After much anticipation, on April 23, 2024, the U.S. Department of Labor (DOL) released its overtime final rule, updating the salary threshold for overtime exemptions for executive, administrative and professional (EAP) employees and highly compensated employees (HCEs). The rule is slated to take effect July 1, 2024, at which time millions of additional workers will be eligible for overtime pay. Despite the expectation of legal challenges to the rule, employers should prepare to comply with the final rule.

Background

Under the Fair Labor Standards Act (FLSA), employees must be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked in excess of 40 hours in a workweek. The FLSA provides an exemption from those requirements when employees meet each of the following tests:

1. Salary basis test—The employee must be paid a fixed, predetermined salary that is not subject to reduction based on quality or number of hours worked.
2. Salary level test—The amount of salary paid to an employee must meet a minimum specified amount.
3. Job duties test—An employee must perform work that is executive, administrative or professional in nature.

The current law, in effect since 2019, says employees who earn under $684 per week (equivalent to $35,568 per year) must be paid overtime when they work more than 40 hours per week. The total annual compensation requirement for HCEs is $107,432 per year. A proposed rule and request for comments on updating the salary thresholds was issued in August 2023, and after receiving comments, the DOL made additional changes in the final rule.

What is changing for employers?

There are several changes included in the final rule that employers should be aware of.

1. Minimum salary required for exemption. The minimum salary required for a bona fide EAP employee to be exempt would increase in two phases.
   1. Beginning July 1, 2024, the threshold will increase to $844 per week (equivalent to $43,888 per year).
   1. Beginning January 1, 2025, the threshold will increase to $1,128 per week (equivalent to $58,656 per year).
2. Total annual compensation for HCEs. The earnings threshold for HCEs will also increase in two phases.
   1. Beginning July 1, 2024, the total annual compensation requirement will increase to $132,964.
   1. Beginning January 1, 2025, the annual compensation requirement will increase to $151,164.
3. Automatic updates to the salary threshold level. The DOL will update salary threshold levels every three years beginning on July 1, 2027 to keep pace with inflation and provide employers with a timetable for future employee salary adjustments. The DOL included a provision in the rule allowing a temporary delay to scheduled updates in the event of unforeseen economic or other warranted circumstances.

What is not changing?

There are a few aspects of the current overtime rule that are not changing, including:

• Job duties test—An employee must continue to meet both the duties and pay requirements of at least one exemption in order to be classified as exempt.
• The existing weekly salary level of $455 ($23,660 per year) will continue to apply to employers in Puerto Rico, the Virgin Islands, Guam and the Commonwealth of the Northern Mariana Islands.

Will the final rule be challenged?

Yes. According to Reinhart Law, on May 22, 2024, several business and industry lobbying groups filed a lawsuit in the U.S. District Court for the Eastern District of Texas seeking to postpone the effective date of the overtime final rule.

According to the lawsuit, the final rule “disregards concerns raised by the business community and ignores the court’s past legal decisions on the issue” and will lead to increased labor costs for employers impacted by the final rule.

Two additional lawsuits were filed on June 3, 2024 by software company Flint Avenue and the state of Texas. According to those lawsuits, the final rule is arbitrary and capricious, the DOL lacks authority to issue the change and acting Labor Secretary Julie Sue improperly issued the rule because the Senate hasn’t confirmed her.

While awaiting the outcome of these cases or others that may arise, employers should continue to prepare for the final rule to take effect.

What steps should employers take now?

Employers should make a variety of preparations as the final rule effective date approaches.

For exempt employees:

• Confirm that current exempt positions meet the job duties test.
• Consider prohibiting salaried employees from working overtime.

For nonexempt employees:

• Train previously exempt employees and their managers on timekeeping systems and overtime compliance.
• Consider adjusting salary levels or reclassifying positions for employees whose earnings are at or above the current threshold.
• Consider the impact on employee morale when deciding to convert employees from exempt to nonexempt status.

Administrative tasks for all employers

• Provide written communications to all employees about specific changes to their compensation and any new responsibilities that come with the changes (e.g., timekeeping, meal and rest breaks).
• Conduct an audit to determine the financial impact on compensation budgets.
• Review existing timekeeping policies and procedures to ensure that they are compliant and accurate.
• Review applicable state laws for additional wage and hour requirements.
• Monitor legal challenges to the final rule.

Stay tuned to the International Foundation for updates on legal challenges and how to prepare for the final rule.

Resources

• Frequently Asked Questions – Final Rule from the U.S. Department of Labor
• Chart on earnings thresholds for EAP employees from the U.S. Department of Labor

Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.