DOL Announces Final Overtime Rule, Effective July 1

As we predicted, the U.S. Department of Labor announced a final rule increasing the salary threshold to qualify for certain overtime exemptions under federal law. Salaried employees who make less than $43,888 annually cannot be considered exempt and will therefore be eligible to receive time-and-a-half pay for every hour they work beyond the standard 40-hour workweek.

These salary requirements do not apply to outside sales employees, teachers, and employees practicing law or medicine. Currently, to qualify for exemption, employees generally must be paid no less than $684 per week ($35,568 annually) on a salary basis.

The increase will take effect in two stages. Effective July 1, 2024, employees classified as exempt under the executive, administrative, or professional exemption must receive a salary of more than $43,888 per year ($844 per week) to maintain the exemption. Effective January 1, 2025, the minimum threshold will then jump to $58,656. The rule also automatically updates these thresholds beginning on July 1, 2027.

Change is Required for PA Employers

Employers must take action by July 1, 2024, or they could be subject to misclassification lawsuits or millions in liability exposure for even a few misclassified employees. The DOL estimates that this ruling will impact 4 million employees. Employers need to increase base salaries to ensure exempt employees make at least the new minimum salary required OR reclassify currently exempt employees as nonexempt and provide them with the rights and benefits that nonexempt employees are entitled to (e.g., minimum wage and overtime pay).

Next Steps for PA Employers

  • Perform a classification audit.  Audit employees to ensure they meet “exempt” requirements. Generally, exempt employees satisfy three tests:
    • Salary-level test: Employers must pay employees a salary of at least $684 per week. The FLSA’s minimum salary requirement is set to remain the same to start 2024, but the United States Department of Labor (DOL) has published a proposed rule that would increase the minimum salary requirement sometime in 2024 (see below).
    • Salary-basis test: With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.
    • Duties test: Employers should audit job roles for employees classified as exempt to ensure compliance. The audit should involve assessing each exempt employee’s “primary duties” against those outlined by the DOL.
  • Perform a cost-benefit analysis to maintain exemption.  Employers considering converting an exempt employee to non-exempt instead of raising their base salary to comply with the new minimum should consider whether anticipated overtime will be more costly than the salary increase. It will likely be more costly to convert exempt employees to non-exempt if they frequently work more than 40 hours per workweek.
  • Audit current time tracking policies for exempt employees.  In misclassification lawsuits, employers often face the greatest exposure when they are unable to present any data or timekeeping records for employees classified as exempt. Employers should consider automating time entry practices for exempt employees to avoid misclassification suits. The added timekeeping practice will also help companies audit whether conversion to non-exemption at an hourly rate matching the employees’ salary will be particularly costly.

With less than a month until action is required, employers and their HR departments should begin auditing employee classifications to determine who may be affected by this ruling. Feeling overwhelmed? Outsource your auditing to the experts at TREW HR. Misclassification can result in costly penalties from the US Department of Labor, even if the error was accidental.

If you have any questions on the ruling or would like more information on how to prepare, please contact us at info@trewhr.com.

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