U.S. Department of Labor Restores and Extends Overtime Protections

U.S. Department of Labor Restores and Extends Overtime Protections
May 28, 2024 7 mins

U.S. Department of Labor Restores and Extends Overtime Protections

U.S. Department of Labor Restores and Extends Overtime Protections

The Department of Labor released a final rule increasing overtime protections for the standard salary level threshold for the “white collar" exemptions and the threshold for employees classified as Highly Compensated Employees. Employers need to prepare for these significant changes.

Key Takeaways
  1. The first increase to the minimum salary threshold to $844 per week ($43,888 per year) occurs on July 1, 2024 with a subsequent increase to $1,128 per week ($58,656) effective January 1, 2025.
  2. The ruling also establishes a means to increase and update these minimum thresholds every three years beginning on July 1, 2027.
  3. The final rule impacts the exemption status of over an estimated three million workers in the U.S. Employers will need to either reclassify these employees as non-exempt or significantly raise current base salaries to adhere to the rule.

On April 23, 2024, the United States Department of Labor (DOL) published a final rule revising the Fair Labor Standards Act (FLSA). The rule implements new exemptions from the minimum wage and overtime pay requirements for executive, administrative, professional, outside sales and computer employees. Notable changes include:

  • Increasing the standard salary level
  • Increasing the highly compensated employee total annual compensation threshold
  • Adding to the regulations a mechanism that will allow for the timely and efficient updating of the salary and compensation thresholds

While the rule will likely face legal challenges prior to its effective date of July 1, 2024, employers should take steps now to ensure employees are classified in line with the proposed changes and prepare to capture and report time for employees who may be reclassified as non-exempt as a result of the new rule.

Details of the New Rule

The rule increases the minimum salary threshold to $844 per week ($43,888 per year) on July 1, 2024, with a subsequent increase to $1,128 per week ($58,656) effective January 1, 2025. Employers can also expect triennial increases to the standard salary level beginning on the third anniversary of the initial implementation of this rule (July 1, 2027).

Employers will have until July 1, 2024, to either increase the pay of employees currently classified as exempt to be above the new threshold of $43,888 per year or reclassify those employees into the non-exempt status and begin to compensate for any overtime hours worked.

Raising the salary alone may not be enough to qualify the employee for exemption. Under the rule, white collar exempt employees must also satisfy their relevant “duties test” under the FLSA. Fortunately for employers this test remains unchanged under the new rule, but it must be considered alongside the simpler calculation of threshold pay.

The change on January 1, 2025, represents a roughly 65 percent increase from the present threshold. Employers may need to restructure strategic deployment of resources considering these thresholds as a large financial component of the profitability of a company.

Additionally, the final rule increases the minimum annual compensation threshold for Highly Compensated Employees (HCE) to $132,964 on July 1, 2024, and then to $151,164 on January 1, 2025. Much like the threshold for the standard salary level, the minimum annual compensation threshold for HCEs will also increase every three years beginning on July 1, 2027. Under the U.S. Tax Code, there are many exemptions allowing HCEs to be carved out of tax efficient schemes without penalty to the company. The increase to HCE threshold will limit how many employees are actually able to be carved out of a program.

Considerations for Companies in Light of the New Rule

Companies should consider taking the following measures to prepare for the changes associated with the new rule:

  • Assess Impacted Employees’ Compensation and Current Classification. HR and rewards professionals should review their employee populations in order to model the number of roles and individuals impacted as well as the scale of these impacts. Employers should be mindful of the July 2024 and January 2025 thresholds given the magnitude of the increases — particularly the increase in effect on January 1.
  • Establish the most Prudent Path Forward for Your Organization. Following the completion of the initial review of your organization’s impacted population, engage with business and finance leaders to determine the best path forward. Some employers may not be able to absorb the full financial impact of increasing wages to meet the threshold of the new ruling. For these employers, the impacted population will need to be reclassified to non-exempt and provided the federal and local protections of this classification — including at least time and a half for any overtime hours worked. While the financial impact of the overtime pay associated with this change should likely be less than increasing the salaries to meet the exemption threshold, companies should model this based on typical hours worked to ensure the financial implications of each decision are considered.
  • Determine the Immediate and Secondary Financial Implications of the Change. Employees who are being reclassified to non-exempt will need to be able to effectively document and submit their time to payroll for proper processing and payment of applicable hours. Employers and managers should be cognizant of any hours employees typically work that exceed daily and weekly thresholds for payment of overtime, consider the cost of implementing this tracking system more broadly, and audit the system regularly for completeness and accuracy.

    Where employers choose to increase base wages to meet the new thresholds established for otherwise exempt employees, pay compression is likely to occur with employees performing similar roles who are already at or beyond the new threshold. Compensation reviews for these employees and potential action may be necessary as well to ensure internal pay equity is maintained.
  • Evaluate the Less Visible Changes that Reclassification May Have on Your Organization’s Employees and Communicate Effectively. Reclassification to a non-exempt status and the need to track and report hours can often feel like a demotion to many employees. Employers should ensure communication centers around the benefit to the impacted employees in the sense that it guarantees all hours worked are compensated fairly.

    Many managers may not understand how to effectively monitor and manage the hours worked of a non-exempt workforce. HR and communications teams should work together to identify the managers and supervisors of impacted employees and facilitate any training needed to confirm proper review and submission of workers’ time.

    As always, timely, transparent communication with all impacted parties is a necessity to enhance understanding, build buy-in and maintain compliance with the rule as it continues to evolve moving forward.
How Aon Can Help:

Aon’s Talent Solutions practice has the expertise to help your company navigate the regulatory landscape and make timely, transformative and sustainable decisions. To learn more about how we help, please write to [email protected]

Aon's Thought Leaders
  • Amanda Benincasa
    Partner and Global Head of Corporate Governance, Talent Solutions
  • Anthony Scardino
    Director, Talent Solutions, North America
  • Kaileigh Serafini
    Consultant, Talent Solutions, North America

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