Businesses Face a Choice on How to Address DOL Overtime Rule Change

The new U.S. Department of Labor (DOL) rule making more salaried employees eligible for overtime pay will require organizations to make changes to various employee salaries, payroll systems, and business strategies.

Effective July 1, the Fair Labor Standards Act’s (FLSA’s) annual salary-level threshold for white-collar exemptions to overtime requirements will increase from $35,568 to $43,888. On Jan. 1, 2025, the annual salary threshold will rise again to $58,656.

This phased approach gives employers the opportunity to avoid making large salary increases in one fell swoop. But employers may not want to go through this process twice within a year for the same employees, so many organizations may choose to make the necessary payroll changes all at the same time. That said, the Jan. 1, 2025, increase is much steeper than the July 1 is and may be more vulnerable to legal challenge.

Employees who fall under the FLSA’s white-collar exemptions for administrative, professional and executive employees are not eligible for overtime pay. To qualify for the white-collar exemptions, workers must be paid a salary of at least the threshold amount and meet certain duties tests. If they are paid less or do not meet the tests, they must be paid 1.5 times their regular hourly rate for hours worked in excess of 40 in a workweek.

How Should Employers Respond?

The near certainty of legal challenges to the rule dictates caution with respect to actual implementation. Be prepared to meet the stated compliance deadlines, but you can expect that the legal uncertainty may delay the implementation dates.

To comply, your organization first will need to identify currently exempt employees who make less than the new salary threshold ($43,888 as of July 1 and $58,656 as of Jan. 1, 2025) and more than the old threshold ($35,568). Once that’s done, employers will need to decide whether to raise salaries to keep those employees exempt or to reclassify them as nonexempt. There are drawbacks to both approaches.

Increasing salary levels to maintain the exemption will have obvious budgetary implications. In addition, potentially dramatic salary increases in certain roles likely will have pay implications for other job categories that are not directly affected by the new rule.

Depending on the nature of the business and the anticipated need for relevant employees to work beyond 40 hours in a week, reclassifying them as nonexempt could turn out to be less costly than raising salaries to maintain the exemption. (Note: If those employees have been allowed to track and use compensatory time off for hours over 40, the employer will have a reasonable baseline for predicting potential overtime costs.)

If your organization chooses to reclassify certain employees, managers will need to inform them employees that they are now eligible for overtime and then train them on relevant timekeeping practices.

Don’t expect all reclassified employees to jump for joy over their new status—especially if they have never been eligible for overtime pay. Many white-collar employees value their exempt classification as a sign of their professional status. They may bristle under a rigorous timekeeping rubric and overtime work rules. These employees are probably accustomed to working as many hours as it takes to complete their work and they possibly do not observe standard daily work hours. Your communications and employee relations challenges may ultimately be even more problematic than the reclassification process.

[Related Resource: SHRM Annual Conference & Expo 2024 concurrent session “Wage and Hour Compliance: A DOL Update and Ways to Avoid Common FLSA Overtime Liability Landmines”]