Department of Labor Releases New Rules for Overtime Classifications

Department of Labor Releases New Rules for Overtime Classifications

On April 23, 2024, the U.S. Department of Labor (DOL) issued a final rule updating and revising the Fair Labor Standards Act (FLSA)’s minimum wage and salary levels for employees entitled to overtime pay. The final rule entitled, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employee” (“EAP”) becomes effective on July 1, 2024.

Current FLSA Standard Salary Requirements

FLSA mandates that employers pay employees the federal minimum wage for each hour worked and an overtime premium pay of at least one and half-times the employee’s regular pay for hours exceeding 40 hours in a work week. FLSA provides a “white collar” exemption from minimum wage and overtime pay for executives, administrative employees, professionals, and outside sales personnel.

An EAP exemption applies if the employee: (1) is paid a salary or fixed amount not subject to reduction based on work quality or quantity (salary basis test);  (2) earns a salary meeting the DOL’s minimum (salary level test); and (3) primarily performs tasks that are “executive, administrative or professional” in nature (duties test). All three criteria must be satisfied before the employer is exempted from paying overtime wages. The final rule primarily addresses the salary level test and does not modify the duties portion of the test. The existing methodology for the salary level test requires that an employee earn at least $35,568 per year ($684 weekly) to be exempt from overtime pay requirements, which represents the 20^th percentile of weekly earnings of full-time non-hourly workers in the lowest-wage Census region (the U.S. South).

In addition to the white-collar exemption, the FLSA also establishes a total annual compensation threshold for Highly Compensated Employees (HCE). An HCE is exempt if (1) their annual compensation is at least $107,432 including at least $684 per week paid on a salary basis or fee; (2) they primarily perform office or non-manual work; and (3) they regularly perform the exempt duties of an executive, administrative or professional employee.

New FLSA Requirements

The new rules will incrementally raise the minimum salary threshold in two phases. The first phase will increase the salary threshold for lower-paid white-collar employees to $43,888 annually based on the existing methodology on July 1, 2024. The second phase will become effective on January 1, 2025, whereby the new methodology will establish that the annual salary level will increase to $58,656 representing the 35^th percentile of weekly earnings of full-time salaried employees in the lowest-wage Census region. The second phase increase marks a 65% increase from current thresholds.

The new rules will also elevate the minimum annual compensation overtime threshold for HCEs in two stages. The HCE salary threshold  will increase to an annual compensation of  $132,964 on July 1, 2024. Then, on January 1, 2025, the salary threshold will increase to $151,164, representing an annualized equivalent of the 85^th percentile of weekly earning of full-time salaried workers nationally.

The DOL plans to automatically update both the standard salary and HCE compensation thresholds every three years utilizing the same methodology used to implement these increases based on U.S. Bureau of Labor Statistics data.

Employers operating in states with higher minimum salary requirements, which would otherwise qualify for exempt status under the federal regulations, must adhere to the higher thresholds of those states.

Practical Guidance

The DOL reports that these new overtime classification rules will reclassify more than 4 million workers to nonexempt status, leading to significant increases in employers’ payroll costs. Employers with exempt employees falling below these thresholds may need to either raise their minimum salary to meet the new requirements or reclassify their workers as nonexempt, thereby paying them an hourly wage and overtime.

Although these rules will likely face legal challenges, employers should begin reviewing the exempt status of all their employees (including the duties test which was not addressed under this rule) and conduct audits of job duties to ensure that they are compliant with the new federal rules. These processes may include creating lists of all salaried workers and tracking the actual hours worked for exempt employees to gauge how the conversion to nonexempt status would impact the company’s bottom line. If an entity provides separate benefits for exempt and non-exempt employees, the employer may also need to evaluate the cost of conversion in light of those benefits.

Finally, state and local laws may impose additional wage and overtime requirements beyond these federal requirements. The federal requirements under the FLSA serve as the minimum standard but employers must adhere to both state and federal regulations that apply.

For further questions or assistance regarding the DOL’s new overtime classification rules, please contact Nick Gowen (312-840-7088) or Mathew Musipa (312-840-7039).