*Please note: On May 21, 2024, business groups sued the U.S. Department of Labor to block the new overtime rule. This legal challenge might delay or reverse the rule.
Starting in July 2024, millions of workers will become entitled to overtime pay, thanks to the Department of Labor's (DOL) new overtime rule.
What does this DOL overtime rule update mean for your small business? It may mean that you need to change your employees’ classification. Employees who were previously considered exempt from overtime may now be newly nonexempt.
Read on to find out what you need to know and how to prepare effectively.
Understanding the New Rule
The Fair Labor Standards Act (FLSA) ensures employees receive minimum wage and overtime pay for hours worked over 40 in a week.
However, some employees can be exempt from these rules if they meet specific criteria. The U.S. Department of Labor (DOL) sets these criteria, which include job duties, payment methods, and salary levels.
Key Changes for Executive, Administrative, and Professional Employees (EAP)
Under the new rule effective July 1, 2024, exempt EAP employees must be paid a minimum of:
- $844 per week ($43,888 per year) starting July 1, 2024
- $1,128 per week ($58,656 per year) starting January 1, 2025
Teachers, practicing doctors, and lawyers are exempt from these federal minimum salary requirements but may be subject to different state standards.
Computer Employees
Exempt computer employees can be paid on a salary or hourly basis. If paid hourly, they must earn at least $27.63 per hour.
If salaried, they are considered part of the EAP group and must meet the new salary minimums.
Highly Compensated Employees (HCE)
For HCEs, the new rule requires:
- $132,964 in total annual compensation beginning July 1, 2024
- $151,164 in total annual compensation beginning January 1, 2025
Action Plan for Employers
Employers need to prepare for these changes by following these three steps:
Step 1: Identify Affected Employees
Identify exempt employees earning at or below the new minimum salaries. Consider including employees earning up to $65,000 to address potential wage compression.
Wage Compression Explained: Wage compression occurs when the salary floor increases but the ceiling does not, leading to similar pay for employees with different experience levels.
Step 2: Calculate Total Hours Worked
Determine the accurate number of hours worked by affected employees. Accurate time tracking is crucial to avoid unexpected overtime liabilities.
Time Tracking Options:
- Ask employees to track their own hours.
- Have managers track or estimate hours.
- Use expected work weeks based on job descriptions.
Step 3: Evaluate Compensation Options
Compare each employee's current total annual earnings (base salary plus incentives) with the following options:
Option 1: Increase Salary
Raise the employee’s salary to meet the new minimum ($58,656 by January 1, 2025).
Option 2: Reclassify as Hourly Nonexempt
Reclassify the employee and pay them hourly. Calculate the hourly rate by dividing the current annual salary by 2,080 hours (the typical number of work hours in a year).
Option 3: Cost-Neutral Hourly Rate
Determine a cost-neutral hourly rate that accounts for current overtime, ensuring the employee's total annual earnings remain the same.
Option 4: Salaried Nonexempt
Pay the employee a fixed salary for up to 40 hours of work per week, with overtime pay for additional hours. This option requires careful time tracking to comply with overtime regulations.
Consider Compensation Effects
In addition to the wage compression mentioned previously, you should also consider the effects of giving certain employees raises while others stay at the same rate of pay—even if they are in different job types.
For instance, if several male employees receive raises to bring their salary up to the new threshold, while a female employee whose pay is already above the threshold remains unchanged, it could cause considerable trouble, if only from a morale perspective.
Whenever possible, attempt to classify all employees in a particular job group or position the same way. If this can’t be done, document your reasons for the different classifications.
The Golden Rule
While reviewing the recommended policies, keep in mind the golden rule of wage and hour: nonexempt employees must be paid for all the time they are “suffered or permitted” to work. This doesn’t mean time in the office, but all time, whether approved by the employer or not.
What Should You Be Doing Now?
To comply with the new exempt employee minimum salary rule effective July 1, 2024, organizations need to implement several changes.
Step 1: Review and Update Company Policies
Look at your current policies, especially if you have few nonexempt employees. Clearly define your rules on timekeeping and work hours. Add these policies to your employee handbook or send them as updates.
Note: Refusing to pay for unauthorized time worked—whether it’s regular or overtime—isn’t legal.
Step 2: Communicate the Changes
Who will communicate these changes?
Decide who will share the changes. Managers, executives, and HR are usually responsible for this.
Who do you need to communicate with?
Choose whether to inform only newly nonexempt employees or the whole company. A company-wide message might be needed if many roles are affected.
What should be communicated?
Use templates like the Employee Reclassification Letter for consistent communication. Give at least one pay period's notice for pay changes and two or more for classification changes. Keep records of these changes in employee files.
Step 3: Conduct Training
Training for Managers and Supervisors
Managers and supervisors need to understand the new policies, how reclassification affects budgets, and the importance of avoiding unauthorized overtime.
Employee Training
Train employees on new policies, including timekeeping, travel time, and overtime. Make it clear that these policies are mandatory and noncompliance will lead to discipline.
Emphasize Compliance
Explain that these changes are due to federal law, not employee performance. This helps keep morale high.
Step 4: Monitor and Adjust Budgets
Analyze and Adjust Budgets
Monitor your budgets to analyze the impact of reclassification and pay adjustments. Do this for the first six months to a year after making changes.
Stay proactive, keep your team informed, and take it one step at a time.
While this shift can seem daunting, remember, you're fully equipped to handle it. By following these steps and guidelines, your organization can effectively implement the new FLSA minimum salary rule changes, ensuring compliance and maintaining employee morale.
Understanding the basics of HR compliance is crucial, especially now.
To further strengthen your compliance efforts and avoid potential pitfalls, be sure to read our article "How to Ace HR Compliance Basics (and What You Stand to Lose by Getting It Wrong)."
*This article is intended for educational purposes only and does not constitute HR and/or legal advice. Because laws are constantly changing, we do not represent or warranty that the content is comprehensive of all laws and regulations, and/or accurate as of 6/20/2024. Seek guidance from an HR-certified expert or employment lawyer to ensure you've not missed any changes or compliance that you need to be aware of.
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