fit the definitions of executive, professional, or administrative employees. Each employee category has a “duties” and “salary” component. To be “salaried,” an employee must be paid a fixed amount for each workweek, and that fixed amount must be at or above a certain salary threshold.

With limited exceptions, the new rule increases the minimum salary threshold for exemption from $684 per week ($35,568 annualized) to $844 per week ($43,888 annualized), effective July 1, 2024. On January 1, 2025, this threshold increases to $1,128 per week ($58,656 annualized).

For “highly compensated employees” — those who regularly perform one or more of the exempt duties of an executive, professional, administrator, computer and outside sales personnel, and meet a higher salary threshold — the rule increases the minimum total compensation level from $107,432 to $132,964 effective July 1, 2024, and to $151,164 effective January 1, 2025.

Beginning on July 1, 2027, and every three years after that, the DOL will implement new salary increases to qualify for the overtime exemption. There are no changes to the salary minimum exceptions for teachers, academic administrative personnel, lawyers, and physicians.

The Impact

The DOL estimates that in the first year after enactment, over 3 million American workers who were previously exempt from overtime will be entitled to overtime based on the new salary thresholds.

Action Steps

Employers must prepare for these changes — and there isn’t much time. If you haven’t done so already, the first thing to do is determine which employees are affected by the new overtime thresholds. Employers must consider increasing the salaries of employees that would become entitled to overtime under the new rule, or simply reclassifying them as non-exempt and eligible for overtime.

Employers must remember — as they ponder the pros and cons (and costs) of different approaches — that if salaries are raised, there might still be a “duties test” risk that could impact the exemption. Employers should consider how bonuses might impact an employee’s status. Also, if certain employees are reclassified as non-exempt, employers need to be sure they can handle the related overtime costs.

If you have any questions or concerns about how this new rule will affect your business, don’t hesitate to contact Orr & Reno for assistance.

Steven L. Winer and Lynnette V. Legra