Last Updated on November 8, 2024

The Department of Labor published its updated federal overtime rule on April 23, 2024. The ruling defines the exemptions for Executive, Administrative, Professional, Outside Sales and Computer employees’ EAP exemption. The rule is slated to go into effect July 1, 2024.

On August 30, 2023, the Department of Labor (DOL) proposed changes to Salary Level Test to expand the number of employees eligible for overtime. The Fair Labor Standards Act (FLSA) mandates employees working beyond a 40-hour week are entitled to overtime pay of at least 1.5 times their standard rate. The Act, however, includes a “white-collar” or executive, administrative, or professional (EAP) exemption. This exemption means that employees operating in a genuine executive, administrative, or professional capacity aren’t entitled to the minimum wage or overtime pay benefits of the Act.

Over the years, to determine who falls under this EAP exemption, three tests have generally been applied:

1. The Salary Basis Test: The employee must earn a fixed and predetermined salary, which isn’t subject to change based on their work quality or quantity.
2. The Salary Level Test: The salary paid must meet a specified minimum amount.
3. The Duties Test: The primary job responsibilities of the employee must be executive, administrative, or professional as defined by regulations.

It’s worth noting that the mere title of a job or its description doesn’t necessarily decide its EAP status. Similarly, paying an employee a salary doesn’t automatically render them exempt.

New Threshold for Salary Level Test

The new rule set forth by the DOL seeks to redefine the compensation parameters in relation to the Salary Level test. This proposal suggests the following:

• Standard salary level be increased from the current $35,568 per year to the equivalent of $43,888 on July 1 2024. It will then increase to the salary level at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region ($1,128 per week or $58,656 annually) effective January 1, 2025.
• Highly compensated employee (HCE) total annual compensation threshold be increased from the current $107,432 annual compensation to the annualized weekly earnings of the 85th percentile of full-time salaried workers, which equates to $151,164.

Ongoing Automatic Salary Level Updates

The current overtime regulations do not include a mechanism of automatic updates. The new rule includes an automatic update provision that would be effective 3 years starting July 1, 2027. Salary thresholds will update every three years by applying up-to-date wage data to determine new salary levels.

Economic Effects of Overtime Rule Changes

Economically, a significant impact on employers. The DOL estimates the updated regulations will expand overtime eligibility to some 4.3 million workers by January 1, 2025. This number is anticipated to increase to 6.0 million workers over 10 years. It is estimated the changes to the rule will result in transfers from employers to workers of $1.4 billion in Year 1 to $2.5 billion in Year 10.

Potential Legal Challenges and Future Outlook

The new rule is expected to face numerous legal challenges. Many business groups have significant concerns regarding the increased costs of the ruling. There are also concerns about previous legal precedents that may pose challenges. Notably, a 2017 decision by a Texas-based U.S. district court, along with opinions expressed by U.S. Supreme Court Justice Brett Kavanaugh, indicate that the original proposal’s emphasis on salary levels could be a contentious point. These precedents suggest that the rule’s approach to salary might not be legally sustainable, raising questions about its viability in the face of judicial scrutiny.

Legal Challenges and Pending Cases

Despite its intended benefits, the rollout of the overtime ruling has not been without hurdles. Several legal challenges have been mounted against the ruling. These legal challenges cite concerns over its economic impact on businesses, administrative feasibility and compliance complexities. As these cases unfold in various courts, the future implementation and scope of the overtime ruling remain subject to judicial interpretation and potential amendments. 

On May 22, 2024, a group of businesses in the Eastern District of Texas filed suit. They state that the DOL exceeded its authority with this final ruling. The case, Plano Chamber of Commerce v. U.S. Department of Labor, is related to the new salary regulations for “white collar” employees under the Fair Labor Standards Act (FLSA). The lawsuit alleges that the DOL does not have the authority to set any minimum salary for “white collar” exemptions.  

Similarly, on June 3, 2024, the State of Texas filed suit seeking preliminary and permanent injunctions. These injunction seek to delay and enjoin the final ruling, this case known as the State of Texas v. Department of Labor. The court suggested consolidating this case and the above case, with this case challenging as the lead case. On June 7, the DOL filed a notice opposing consolidation, but agreed to hear the State of Texas’ motion on June 24. 

In the US District Court for the Northern District of Texas, a software company did the same as the State of Texas on June 3, 2024 seeking preliminary and permanent injunctive relief. Flint Avenue, represented by the New Civil Liberties Alliance, in Flint Avenue LLC v. United States Department of Labor, alleges that the rule was improperly issued by Acting Labor Secretary Julie Su, because she has not yet been confirmed by the Senate. 

What’s Next?

The new overtime rule changes will significantly impact how employers manage and compensate their employees. To prepare effectively for these changes, employers should consider taking the following steps:

1. Review Current Policies: Assess existing salary thresholds and job descriptions to determine which employees are currently exempt from overtime and which are not. This will help identify who might be affected by the new rules.
2. Understand the Changes: Familiarize yourself with the specifics of the new overtime regulations and how they will affect your current employee base.
3. Budget Adjustments: Consider the financial impact of the new rules on your payroll. You may need to budget for increased overtime costs or consider raising salaries to maintain the exemption status of certain employees.
4. Communicate with Employees: It’s important to communicate any changes in policy or employee status well in advance. Keeping employees informed helps manage expectations and reduces confusion or dissatisfaction.
5. Train Management: Ensure that all managers and supervisors are trained on the new rules and understand how to comply with them. This includes tracking hours accurately, managing overtime work, and understanding the implications of misclassifying employees.

Preparing early for these changes can help ensure a smoother transition and avoid potential legal and financial issues.

Have Questions On The New Overtime Rule? Contact MyHRConcierge

Do you have questions about how the new ruling may affect your business? MyHRConcierge can help. We provide human resources compliance counseling for all types of small to mid-sized businesses across the United States. Contact us today at 855-538-6947 ext 108, ccooley@myhrconcierge.com or schedule a consultation below: