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New Salary Threshold For FLSA Exemptions From Overtime: Millions More Employees May Be Eligible For Overtime Pay

What Is All the Fuss About?

Under the Fair Labor Standards Act (FLSA), employees generally must be paid an overtime premium of 1.5 times their regular rate of pay for all hours worked beyond 40 in a workweek — unless they fall under an exemption. In recent years, the DOL has attempted to increase the number of individuals who are eligible for overtime. To accomplish this, the DOL has revised regulations to raise the minimum salary that an employee must receive in order for an employer to classify the employee under certain exemptions.

As of this week, millions of additional workers are poised to become eligible for overtime pay, courtesy of the U.S. Department of Labor’s (DOL) updated salary threshold for certain exempt employees. The new threshold exceeds initial expectations, requiring employers to swiftly adjust their pay practices to comply with this significant change. Currently, the salary threshold for exempt employees is $684 a week ($35,568 annualized) under the administrative, executive, and professional exemptions — which are collectively known as the “white-collar” exemptions. Specifically, the DOL has announced that the annual salary threshold for the “white-collar” exemptions will rise to approximately $44,000 by July 1, 2024, and further increase to nearly $59,000 at the beginning of 2025. Consequently, employees must earn at least this new threshold to potentially qualify as exempt from overtime pay under the white-collar exemptions. The DOL estimates that approximately 4 million workers will be affected by this change, potentially prompting substantial adjustments to many employers’ compensation plans.

In addition to raising the salary threshold, the Rule makes the following key changes:

  • The salary threshold will be automatically updated every three years starting on July 1, 2027.
  • The threshold for the “highly compensated employee” (HCE) exemption will rise, first to $132,964 on July 1, then to $151,164 on January 1, 2025 – which is also a bigger increase than initially proposed from the current $107,432. The HCE threshold will also be updated every three years.

These changes appear to be aimed at ensuring that the salary threshold for overtime eligibility keeps pace with inflation and economic changes over time. By automatically updating the threshold every three years, it helps to maintain its relevance and effectiveness in protecting workers’ rights. Additionally, the adjustment to the threshold for the “highly compensated employee” exemption reflects a recognition of changing economic realities and ensures that those in higher-income brackets are not exempt from overtime protections without good reason.

What You Must Do to Prepare for the Changes
The first increase is set to take effect in just over 60 days. While legal challenges have already been filed and many more are anticipated, employers cannot rely on a court to suspend the rule before the effective dates and should start planning without delay. Here a breakdown of the considerations and steps involved:

Assessing Employee Status: Begin by identifying exempt employees who currently earn between $35,568 and $58,656 a year. Determine whether to raise their salary to meet the threshold or convert them to non-exempt status making them eligible for overtime. Before converting an employee to non-exempt status, employers should also consider whether the employee may qualify for another exemption – such as the outside sales exemption – that does not require a minimum salary threshold.

Salary Adjustment or Hourly Rate Calculation: Decide whether to calculate the hourly rate for each employee being converted to non-exempt status based on their weekly salary divided by 40 hours or adjust it to take into account estimated overtime. Or consider other methods of calculations. Be clear, in writing, with employees and the understanding of salary and the hours intended to be worked and covered, especially if you plan to continue paying converted employees a salary and an overtime premium for hours over 40.

Regular Rate Calculations: Understand that overtime premiums are based on the regular rate of pay, which includes “all remuneration” earned from employment with the exception of eight specific exclusions contained in section 7(e) of the FLSA.” For instance, non-discretionary bonuses, commissions, payments for undesirable shifts or duties, and some non-cash payments depending on the circumstances are part of the regular rate. Most bonuses are not discretionary and must be included in the regular rate. It is common for employers to pay out bonuses based on a formula announced ahead of time and designed to incentivize certain behavior. Such bonuses are not discretionary.

Tracking Work Time: Employers are required to make and keep records of non-exempt employees’ working time. Converting employees to non-exempt status may require some planning, and implementation of new technology or processes to ensure that they are accurately recording their work time. Implement systems to accurately record non-exempt employees’ working hours. Also, policies should be reviewed for clarity about acceptable work hours, proper timekeeping procedures, and capturing all hours worked.

Impact on Benefits: If an employer has different vacation, sick leave, and other policies for exempt and non-exempt employees, it will have to consider how to transition reclassified employees to new programs and train workers and their supervisors on the new procedures. Ensure a smooth transition for affected employees. Some employers have different policies for exempt and non-exempt employees when it comes to issuing company equipment and using personal devices. Exempt employees often have more leeway to use company laptops or their own personal devices – such as smartphones – to conduct business while traveling or outside of their regular office hours. Many employers limit such use for non-exempt employees, so they aren’t tempted to perform off-the-clock work. Any reclassified employees should be instructed on new responsibilities or limitations on the use of Company laptops or personal devise, as well as any communications regarding company business outside regular work hours.

Morale Considerations: For many employers, it may not be possible to simply raise every affected employee’s salary to the new threshold, and they must reclassify employees to non-exempt. Recognize that reclassification may impact employee morale. Many employees associate prestige with being classified as a salaried-exempt employee. Oftentimes, exempt employees like the flexibility that comes with being salaried, and they don’t want to track and record their hours worked. Managers who will now have to clock in and out with their direct reports may be particularly sensitive to this change. Therefore, even if their total pay remains the same, employees may view a switch to non-exempt status as a demotion. Employers need to weigh the impact on morale when making the decision to convert employees. Employers should proactively communicate and be prepared to answer questions about the decision to convert employees to non-exempt status. Don’t forget to remind employees that they are valued and let them know that the changes are required in light of the federal government’s new wage and hour rules and that the decisions are meant to keep the business compliant with the latest regulations.

Advance Notice: Provide written communication to each affected employee outlining the changes to their compensation, benefits and new responsibilities and any adjustments to work processes. In addition to developing communications focused on employee relations and morale, employers should provide a written communication to each employee about the specific changes to their compensation and what new responsibilities come with the changes, such as timekeeping, meal and rest breaks, and other requirements, as well as any benefits changes and the method of calculating overtime for hours over 40. Note that some states require advance notice of wage changes, employers should check local requirements. Regardless of the state law, however, clearly communicate the new terms of employment before they take effect.

Policies on Company Equipment: Review and update policies regarding the use of company equipment and personal devices for non-exempt employees.

Training: Develop comprehensive and detailed training for both managers and newly non-exempt employees covering various aspects such as scheduled hours, timekeeping procedures, and policies on off-the-clock work and the need for approval for overtime work. At a minimum training must cover:

  • scheduled hours;
  • overtime approval policies;
  • timekeeping procedures;
  • recordkeeping requirements;
  • rules about meal and rest breaks;
  • policies on using personal devices for work;
  • any changes in benefits eligibility or accrual; and
  • prohibition on off-the-clock work
  • Ensure Compliance with the Duties Test: In order to be classified as an exempt white- collar worker, there are more requirements than just the amount the employee earns. Verify that exempt employees meet the criteria outlined in the relevant exemptions, considering both federal and state requirements.

By carefully considering these factors and taking proactive steps, you can navigate the process of reclassifying employees while ensuring compliance with relevant laws and regulations. Let us know if you need further clarification or assistance with any specific aspect.

We expect to see business groups or states opposing the final rule to file litigation in business-friendly jurisdictions like Texas or Florida in an attempt to sidetrack or derail the rule completely. This is what happened in 2016 when the Obama administration attempted to raise the salary level to over $900 per week. A federal judge in Texas blocked the rule just days before the hike was set to take effect. The DOL stopped pursuing the rule at that time due to a change in the administration. But, employers cannot count on the rule being halted given the uncertain nature of litigation, and therefore, must prepare as if the final rule will take effect as planned on July 1.

Feel free to contact us with specific questions. You can learn more about our products and services on this website or contact one of our attorneys, Jay Rollins or Debra Schwartz by calling  404.844.4130.

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