The Department of Labor (DOL) has released its final overtime rule, bringing mid-year changes and a higher-than-expected salary level increase.
It’ll happen in two phases.
First, by July 1, 2024, executive, administrative and professional employees will need to earn at least $844 per week ($43,888 annualized) to pass the salary level test.
Then, by January 1, 2025, the floor will go up again for these exempt employees to $1,128 per week ($58,656 annualized).
The first round of changes is based on methodology used in the 2019 overtime rule update, while the second round is based on methodology in the new rule.
Compared to the current salary threshold of $684 per week ($35,568 annualized), the salary level will ultimately increase by almost 65%.
Changes for Highly Compensated Employees
Also included in the final rule, the DOL announced the salary floor for highly compensated employees (HCEs) is also heading higher, initially by almost 24%, and then it’ll increase again.
The total annual compensation threshold for HCEs currently sits at $107,432, and that number will rise to $132,964 per year on July 1, 2024.
Then on January 1, 2025, HCEs will need to earn at least $151,164 per year.
Automatic Adjustments
Among the other changes, the final rule adds a new component to the salary threshold rule: automatic adjustments every three years.
So, employers would be on schedule to face the next salary change on July 1, 2027.
The regular updates would be based on earnings data available at each three-year mark, the DOL explained.
While the DOL says the automatic updates will provide greater predictability, they’ll also mean ongoing budgetary adjustments for businesses.
Salary Increase or Reclassification?
As in the past, this round of revisions to Section 13(a)(1) of the Fair Labor Standards Act (FLSA) has been contentious.
In fact, after the DOL posted the proposed rule in the Federal Register on September 8, 2023, it received more than 30,000 comments. The proposed salary number had been $55,086.
It’s likely the final rule will face legal challenges. But for the time being, employers should plan to either:
- raise the salaries of currently exempt employees who earn less than $43,888 per year, or
- reclassify them as nonexempt from the minimum wage and overtime requirements of the FLSA.
5 Factors to Consider
It’s crunch time for companies trying to keep payroll costs low. Here are five factors to consider ASAP with budgetary and compliance concerns in mind:
Factor #1: When you examine the salaries of exempt employees, how close are they to the new minimum level? If someone is earning $55,000 now, your budget might be able to absorb the increase necessary to get that person to $58,656 by January 1, 2025. But if someone’s current salary is, say, $45,000, the budgetary repercussions will be more dramatic.
Factor #2: For employees whom you plan to switch from exempt to nonexempt, will overtime be permitted? If not, will any other employees have the capacity to pick up their unfinished work? Of course, piling too much work on other employees will harm morale.
Factor #3: What type of exemption do employees have? For someone whose classification is executive exempt, avoiding off-hours work — such as checking email or handling emergencies — may not be feasible. Employees classified as administrative or professional may need to attend conferences, evening meetings and other events away from their home community, making the compensability of travel time an issue.
Factor #4: How does the new federal salary threshold compare to your state’s requirements? For example, employers in California must pay their executive, administrative and professional employees $66,560 annually. So, employers there might not blink an eye at the DOL’s higher salary floor. But in Maine where the minimum salary threshold for exempt employees is $42,450.20 per year, moving employees to the new federal threshold will be more of a shock.
Factor #5: If you offer employees a retirement plan with a company match, what will revised contribution numbers do to the bottom line?
