U.S. DOL’s Final Overtime Rule Increases Salary Thresholds for Exempt Employees

As of July 1, 2024, an estimated one million employees who are currently salaried, exempt employees in the United States could be impacted by the salary threshold change. These employees, unless there is intervention by their employer, might become eligible for overtime pay under the Fair Labor Standards Act (FLSA) after working 40 hours in a workweek. According to the U.S. Department of Labor (DOL), another estimated three million could be impacted on Jan. 1, 2025.

On April 23, 2024, the DOL published a final rule that raises the minimum salary threshold of the standard exemption for executive, administrative, professional, and outside sales employees, as well as some computer employees from the minimum wage and overtime protections under the FLSA. These are often called the EAP or white-collar exemptions. The final rule also increases the total annual threshold for highly compensated employees.

What are the Salary Thresholds Under the New Final OT Rule?

The minimum salary threshold for the EAP exemption will increase to:

• $844 per week (approximately $43,888 per year) from its current level of $684 per week (approximately $35,568 per year) on July 1, 2024
• And then to $1,228 per week (approximately $58,656 per year) on Jan. 1, 2025

The second increase sets the salary threshold nearly $3,600 more than the amount included in the DOL’s proposed overtime rule issued in 2023. Similarly, the increases to the highly compensated employees (HCE) salary are more than originally proposed. The minimum annual compensation threshold for an HCE will increase to:

• $132,964 on July 1, and then to $151,164 on Jan. 1, 2025

The new threshold eventually will be more than $7,000 more than its current amount.

Included in the rule is a provision to update the thresholds automatically every three years using current wage data. Under the new rule, the white-collar exemptions salary threshold was set based on the 20^th percentile (for July 1) and then 35^th percentile (Jan. 1, 2025) of weekly earnings of full-time salaried workers in the lowest-wage Census region.

The new OT rule includes language that permits the DOL to temporarily delay any subsequent increases.

These changes, including even higher thresholds than in the proposed rule, leave businesses in a position of having to make decisions about their employees prior to the deadlines.

Steps Businesses May Consider Around New OT Rule?

It might not be as simple as just increasing the salaries of impacted currently exempt employees to maintain their exempt status under the FLSA, especially since that isn’t always financially prudent or possible for a small business. Plus, the amount of an employee’s salary isn’t the only factor used in determining whether they are 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.

• Review each employee’s classification. And then consider next steps for impacted employees. Will you consider adjusting an employee’s salary or, instead, reclassify them as nonexempt. Note that changing an exempt employee to nonexempt status includes other considerations on pay including how compensation such as bonuses might impact the calculations of any overtime pay owed to the reclassified employee.
  • With more nonexempt employees, your recordkeeping responsibilities could increase. You might need to consider new or improved technology to handle an influx of administrative tasks for employee time keeping.
  • Exempt and nonexempt status may be determined by any number of tests, such as the salary basis test, the salary threshold test, and the job duties requirements under the FLSA’s white-collar exemptions.
• Consider unintended ways reclassification could affect your business. Overtime expenses might rise, employee morale might dip, turnover could increase, some employee might perceive themselves as having been demoted, benefits tied to compensation could change, etc.
• Revisit policies on use of company equipment and hours worked. Policies should be reviewed to ensure they clearly set forth any expectations for exempt and nonexempt employees about the use of company equipment and personal devices outside of work hours and while traveling for business.
• Provide advance notice and proper training. You should check to see whether your state or local jurisdiction has laws requiring advance notice of wage changes. Employees reclassified as nonexempt should receive training on relevant company policies or procedures including timekeeping, meal and rest breaks, approval for overtime work, and more.

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 calculations of overtime hours (e.g., daily) and different types of overtime (e.g., tipped employees) and rates 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 still 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 a professional, executive, or administrative position and meets the following three requirements: their earning level meets the standard threshold ($844 as of July 1, 2024, and then $1,128 as of Jan. 1, 2025), 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.

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. For example, California has a one-day rest rule that prohibits an employer from requiring an employee to work more than six consecutive days in a workweek.

Paychex Can Help

Paychex understands the complexities created for employers by the new 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 changes to the federal overtime rule in the future 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.