The Department of Labor, on April 23, 2024, issued a new overtime rule regarding the so called “white collar” exemptions to the federal overtime regulations. The changes, which take effect on July 1, 2024, are likely to result in millions of additional employees becoming eligible for overtime pay.

The changes, which are scheduled to take place in phases, will substantially increase the threshold amount of money that employees must earn in a year before they can be considered exempt from the overtime requirements under the executive, professional, and administrative exemptions to the overtime rules.

Specifically, the new changes will significantly increase the threshold salary requirement from $35,568 annually to $43,888 annually as of July 1, 2024. On January 1, 2025, the salary threshold increases to $58,656 a year. Interestingly, the changes do not revise the substantive “duties” tests which also must be satisfied in order for an employee to fall within one or more of the “white collar” (i.e., executive, professional, or administrative) exemptions.

The changes will also increase the threshold amount of the “highly compensated” exemption to the overtime rules from $107,432 to $132,994 a year on July 1, 2024 and, subsequently, to $151,164 a year on January 1, 2025. The DOL’s changes also contemplate automatic updates every three years to the overtime threshold beginning on July 1, 2027.

The practical and stated purpose of the changes is to significantly increase the number of individuals eligible for overtime pay. The changes appear likely to have a disproportionate impact upon employers based outside of major metropolitan areas, as well as upon non-profits and smaller employers. As was the case in 2016 when the Department of Labor (under then President Obama) unsuccessfully attempted to increase the minimum salary threshold for overtime eligibility, the new changes are likely to result in court challenges. The changes have resulted in a cascade of complaints from employer groups.

Employers should begin preparing now for the new changes. In this regard, employers should consider the following:

  1. Carefully reviewing the job positions and job descriptions of their current employees to determine whether they are being properly characterized as exempt. This undertaking should be done under the guidance and direction of employment counsel in order to better ensure that the characterizations are being properly made, particularly in light of the significant consequences of mischaracterization. Importantly, the dangers and costs of mischaracterizing employees as exempt – if they are actually non-exempt – are profound regardless of whether the new changes to the salary thresholds are successfully challenged.
  2. Analyze which of their employees are currently considered exempt who are earning less than the new salary thresholds.
  3. For employees presently earning slightly less than the new thresholds, consider whether it makes sense to increase their salary above the new threshold so that these individuals would be eligible for exemption from the overtime rules if they satisfy one or more of the “substantive duties” tests.
  4. In circumstances where previously exempt employees may be considered non­exempt, decide whether to place limits on the number of hours that these individuals can work and, if so, the nature and extent of these limitations. The imposition of limitations on hours that individuals can work will not only have a financial consequence to individuals, but will likely have an impact upon employee morale as well.
  5. If a decision is made to limit the number of hours that a (new) non-exempt employee can work, then a decision also needs to be made regarding whether and to what extent to reassign certain work duties to other employees.
  6. The availability of overtime pay for employees not previously eligible to receive it should prompt consideration of hiring additional employees to reduce the likelihood that any employee will need to work overtime.
  7. Whether certain states currently have salary thresholds for overtime that are higher than the current federal salary threshold.
  8. The extent to which increased overtime obligations may impact the employer’s financial ability to fund other employer benefits. In this regard, if employers provide different leave benefits to exempt and non-exempt employees, they will
    have to consider adjusting leave benefits for employees who are re-characterized as non-exempt.
  9. When to communicate to employees that their employment status is changing (e.g., from exempt to non-exempt).
  10. The manner in which to communicate to employees that their status has been changed from exempt to nonexempt.
  11. Exploring current (and possibly enhanced) insurance coverage for overtime and mischaracterization claims.
  12. Reviewing, updating, and effectively communicating to employees policies related (or potentially related) to overtime work, including regarding work hours that are acceptable, and regarding the recordation of all time worked.
  13. Training managers on the impact of the new overtime changes, how to handle overtime requests, and how to address employee complaints about compensation, including overtime.
  14. The impact that reclassification may have on employees and, specifically, on their status at the organization. Will employees bristle at new requirements for recording hours? Will they view the reclassification to non-exempt status as a demotion?
  15. Whether changes need to be made to other employer policies such as working outside of assigned schedules, the use of company issued computers and cell phones during non-working hours, etc.

Regrettably, the new overtime changes do nothing — at least not yet — to address the significant confusion that the overtime rules currently engender. The changes will no doubt only add to the confusion and spawn a new generation of overtime claims.

Employers that plan now for the new overtime changes will be better prepared (i) to deal with the legal, financial, and management issues that will accompany these changes and (ii) to attempt to prevent, and to respond to, overtime and employee mischaracterization claims — regardless of whether the new changes are successfully challenged in court.

For more information on changes to the federal overtime regulations, contact Marc at [email protected] or 301-657-0184.