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DOL Announces Significant Changes To Federal Overtime Rules

The highly anticipated final rule regarding overtime protections under federal law was announced by the U.S. Department of Labor (“DOL”) on April 23, 2024. This final rule dramatically increases the minimum salaries that employees must be paid to qualify for certain exemptions under the Fair Labor Standards Act (“FLSA”).

These increases are set to take place in two phases:

• As of July 1, 2024, the minimum weekly salary for employees who qualify for the “white-collar” exemptions will increase to $844 per week, and the compensation threshold for “highly compensated” employees will increase to $132,964 per year.

• Beginning January 1, 2025, the “white-collar” exemption salary threshold will increase to $1,128 per week, and the annual compensation threshold for "highly compensated" employees will increase to $151,164.

Additionally, these new salary thresholds would be adjusted every three years based on inflation.

The DOL has proposed similar changes in the recent past. Under the Obama administration, a proposed rule that would have significantly increased the overtime salary thresholds was challenged by business groups and enjoined by a federal court in Texas days before it was set to take effect. It seems likely that this rule will also be challenged, and may possibly be struck down, within the coming weeks.

Pending such possible developments, however, employers must be prepared for the final rule to take effect beginning July 1, 2024. Once these changes are implemented, millions of salaried employees who are currently exempt from overtime protections may become eligible for overtime pay, unless their salaries are increased in accordance with the new thresholds.

Current FLSA Overtime Exemptions

Under the FLSA, employees generally must be paid overtime pay at a rate of 1.5 times their regular rate of pay for all hours actually worked over 40 hours in a work week, unless they qualify for an exemption as defined by the FLSA regulations.

Currently to qualify for one of the “white-collar” exemptions under the FLSA, an employee must satisfy the following three tests:

1. Be paid on a salary basis;

2. Be paid a weekly salary of at least $684, regardless of hours worked; and

3. Primarily perform bona fide executive, administrative, or professional duties as defined by the FLSA regulations.

To qualify for the “highly compensated employee” exemption under the FLSA, an employee currently needs to be paid on a salary basis, earn at least $107,432 per year, and satisfy a minimal duties test as defined by the FLSA regulations.

What Is Changing?

Effective July 1, 2024, the final rule will increase the second prong of the white-collar exemption test from the current minimum weekly salary of $684 per week ($35,568 per year) to $844 per week ($43,888 per year). It will also increase the minimum annual salary for the "highly compensated" employee exemption from $107,432 to $132,964 per year.

Then, on January 1, 2025, these amounts will be increased again as follows: the minimum weekly salary will be increased to $1,128 per week ($58,656 per year), and the annual salary amount for "highly compensated" employees will be increased to $151,164 per year.

The final rule also requires future updates of these salary thresholds every three years, starting on July 1, 2027. It is not clear how these amounts will be determined in the future, but the DOL has advised that it is developing a methodology that will be based on current earnings data at the time of the increase.

It is important to note that some specific classifications of employees – such as teachers, school administrators, attorneys, and certain healthcare providers – qualify for the professional employee exemption under the FLSA but are not subject to the salary basis and salary threshold requirements. Therefore, the changes implemented by this final rule will not impact such employees.

Next Steps For Employers

In light of the DOL’s announcement of the final overtime rule, it is critical that employers review their pay practices and employee classifications to determine how these changes may affect their workforce.

Most importantly, employers should be looking at whether any of their employees who are currently classified as exempt under one of the white-collar exemptions are paid less than $844 per week. Although the second phase of the final rule is not set to take effect until January 2025, employers should also consider how this change will affect any exempt employees currently earning less than $1,128 per week.

Employers should also determine if any current employees classified as exempt under the "highly compensated" employee exemption earn less than the new thresholds of $132,964 and $151,164 per year.

To the extent that an employer has exempt employees who are earning less than the new salary thresholds, the employer will need to decide how to ensure compliance with these changes. For employees impacted by this final rule, employers may consider re-classifying the positions as non-exempt, which would make those employees eligible for overtime pay. Alternatively, an employer could increase the employee’s weekly or annual salary amount to keep the position exempt from overtime. Employers should be mindful that re-classifying a position as non-exempt entails additional compliance responsibilities under the FLSA, such as minimum-wage and time-tracking requirements.

This can be a tricky area to navigate, so employers are advised to consult with legal counsel to determine how best to ensure compliance with the final rule.

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SHPC will continue to monitor developments with the DOL’s final rule and provide updates as they occur. In the meantime, please feel free to contact one of our experienced employment attorneys with any questions regarding overtime exemptions or employee classifications.