U.S. DOL’s 2024 Overtime Rule Vacated, Salary Thresholds for Exempt Employees Revert to 2019 Rule

Businesses can stop preparing for a second increase in the minimum salary thresholds of the Fair Labor Standards Act’s (FLSA) executive, administrative, and professional (EAP) exemptions and the highly compensated employee (HCE) exemption under the U.S. Department of Labor’s 2024 Overtime Rule. The additional increase was slated to go into effect Jan. 1, 2025, and could have impacted an estimated three million workers, according to the DOL. The rule also would have updated thresholds automatically every three years.

On Nov. 15, the U.S. District Court for the Eastern District of Texas vacated the 2024 Overtime Rule nationwide, ruling the agency exceeded its statutory authority. With the decision, the thresholds revert to the amounts established by the 2019 Overtime Rule.

The DOL has appealed the decision, but not much headway is expected heading to the U.S. Court of Appeals for the Fifth Circuit, considered one of the most conservative courts in the country. Plus, the incoming administration likely would abandon such an appeal since the 2019 rule came out during the previous administration’s time in office. The next administration also could decide to engage in new rulemaking that would adopt new EAP and HCE salary thresholds and/or new methodology for determining salary thresholds.

What are 2019 OT Rule Salary Thresholds?

The minimum salary threshold for the EAP exemption is $684 per week (approximately $35,568 per year). The minimum annual compensation threshold for an HCE is $107,432, of which $684 is paid per week on a salary for fee basis.

Steps Businesses May Consider Regarding OT Rule

The court’s decision also vacated the July 1, 2024, increase, which made an estimated additional 1 million workers eligible for minimum wage and overtime protections under the FLSA. Employers who made changes to employee salary structures or classifications due to the July increase should consult with their legal counsel before making any decisions related to pay or classification of impacted employees. They should also be mindful of any state-specific salary requirements in effect.

Whereas this decision might have eased employer fears of rising labor costs, salary isn’t the only factor used in determining whether an employee is exempt from the FLSA’s minimum wage and overtime protections. Requirements related to the basis on which the employee’s salary is paid and primary job duties must also be met to satisfy an exemption under the FLSA.

What is Overtime Pay?

Under the FLSA, overtime pay is one and one-half times an employee’s regular pay rate for every hour that is worked beyond 40 hours in a workweek. There are exceptions because not everyone is eligible for overtime pay, including exempt employees. There are also different types of overtime requirements that can vary between states and cities.

What Businesses Are Required to Pay Overtime?

Any business covered under the Fair Labor Standards Act (FLSA) is required to pay nonexempt employees overtime pay. A business with two or more employees (Enterprise Coverage) is covered by FLSA if:

• They have annual sales of at least $500,000
• They engage in running a hospital or facility that cares for the sick, aging, and mentally ill; provide education (preschool through institutions of higher learning)

An employee does not have to work for a business with Enterprise Coverage to be covered under FLSA. There is also Individual Coverage available to protect nonexempt employees if:

• Employee activities include conducting business between states, including sending mail or making phone calls to persons in other states, and handling goods moving into the state or out of the state.

The law, generally, also covers housekeepers, cooks, and other domestic service workers

Do Small Businesses Have to Pay Overtime?

Some smaller businesses that don’t meet the specifications to be covered by the FLSA still might have obligations under their state’s overtime law, as well as an obligation to pay overtime to a nonexempt employee who is covered under the Individual Coverage rules. Employers should consult legal counsel and their state labor department to understand any additional requirements.

How are Employees Classified Nonexempt or Exempt?

An employee’s eligibility for overtime pay is based on employee classification — exempt and nonexempt. Nonexempt employees must be paid at least the minimum wage for all hours actually worked and must be paid the appropriate overtime premium when they work more than 40 hours in a workweek. Again, employers should be aware if their state has additional obligations, such as California, which requires employers to pay overtime to an employee who works in excess of eight hours in a workday, as well as for the first eight hours on the seventh consecutive day worked in a workweek.

An exempt employee typically works in an EAP position and meets the following three requirements: their earning level meets the standard threshold, which reverted to $684 following the court’s ruling, they are paid on a salaried basis (e.g., salary isn’t reduced based on quality of quantity of employee’s work), and they perform job duties considered exempt.

• Professional exemption: Primary duties involve consistent exercise of discretion and judgment requiring an advanced degree or their work involves invention and originality.
• Executive exemption: Primary duty involves managing or supervising two or more full-time employees or their equivalent with authority to hire and fire or whose recommendations regarding hiring and firing are given particular weight.
• Administrative exemption: Primary duties involve non-manual work that helps in managing the business, requiring the use of discretion and independent judgment.

There are additional exemptions, including for Outside Sales, Computer employees, and Highly Compensated Employees (HCEs). More details on the duties for employees who fall under those exemptions can be found on the DOL Fact Sheet #17.

States might have additional requirements that must be met for them to be classified as exempt.

Can Employers Refuse to Pay Overtime?

No. Employers covered by FLSA are required to pay the applicable overtime premium to nonexempt employees for all hours worked over 40 in a workweek, even if the work resulting in overtime was not authorized.

As an employer, you can implement a policy that prohibits unauthorized overtime, and an employer may discipline, up to and including terminating, an employee who consistently violates company policy.

However, if a nonexempt employee does work overtime then they must be paid at the applicable overtime rate.

The risk involved in not paying an employee overtime can be substantial. You could be required to pay back wages, fines, and possibly the employee’s legal fees. Plus, depending on your state’s laws, you might be at risk for additional penalties.

Can an Employee Refuse to Work Overtime?

The simple answer is yes. An employee can refuse to work overtime but must be mindful that in “at-will employment” states, they can typically also be fired for refusing their employer’s request. There are exceptions in some states.

Paychex Can Help

Paychex understands the complexities created for employers by the now-vacated 2024 OT Rule. If you have questions, we recommend having a conversation with an HR expert or legal counsel. Additionally, employers need to understand how to classify employees and stay up to date on future changes to the federal overtime rule or state requirements that could impact their business. Consider how a payroll service provider such as Paychex could alleviate some of the work and give you time back to grow your business.