Impact of the April DOL Ruling on Overtime Pay
The recent U.S. Department of Labor (DOL) ruling modifies the provision in the Fair Labor Standards Act (FLSA) exempting certain kinds of “white-collar” employees from the Act’s minimum wage and overtime pay requirements. This change, effective July 1, impacts a broad range of employers across the country and results from a Supreme Court decision in February 2023 involving an oilfield worker and his employer.
The FLSA establishes minimum wage, overtime pay, recordkeeping and youth employment standards, and affects employees in the private sector and in Federal, State and local governments. It requires overtime to be paid at a rate of time and a half to covered employees working more than 40 hours in a week; however, executive, professional and administrative employees paid on a salary basis are exempt from this requirement. The new DOL rule raises the earnings threshold as one component of the test for the exemption and establishes a mechanism for future increases.
An Exemption Change
The Supreme Court’s decision addresses the exemption for executives who are considered “highly compensated” with an annual salary of $107,432 or more. Even if an employee meets the “highly compensated” threshold, the worker can still qualify as non-exempt under the FLSA if his or her paycheck is based on a daily rate of pay rather than a predetermined, fixed salary. In such cases even a highly-compensated employee will be classified as non-exempt as occurred in the case of the oil field worker. To be exempt from overtime under the white-collar exemption, criteria considered include the threshold salary amounts plus a duties test. If employees are paid at a lower amount or do not qualify under the tests, they must be paid overtime at 1.5 times the regular hourly rate for time worked that exceeds 40 hours in a workweek.
Does it Apply to My Organization?
The FLSA is generally applicable to employees at organizations with annual gross sales of $500K or more. However, it also applies individually to employees working in interstate commerce or producing goods for commerce. Regardless of the annual gross sales amount, the FLSA is applicable to some types of organizational categories as a whole, whether profit or not-for-profit, including hospitals, entities providing residential medical or nursing care, schools and public agencies.
The DOL regulation includes a two-part approach to implementing the change, providing employers with options of how to adjust the pay of exempt employees. Effective July 1, 2024, the annual salary minimum for white-collar exemptions to overtime requirements will increase from $35,568 to $43,888. As of January 1, 2025, this baseline will rise to $58,656 annually. Employees making less than the threshold can be eligible for overtime based on the number of hours worked. This rule will affect millions of workers and represents a baseline increase of nearly 65% by 2025, a change that could have significant budget impact for many employers. In addition, the overtime threshold will be increased automatically by the DOL every three years starting on July 1, 2027.
The Tests
What are the tests for bona fide exempt executive status and a highly-compensated employee? The employee must:
- Receive his or her earnings on a predetermined, fixed salary basis and not be subject to reductions due to variation in quality or quantity of work.
- Perform at least one of the following duties regularly:
– Managing enterprise
– Directing other employees
– Exercising the authority to hire and fire
Employers impacted by the FLSA must also keep time and pay records for each covered nonexempt worker with accurate information about the employee and data about hours worked and wages earned.
What Your Organization Should Do Now
- Immediately review payroll practices to determine if the new ruling will impact any employees and/or classifications. Keep in mind there may be additional State and local laws that impact exempt status and overtime.
- Work with your human resources and compensation specialists or choose to obtain outside wage and hours expertise for this review, such as employment legal counsel.
- Decide about possible salary adjustments for those employees impacted so they can remain exempt. In other words, will you raise the salary of employees who earned above the overtime salary threshold under the prior standard, but now will be below it?
- Will you choose to comply with only the 2024 threshold now or also with the 2025 level?
- As an employer, you may choose not to raise salaries. Rather, you may pay overtime to these employees when they work more than a 40-hour workweek. You may also decide to adapt schedules for these employees to limit overtime expense.
- Plan your salary and overtime budget requirements for the changes.
- Modify internal policies and operational processes to reflect compliance with the regulatory changes and to guide employee decisions. Make needed changes in the payroll and human resources systems.
- Verify that your time and pay tracking and reporting systems are in compliance with FLSA requirements.
- Plan for implementation including training for employees on time-keeping requirements and rules against off-the-clock work.
- Use clear internal communications throughout the process to explain the reasons that formerly-exempt employees are now being classified as non-exempt. Be ready for questions and possible employee relations concerns, especially from those whose status will be changing.
A Fresh Start
Look at this new ruling as a good time to conduct a thorough review of your job classifications. This may include making changes in employee job categories that are currently in a gray zone with the duties tests. It’s an ideal time for a fresh start!
