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Takeaway
The Department of Labor recently announced a new overtime rule that will — barring any legal challenges —increase the salary threshold required to exempt certain employees from overtime pay requirements under the Fair Labor Standards Act (FLSA). On July 1 under the new rule as drafted, the threshold will increase to $43,888 annually, and then again to $58,656 on Jan. 1, 2025. The threshold for highly compensated employees will also increase to $132,964 on July 1 and once more to $151,164 on Jan. 1, 2025. Read what you need to know to prepare for this widespread compliance update.
On April 23, the Biden-Harris administration announced the expansion of overtime protections for millions of lower-paid, salaried employees. The final rule increases the salary threshold required to exempt bona fide executive, administrative or professional employees and highly compensated employees from the Fair Labor Standards Act (FLSA).
While this new rule will face legal challenges, it could still affect your business. Here’s how.
What does the new overtime rule do?
Minimum weekly salary for white-collar exemptions increased
For employees whose job duties meet the criteria for the white-collar exemptions (administrative, executive or professional exemptions), the minimum salary to maintain FLSA-exempt status will increase twice within the next nine months to:
- $844 per week ($43,888 per year) on July 1
- $1,128 per week ($58,656 per year) on Jan. 1, 2025
Increased salary threshold for highly compensated exempt employees
Under the Department of Labor’s current requirements, certain highly paid employees who perform office-based or non-manual labor and earn at least $107,432 annually (including a minimum of $684 per week on a salary or fee basis) qualify for the exemption.
These employees must also routinely perform at least one duty typical of an exempt executive, administrative or professional employee as outlined by the Department of Labor’s Wage and Hour Division. The new regulations will raise this threshold to:
- $132,964 on July 1
- $151,164 on Jan. 1, 2025
Subsequent, undefined adjustments are scheduled for July 1, 2027, and every three years that follow.
Who does the new overtime rule affect?
Organizations that currently pay salaried, exempt employees less than $43,888 per year may see their costs per impacted employee increase significantly between now and January 2025.
Top Impacted Industries
According to the Department of Labor, the most affected industries include:
- professional and business services (827,000 impacted workers)
- leisure and hospitality (roughly 24% of workers impacted)
- private nonprofit organizations (18.9% of workers impacted)
- professional and technical services, retail trade and other health care services (these industries may incur the highest costs)
- hospitals (estimated largest cost per establishment)
- food services and drinking places
Top Impacted Professions
- management, business and financial (2 million impacted workers)
- farming, fishing and forestry (about 45% of white-collar exempt workers impacted)
What legal challenges does the new overtime rule face?
Like previous rules related to FLSA, the new overtime rule will likely face several legal challenges. Though it likely won’t pass, one member of Congress has proposed legislation that seeks to prohibit the Secretary of Labor from implementing and enforcing the rule.
Similarly, a 2016 rule that sought to increase the standard salary level from $455 to $933 per week was invalidated less than 10 days before it was to take effect. However, the new rule seeks to avoid the same fate by setting the salary threshold at the 35th percentile of full-time, salaried employees in the lowest-wage census region. (In contrast, the 2016 rule used the 40th percentile.)
How should employers prepare for the new overtime rule?
Despite possible challenges to the rule, employers should:
- review their employees’ exempt statuses and determine who may be affected by the final overtime rule (like those who make less than $844 or $1,128 per week)
- prepare to increase pay or change exempt classifications by July 1 for employees affected by the initial salary threshold increases (up to $844 per week and $132,964 annually for highly compensated employees)
- and consider increasing compensation or changing the exempt classification by Jan. 1, 2025, for employees affected by the full salary threshold increases (up to $1,128 per week and $151,164 annually for highly compensated employees)
Some organizations may hold on acting until the July 1 deadline to give the courts time to address challenges to the new rule.
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