*Updated on 12/5/2024: This article has been updated to reflect recent changes regarding the FLSA overtime rule. Please read the new developments below.
Exempt Salary Rule Overturned
Well, that didn’t last long. In a surprise ruling on November 15, 2024, a federal court in Texas declared that the Department of Labor (DOL) overstepped its authority with its recent updates to the minimum salary thresholds for exempt employees.
If you’re feeling a bit of déjà vu—this isn’t the first time an updated salary rule has faced legal challenges.
So, what does this mean for employers?
In short, the increases that took effect on July 1, 2024, have been voided.
The upcoming second increase slated for January 1? Canceled. Those automatic updates every three years? A distant memory. Employers are now back to the pre-July 2024 thresholds.
Let’s get into what this means and what steps you, as an employer, should take next.
Reverting to the Old Salary Thresholds
Under the court’s decision, the salary minimums have reverted to their pre-July 2024 levels. Here’s the new (old) reality for employers:
Standard Salary Threshold: $684 per week ($35,568 annually) for most executive, administrative, and professional employees. This replaces the $844 per week requirement under the short-lived rule.
Highly Compensated Employee (HCE) Threshold: $107,432 annually, down from $132,964.
In a nutshell, if you scrambled to comply with the July 2024 rule, you’re now working with outdated but still compliant numbers. The ruling gives employers flexibility to decide how they want to respond—but careful planning and communication are critical.
What Does This Mean for Employers?
With the recent court ruling reversing the overtime rule changes, you might be wondering, "What does this mean for my business now?" Do you reverse any changes you made in anticipation of the new rules? How do you handle communication with your team?
Action Items for Employers
1. Decide Whether to Roll Back Changes
Employers are not obligated to reverse salary increases or reclassifications made earlier this year, but they may choose to do so to align with the lower thresholds.
You cannot retroactively reduce pay or reclassify employees to non-exempt status. Any changes must be prospective.
Review state and local laws, which may require advanced notice or limit your ability to modify pay or classifications.
2. Communicate Clearly and Thoughtfully
Transparency is key. If you’re making changes to employee pay or classification, don’t let them find out from their paychecks. Clear and upfront communication can help reduce confusion and build trust.
Be prepared to explain:
- Why the changes are happening (thanks to the court’s decision).
- How the changes align with your business needs.
- What employees can expect moving forward.
Even a simple acknowledgment that these shifts are due to changing federal law can help employees understand that your decisions are not arbitrary.
3. Don’t Neglect Morale
No one loves hearing their pay is going down (or not going up as planned). To minimize negative reactions:
- Show empathy and appreciation for employees’ hard work
- Emphasize the value to the company
- Consider ways to offer non-monetary perks, such as flexible schedules, additional PTO, or professional development opportunities.
If you’re not making changes, shout it from the rooftops (or at least in a team meeting). Employees will appreciate the stability in a time when federal laws feel like a game of musical chairs.
What’s Next for Employers?
While this ruling throws out the most recent updates to the salary thresholds, history tells us this probably isn’t the end of the road. (Who remembers the rollercoaster ride back in 2016?)
Keep an eye on federal developments and be prepared for potential new rules down the line. In the meantime, make sure you’re complying with the restored thresholds of $684 per week for exempt employees and $107,432 annually for HCEs.
This is also a good time to do an audit of your classifications and pay practices—just in case another update comes around.
Adapting to the Changes
If you’re feeling whiplash from the constant back-and-forth on salary rules, you’re not alone. But here’s the good news: you’ve got options. Whether you roll back changes, hold steady, or tweak your plans, the key is to be thoughtful, compliant, and transparent.
At the end of the day, your employees want to know they’re being treated fairly—even if the rules keep changing. Keep your communication clear, your approach consistent, and your sense of humor intact. (Because if we can’t laugh at federal employment law, what can we laugh at?)
Got questions or need advice? Reach out—we're here to help!
*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 12/5/2024. 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.
*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.
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—is NOT 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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