Overhauling Overtime Pay: How DOL’s New Salary Thresholds Are Impacting Employers

The Fair Labor Standards Act (FLSA) provides overtime pay protections that ensure most workers who log more than 40 hours per week get paid time-and-a-half for the extra hours. Although nearly all hourly workers are eligible, salaried workers are excluded unless their earnings fall below a specified threshold.

When salaried workers’ earnings exceed the threshold, employers can change their status from nonexempt to exempt from overtime pay benefits if their job duties are deemed executive, administrative, or professional (EAP); this scenario typically applies to managers and other employees in executive or professional positions.

On July 1, 2024, the U.S. Department of Labor (DOL) enacted its final rule for changing the overtime pay eligibility guidelines. As we approach the end of this third quarter of the calendar year, employers should be reviewing whether they have properly identified those employees whose exempt status may have been impacted by this final rule.

Calculating Thresholds for Overtime Pay

On July 1, 2024, salary thresholds increased for both EAP and highly compensated employee (HCE) exemptions. For EAP, the threshold rose from $684 to $844 per week ($43,888 annualized). For HCE, the threshold increased to $132,964. In January 2025, the EAP threshold will grow to $1,128 per week ($58,656 annualized), and HCE will rise to $151,164.

Importantly, the new rule introduces a methodology to automatically adjust these salary thresholds every three years based on current wage data from the U.S. Census. Specifically, the EAP salary threshold will be set at the 35^th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, while the HCE threshold will be set at the annualized weekly earnings of the 85^th percentile of full-time salaried workers nationally.

Under the new methodology, thresholds will be closely tied to current wage data and economic conditions instead of static metrics.

Employers should know that nondiscretionary bonuses, incentive payments, and commissions can satisfy up to 10% of the new minimum salary requirement for EAP-exempt employees; for example, under the new $43,888 annual salary threshold, employers can apply up to $4,388 in nondiscretionary bonuses and incentives toward the minimum. This means that the base salary paid to the employee must be at least 90% of the threshold — $39,499 — through 2024.

For HCE employees, the 10% nondiscretionary bonuses and incentives do not apply to the HCE exemption. Therefore, the full HCE annual compensation threshold must be met through base salary alone, without any credit for bonuses or incentives.

Executing Classification Change Management

With the changes to overtime pay protections already in motion, employers need to get ahead of the requirements; creating a list of exempt employees who currently earn between $35,568 and $58,656 is a good start because employers will need to decide quickly whether to raise their salaries or convert them to non-exempt status.

Preserving exempt status

For employees to qualify for exempt status, they must meet both the wage and hour basis and the legal requirements under federal law for white-collar exemptions based on the duties test:

• Executive exemption: The employee must manage the enterprise, direct the work of at least 2 full-time employees, and have the authority to hire and fire.
• Administrative exemption: The employee must perform non-manual work that’s directly related to business management and apply independent judgment.
• Professional exemption: The employee must perform work that requires advanced expertise that’s acquired through specialized instruction or training.

Reclassifying to non-exempt status

If employees are reclassified to non-exempt status, employers need to decide how much to pay, how to determine the regular rate of pay, how to handle incentives and bonuses, how to track time, and how benefits will be affected.

If an employee is reclassified, they should receive prior written communication about the specific changes to their compensation, responsibilities, and work rules.

Developing a training plan for newly reclassified employees and their managers before the changes taking effect helps facilitate the transition. Although the specifics may vary from business to business, employers should cover the following:

• Work hours
• Timekeeping procedures
• Recordkeeping requirements
• Overtime approval policies
• Meal and rest break schedules
• Rules for off-the-clock work
• Policies for using personal devices

For most employers, it’s not feasible to raise every affected employee’s salary to the new threshold, which means that previously exempt-salaried employees will lose the flexibility and status that comes with not having to track and record hours or follow strict work rules. Even if their total compensation remains the same, employers should anticipate and be ready to address how this may impact morale, as some employees may consider the reclassification a demotion.

Planning for Compliance Burdens and Administrative Costs

The DOL’s final rule will require reclassifying a significant number of employees from exempt to non-exempt status in a short period. Due to the level of the increase to the threshold for white-collar exemptions, an estimated 3.6 million additional employees could become eligible for overtime pay.

This action will increase administrative costs and compliance burdens because transitioning employees requires incremental timekeeping, hours tracking, and overtime pay administration. Automatic salary threshold updates every 3 years compound the impact, so employers should be working to build a repeatable framework to address these requirements going forward.

At Gross McGinley, LLP, our business lawyers help HR professionals and business owners take proactive steps to ensure adherence to labor and employment rules. We can help you understand these new DOL guidelines and avoid problems with worker classification and potential liability.