The higher overtime salary threshold that kicks in on July 1 will affect a million-plus salaried exempt employees. And it’s good news for many folks — inflation is taking a bigger bite out of everyone’s paycheck and companies are scaling back pay raises and bonuses.
Behind the scenes, many employers will be scrambling to adjust work schedules and responsibilities to minimize paying more OT than they can afford. Businesses that trimmed their workforces in recent years may be in a better position to pay OT as needed to their more critical — and hardest-working — performers.
Just to recap, the Department of Labor (DOL) set a two-phase increase to the salary threshold for “bona fide” executive, administrative and professional employees under the Fair Labor Standards Act (FLSA). The first increase goes into effect on July 1 to $844 per week or $43,888 per year, up from the current $684 per week or $35,568 annualized.
A second increase kicks in on January 1, 2025, when the salary floor goes to $1,128 per week or $58,656 per year. The DOL final OT rule also raises the annual compensation threshold for highly compensated employees to $132,964 per year (up from $107,432), and calls for future OT floor threshold adjustments every three years.
That’s a 65% increase in the salary threshold that companies will need to keep tabs on, and employers have less than a year to prepare for the changes. Failing to pay non-exempt employees time-and-a-half for work time above a normal 40-hour work week can lead to lawsuits and costly fines. Wage and hour claims are costly to litigate, and the government wins disputes more often than not.
OT Changes a Bigger Hurdle for Small Businesses
There are two steps employers can take to comply with the final OT rule: either adjust workers’ pay or reclassify them as non-exempt (if currently exempt). Classifying or reclassifying a worker is not up to the employer’s discretion — decisions must be made according to FLSA guidelines, as affirmed by many court decisions in OT disputes.
Some payroll decisions will be easier to make than others clearly. “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,” notes payroll expert and ResourcefulFinancePro contributor Jennifer Weiss. “But if someone’s current salary is, say, $45,000, the budgetary repercussions will be more dramatic.”
Of course, in the real world, there are other options besides increasing workers’ pay or reclassifying them. Some smaller businesses may choose to lay off employees and/or increase prices, which can lead to a drop in customers and fewer sales. Struggling companies may choose to reduce certain products and services, or close shop altogether.
In California, for example, numerous restaurant and fast food chains laid off workers following a hike to the minimum wage. California Governor Gavin Newsom and Democrat lawmakers are now seeking to pull back a $25 minimum wage set to go into effect for health care workers because of predicted job losses, adding to the state budget debt and negative impacts on patient care. (Some good news for California businesses: The eventual $59K OT exemption threshold set by the DOT is lower than the Golden State’s of $66,560.)
OT is a different animal than minimum wage obviously. But current economic conditions suggest the changes to OT eligibility may prove detrimental to more employees than not. A majority of Americans say the country’s in recession right now despite how well the stock market may be doing. Private payroll numbers came in lower than expected for May, with manufacturing slowing down the most. CEOs and CFOs are cutting costs in any area possible to help their organizations withstand an economic downturn in the second half of 2024 and beyond.
OT Rule Faces Industry Group Lawsuits
The clock is ticking on legal challenges to block the OT rule before the first phase begins on July 1. Business groups representing the construction industry, restaurants and hotels, retail stores and home builders argue the DOT is in violation of the Administrative Procedures Act and a previous court ruling.
Three challenges are now pending in Texas district courts. Texas Attorney General Ken Paxton, rumored to be Donald Trump’s top choice for AG, is now suing to stop the rule, which he describes as regulatory overreach.
At the end of President Obama’s second term in 2016, the DOL sought to raise OT eligibility for millions of workers. Many companies prepared for the significant changes and began to comply. Then eight days before the rule was to go into effect, federal courts stayed the OT rule.
Businesses in Texas and other Southern states will struggle more than other regions to meet the DOL’s planned OT exemption thresholds. OT can also be based on how many hours are worked above an eight-hour work day in four states — Alaska, California, Colorado and Nevada.
