New Overtime Rules To Affect Millions of Employees and Their Employers

  • Employer strategies
  • 4/30/2024
Board meeting discussion

Key insights

  • The Department of Labor issued a final rule to change the minimum salary threshold and highly compensated employee threshold under the Fair Labor Standards Act (FLSA), with both thresholds set to increase. This means some employees who were previously exempt from overtime may now qualify for overtime pay.
  • The changes are estimated to impact up to 4 million employees.
  • This law change includes updates to the thresholds every three years.
  • Review FLSA definitions for salaried exemptions and highly compensated employees and consider how your organization could be impacted.

Compliance concerns with new overtime rules, salary thresholds?

Consult an Advisor

Overtime rule changes are on the horizon, and new Fair Labor Standards Act (FLSA) salary thresholds could significantly impact employers. Review the rules and take necessary steps to stay in compliance, navigate payroll expenses, and communicate any changes needed in your organization.

Background on DOL changes

On April 23, 2024, the Department of Labor (DOL) issued the highly anticipated final rule to substantially change the minimum salary threshold and highly compensated employee (HCE) threshold under the FLSA.

On July 1, 2024, the minimum salary threshold will increase 23.4% over the current threshold. Then, on January 1, 2025, another increase is set to take place resulting in a 64.9% increase over present day.

The DOL estimates changes to the overtime rules could impact up to 4 million employees.

The HCE threshold increases from $107,432 to $132,964 on July 1, 2024, and then to $151,164 on January 1, 2025. The final rule also implements a virtually automatic update to each threshold that will occur every three years beginning July 1, 2027.

The final rule follows the proposed rule published by the DOL on September 8, 2023, and has been submitted to the federal register (not yet published).

Consider new overtime rules and historical context

The FLSA sets rules that determine if an employee is eligible to receive overtime (non-exempt) or not required (exempt). The salary thresholds set by the FLSA are the minimum salary amounts at which point a covered employee becomes exempt from receiving overtime.

In order to classify as exempt most employees have to pass three tests: (1) paid on a salary or fee basis; (2) the salary or fee basis exceeds the minimum, currently $684 weekly; and (3) job duties test. When employees are paid a total compensation that meets or exceeds the HCE threshold, the HCE does not have to pass the, often rigorous, duties test. The tests they will need to pass include: (1) paid on a salary or fee basis; (2) the salary or fee basis exceeds the minimum, currently $684 weekly; (3) some exempt office work included. In addition to salary, total compensation may include bonuses, commissions, and/or incentives.

To fully understand the final rule’s meaning and impact, review the definitions for both salaried exemptions and highly compensated employees. The DOL has laid out these definitions clearly for precise application. An employee must meet the strict definitions to qualify for exemption from overtime.

Fair Labor Standards Act definitions

Salary basis

To qualify for exemption, employees generally must be paid at not less than (amount as determined in the table below) per week on a salary basis. Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis.

The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Subject to exceptions listed below, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. Exempt employees do not need to be paid for any workweek in which they perform no work.

If the employer makes deductions from an employee’s predetermined salary (i.e., because of the operating requirements of the business), that employee is not paid on a “salary basis.” If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available.

These salary requirements do not apply to outside sales employees, teachers, and employees practicing law or medicine.

Bonuses and incentive payments

Employers may use nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis, to satisfy up to 10% of the minimum salary threshold.

Additionally, if after the 52-week period, the employer has not met its financial obligation, the employer can make a final “catch-up” payment within one pay period after the end of the 52-week period to bring an employee’s compensation up to the required level. Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid.

Learn more in the DOL’s Fact Sheet #17G: Salary Basis Requirement and the Part 541 Exemptions Under the Fair Labor Standards Act (FLSA).

Highly compensated employee

The regulations contain a special rule for “highly compensated” employees who are paid total annual compensation (amount as determined in the table below) or more. A highly compensated employee is deemed exempt under Section 13(a)(1) if:

  1. The employee earns total annual compensation of (amount as determined in the table) or more, which includes at least the minimum salary threshold ($684 per week before July 1, 2024, $844 as of July 1, 2024, and $1,128 on January 1, 2025) paid on a salary or fee basis
  2. The employee’s primary duty includes performing office or non-manual work
  3. The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee

Learn more in the DOL’s Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act (FLSA).

A significant exception to the salary requirements

The salary requirements do not apply to outside sales employees, teachers, clergy, and employees practicing law or medicine. Under the FLSA, there are select others that would be impacted, as well.

Watch for potential legal challenges

In 2016, a similar rule updating salary thresholds was finalized. Ultimately, the 2016 FLSA changes were legally challenged, which resulted in the dampening or removing of updated elements.

This 2024 final rule contains similar elements to those that were challenged in 2016, and therefore a legal challenge of this rule is anticipated.

Review the salary threshold timeline and impact

The table below shows the existing rule in effect since 2019, and the upcoming changes by year under the final rule update.

Implementation Timeline

  Current July 1, 2024 January 1, 2025 July 1, 2027
Salary threshold weekly/annualized $684/$35,568 $844/$43,888 $1,128/$58,656 35th percentile of lowest region**
Estimated impacted employees* Those not currently in compliance 1,806,000 employees 4,045,000 employees To be determined
HCE threshold weekly/total annual compensation $684/$107,432 $844/$132,964 $1,128/$151,164 85th percentile of lowest region**
Estimated impacted employees* Those not currently in compliance 223,000 HCE employees 293,000 HCE employees To be determined

*Estimates are quoted from the DOL’s research, analysis, and assumptions.
** These percentiles are applied to the exempt population in the most current census report at the time of threshold increase determination. The current lowest region of the census is the South as defined by the Current Population Survey.

Take steps toward FLSA compliance

  1. Review your FLSA pay practices and classifications in whole and with consideration to state and local labor laws.
  2. Identify your impacted employees. Model potential costs and consider allowable alternative methods for lowering the salary burden below the new thresholds.
  3. Develop a communication plan and training strategy considering all parties, such as stakeholders, managers, and impacted employees.
  4. Plan to implement the payroll changes closer to July 1, 2024. A legal challenge to this rule is likely imminent.

How we can help

Navigating the FLSA and its many exceptions and exemptions can be complex. CLA’s talent solutions team can help you navigate labor law compliance through deep understanding and focused application of the FLSA.

CLA cannot and does not provide legal advice. It’s important to consult with qualified counsel before adopting any new policies. It’s also your responsibility to determine whether legal review of work product is necessary prior to implementation.

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