Department of Labor announces final rule expanding federal overtime protections.

For the first time since 2019, the U.S. Department of Labor announced a final rule that expands overtime protections for millions of salaried workers by increasing thresholds required to exempt employees from federal overtime pay requirements.

Under the Fair Labor Standards Act (FLSA), eligible salaried employees are to be compensated at a rate of 1.5 times their regular salary for work beyond the normal 40-hour workweek. Salaried workers whose income exceeds the threshold amounts set by the Department of Labor are excluded from these overtime protections. The Department periodically updates these thresholds based on federal income data. The Department’s newest final rule, which will go into effect on July 1, 2024, increases the previous threshold amounts and implements a mechanism so that thresholds will automatically increase in the future.

New Overtime Threshold Requirements

The final rule announced on April 23, contains three central provisions expanding overtime protections.

• Beginning on July 1, 2024, the Department of Labor will update the standard salary level for exemption from its current level of $35,568 per year, to $43,888 per year, and beginning January 1, 2025, to $58,656 per year. This reflects the 35^th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Regions based on data collected by the U.S. Bureau of Labor and Statistics. This is an increase from the previous 2019 rule which set the threshold at the 20^th percentile of weekly full-time salaried employees in the lowest-wage Census Region. The new rule allows workers earning more than $684 per week, but less than $844 per week to be eligible for federal overtime protections.
• The highly compensated employee total annual threshold will increase from $104,432 per year, to $132,964 on July 1, 2024, and to $151,164 beginning on January 1, 2025. This reflects the 85^th percentile of full-time salaried workers nationally.
• The final rule will also include a mechanism to automatically increase the threshold amounts starting on July 1, 2027, and every three years thereafter, based on more current earnings data.

Exempt Employees

Section 13(a)(1) of the FLSA provides an exemption for “any employee employed in a bona fide executive, administrative, or professional capacity” under what is commonly referred to as the “white-collar” or executive, administrative, or professional (EAP) exemption. To fall under the EAP exemption, employees  must generally meet three tests: 1) they must be paid a salary that is a predetermined fixed amount not subject to reduction based on the quantity of work performed; 2) they must be paid at least a specific weekly salary level; and 3) they must primarily perform executive, administrative, or professional duties as set out under the Department’s regulations in 29 CFR 541.

Impact

The Department estimates that in the first year the new rule will allow some 4 million currently exempt workers to become eligible for overtime protections, resulting in approximately $1.5 billion in annual transfers from employer to employees. It also estimates employers will accrue approximately $1.4 billion in direct costs to implement the new regulations in the first year.

The impact of the final rule will be an increase in federal overtime protections, narrower unintended EAP exemptions, and clearer guidance for employers on how to pay employees for overtime hours. Employers will now have the choice to either increase wages for salaried employees to maintain their existing exempt status, reduce or eliminate overtime hours, pay the 1.5 times overtime premium, or reduce base salaries to offset new overtime pay.

The Department has long recognized a need to regularly update earnings thresholds to ensure they remain useful in helping distinguish between exempt and non-exempt employees. A new mechanism in the final rule will regularly update the thresholds to eliminate issues that can arise if the Department does not adequately update threshold amounts over long periods of time. For example, between 1975 and 2004, threshold levels remained stagnant while the federal minimum wage continued to increase, resulting in a federal minimum wage earner’s income exceeding the long test salary level for a 40-hour workweek.