The U.S. Department of Labor (DOL) recently implemented the first phase of a two-step update to overtime pay regulations under the Fair Labor Standards Act (FLSA) that will substantially impact American workplaces.

As of July 1, 2024, the standard salary threshold for white-collar overtime exemptions rose from $35,568 per year to $43,888 per year, or from $684 per week to $844 per week. It will rise again on January 1, 2025, to $58,656 per year or $1,128 per week. Employers have important decisions to make concerning compensation for currently exempt employees who fall below these new thresholds.

New Overtime Exemption Salary Levels

On April 23, 2024, the DOL published the final version of a rule change that had been proposed in early 2023. The first phase increased the weekly salary threshold for executive, administrative and professional employees to qualify for overtime exemption from $684 to $844 effective July 1, 2024. The second phase will further increase the threshold to $1,128 per week, or $58,656 per year, as of January 1, 2025.

Additionally, the minimum annual compensation required to claim overtime exemption under the highly compensated employee provision will rise from $107,432 to $132,964 on July 1, 2024, and subsequently to $151,164 as of January 1, 2025.

Future Adjustments Planned

In an effort to avoid initiating extensive rule-making processes for future updates, the 2024 overtime rule change also introduces automatic threshold adjustments every three years beginning July 1, 2027. The DOL will recalculate salary levels based on the most current wage data available at least 150 days before the update.

Impact on Employers

The DOL estimates that around 4 million currently exempt workers will lose overtime eligibility due to the phased salary threshold increases. Approximately 1 million of those 4 million employees crossed the line into nonexempt status when the initial increase took effect on July 1, 2024. The remaining 3 million exemptions will end upon implementation of the second phase of the new rule on January 1, 2025, if salaries do not change.

Employers have several options for managing the transition and maintaining compliance with FLSA regulations:

Increase Salaries to Retain Exemption Status

The most straightforward approach involves raising employees’ salaries to meet or surpass the updated thresholds for their category of exemption. This approach minimizes disruption but also generates additional costs in higher pay and elevated benefits expenses tied to wages. Compressing existing salary structures can also create morale problems if long-term employees feel pay inequity relative to more recently hired staff earning similar amounts.

Convert to Nonexempt Status

Converting impacted employees to non-exempt status shifts them into overtime eligibility. The inherent opportunity for extra earnings offsets the general absence of a salary increase for the employees. However, fluctuating pay could make budgeting difficult depending on variability in overtime needs. These newly nonexempt personnel will also lose access to certain salaried benefits and perks.

When calculating new hourly rates for converted employees, the goal should be cost neutrality in either direction. If workers typically do not incur overtime, divide their current annual salary by 2,080 hours to generate an hourly rate targeting the same overall compensation for a 40-hour work week. For employees who regularly accrue overtime, the total annual hours method will estimate the total hours expected, including overtime. Divide the salary by those anticipated total hours to produce an hourly rate covering that typical extra time.

Implement Fixed Salary Plus Overtime

Rather than transitioning affected workers all the way to pure hourly, nonexempt status, employers can elect to shift them to a fixed salary plus overtime structure. This hybrid approach allows for the retention of some salaried advantages even while paying time and a half for working over 40 hours per week, as the FLSA mandates. Careful tracking of hours will remain crucial for calculating accurate pay.

Create or Revise Existing Flat Dollar Allowances

Employers can explore instituting or reworking monthly or annual flat-dollar bonus payments as a way to help close the exemptions salary gap. Designating part of employees’ compensation as a recurring flat allowance avoids the additional administrative work of documenting hours. These payments must meet requirements regarding discretion and calculation methods for exemption eligibility. They also do not scale relative to hours worked in the same manner as hourly overtime rates.

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Copyright © 2024 Smarts Publishing. This is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.