Expanded Overtime Rules

The Department of Labor (DOL) has issued the final overtime rules. This ruling is set to take effect on July 1, 2024, raises the salary threshold for overtime eligibility under the Fair Labor Standards Act (FLSA) – meaning more employees will qualify for overtime pay.

Final Overtime Rules

Most employees must be paid at least the federal minimum wage and overtime at a rate of 1.5 times their regular pay for hours worked beyond the 40-hour workweek. However, certain employees are exempt from these protections and can be paid a fixed salary that does not vary based on the quality or quantity of work performed. Employees who qualify as exempt are not entitled to overtime pay. Generally, exemptions are intended for those in positions where their work requires a higher level of responsibility and independent judgment.

Standard Exempt Employees

Under the FLSA, employees must be paid a minimum weekly salary and perform specific executive, administrative, or professional (EAP) job duties to be exempt from overtime protections. While these criteria cover many exempt employees, it is important to note that there are additional exemptions for various roles, such as creative professionals, computer employees, and outside sales personnel.

Executive employees must meet all the following standards to qualify:

1. They must be paid a weekly minimum salary established by the DOL;

2. Their primary job must be managing the business or a customarily recognized department of the business;

3. They must regularly direct the work of at least two other full-time employees; and

4. They must have the authority to hire or fire other employees.

Administrative employees must meet all the following standards to qualify:

1. They must be paid a weekly minimum salary established by the DOL;

2. Their primary job must be the performance of non-manual work directly related to the management or general business operations of the employer; and

3. Their primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Professional employees must meet all the following standards to qualify:

1. They must be paid a weekly minimum salary established by the DOL;

2. Their primary job must be the performance of work requiring advanced knowledge, which is predominantly intellectual in character and requires the consistent exercise of discretion and judgment;

3. The advanced knowledge must be in a field of science or learning; and

4. The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

For example, your employee, John Doe, qualifies for an exemption as an administrative employee. As of June 2024, his salary is $700 per week. Assuming John’s job duties haven’t changed, you will need to consider raising his salary or reclassifying him as an hourly employee after July 1, 2024, because his compensation will not meet the minimum weekly salary requirements.

Highly Compensated Employees

Highly compensated employees have a slightly different set of criteria to qualify for an exemption. They only have to perform one of the duties of an EAP employee, but they must also be paid a higher annual compensation than standard exempt employees.

Let’s say your employee, Jane Doe, is paid a salary of $108,000 as of June 2024. She is an office manager who schedules appointments, handles invoicing and collections, and assists with employee recruitment; however, she doesn’t directly hire or fire employees. She doesn’t meet all the criteria to qualify for any EAP exemptions, but she performs at least one of the duties necessary for an administrative exemption. As of June, she is considered exempt as a highly compensated employee. By July 1, 2024, her annual compensation will no longer be sufficient to qualify for this exemption. You will need to reclassify her employee status, raise her annual salary, or adjust her job description and duties to qualify for a standard EAP exemption.

Blue-Collar Workers

Certain types of employees are never exempt from overtime protections, regardless of their job duties or pay. Manual laborers who perform repetitive operations requiring physical skill and energy, such as carpenters, electricians, mechanics, and general laborers, are always non-exempt. Public safety employees, including police officers, firefighters, and paramedics, are also non-exempt under the FLSA.

Context of the Final Rule: Recent Guidance on Worker Classification

This final overtime rule follows updated guidance issued by the DOL in January 2024, which clarified the classification of workers under the FLSA. The guidance emphasized a thorough, case-by-case evaluation for determining whether a worker is an employee or an independent contractor. If a worker is considered an employee, the employer must generally adhere to the rules of the FLSA, including overtime laws.

When classifying workers, employers should consider factors such as:

• The level of control the employer has over the worker’s tasks,

• The worker’s ability to earn profits or incur losses,

• The extent of the worker’s investment in their tools and resources,

• The duration and stability of the working relationship,

• The significance of the worker’s role in the business’s core operations, and

• The worker’s skill level and initiative in business operations.

These updated guidelines, coupled with the new salary thresholds, will increase the number of workers subject to the FLSA and overtime rules. Proper classification is crucial to ensure compliance with wage and hour laws and to avoid legal and financial repercussions. Misclassifying employees as independent contractors can lead to significant penalties, back wages, and tax liabilities.

Considerations for Employers in Light of the New Rule

Employers must carefully assess their options in response to the new salary thresholds. They need to decide whether to increase employees’ salaries to meet the new exemption threshold or reclassify them as non-exempt and prepare to pay overtime. This decision is complex and requires a detailed analysis of each employee’s work patterns and hours.

Employers should review the hours worked by salaried employees to determine the most cost-effective approach. For employees who regularly work over 45 hours a week, raising their salary to meet the new threshold could be more economical than paying overtime.

It’s also essential to consider the administrative challenges you could face during this transition. You’ll need to update HR systems, revise employee handbooks, and potentially address shifts in company culture. Implementing time-tracking mechanisms is crucial to ensure accurate recording of hours worked, breaks, and overtime for newly non-exempt employees. This process requires careful planning and communication to minimize disruptions and maintain compliance with the new regulations.

Final Thoughts

This article provides a brief overview of the new DOL rule expanding overtime rules and related guidance on worker classification. Given the complexities and implications of these changes, it is advisable to consult with one of our expert advisors for personalized guidance. For more information, please contact our office.