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New federal overtime rule imminent: Employers brace for impact

The long-awaited update to the federal overtime rule has been finalized by the Department of Labor (DOL) and was cleared by the White House Office of Information and Regulatory Affairs (OIRA) on April 10.

The final rule, which could take effect this summer, will significantly increase the salary threshold for overtime exemptions under the Fair Labor Standards Act (FLSA).

Under the new rule, the minimum salary for exemption as an executive, administrative, or professional (EAP) employee will rise from $684 per week ($35,568 annualized) to $1,059 per week ($55,068 annualized).

The rule also increases the minimum total annual compensation level for exemption as a “highly compensated employee” from $107,432 to $143,988. Additionally, the rule will require automatic increases to these thresholds every three years.

The DOL estimates that the updated overtime rule will expand overtime pay protections to approximately 3 million workers nationwide. Employers are now faced with the challenge of deciding whether to raise salaries to meet the new thresholds or reclassify affected employees as non-exempt, which would require paying overtime for hours worked beyond 40 in a workweek.

Analyze, adjust, and retrain

Here’s a six-step action plan to help you prepare for the final rule and implementation:

  1. Identify employees who may be affected.
  2. Compare the cost of increasing a person’s salary to the new minimum vs. the cost of paying overtime. Consider how you’ll calculate an employee’s “regular rate of pay” and how benefits or bonuses could be affected.
  3. If you decided to raise salaries to the new minimum, verify each employee/role still meets the “duties test” – meaning their primary job duties align with those of an EAP employee under the FLSA.
  4. If you decide to reclassify employees from exempt to non-exempt, consider how the shift could impact job satisfaction and morale. Certain employees may see it as a demotion in status, for example, or may be unhappy with a loss of flexibility or new requirements to track their hours.
  5. Determine whether other company policies are based on an employee’s exempt or non-exempt status. Look at company equipment and personal device policies, professional development, time off requests, etc.
  6. Notify affected employees and their managers in advance, including how the change will impact timekeeping requirements. Ensure all parties understand what counts as “hours worked,” including certain travel time and time spent working from home.

Employers with workers in states outside of New England should also review applicable state laws, as some states (e.g., California, New York, Washington, Oregon) have higher salary thresholds or additional requirements.

While the final rule is expected to face legal challenges from business groups concerned about increased payroll costs, employers should not rely on the courts to halt its implementation. Once the final rule is published in the Federal Register, employers will likely have only 60 days to comply with the new requirements. The new overtime rule may have significant ripple effects for businesses, requiring changes to payroll systems, policies, and scheduling practices.