Insights
Publications

A New Overtime Threshold Takes Effect in Mere Weeks: HR Should Assess Its Impact Now

May 13, 2024
HR Dive

On April 23, 2024, the U.S. Department of Labor (DOL) issued its final rule increasing the minimum pay requirements under the Fair Labor Standards Act (FLSA) for various exempt “white-collar” employee categories beginning on July 1, 2024.

The “white-collar” exemptions apply to executive, administrative, or professional (EAP) employees who receive a fixed and predetermined salary, meet a certain salary threshold, and perform executive, administrative, or professional duties.

The FLSA also includes a highly compensated employee exemption (HCE) for employees who primarily perform office work, earn the specified six-figure annual salary threshold, and perform at least one of the outlined EAP duties. The final rule increases the HCE minimum salary threshold as well.

What Is the Impact?

It depends. For employers already operating under state exemption laws that are more stringent than the federal standards, this change is unlikely to have an impact. For example, in California and New York, the minimum salary thresholds are higher than the new federal standard, and thus, these changes likely will not impact employees working in those states.

For employers with employees in states which do not have higher salary thresholds, changes will be required. Because many employers have adopted flexible remote work policies that permit employees to work in states other than where the employer is based, they have workforces spread over many states. These employers will need to conduct a careful analysis of the state laws that apply to their employees, and determine whether they are more or less stringent than the new federal law. 

Many employers will opt to increase annual salaries to satisfy the new requirements in advance of the deadlines set forth below. If the new salary minimum threshold is not met for an employee classified as exempt under EAP or HCE, the employer will be responsible for paying overtime for any time logged over 40 hours in the workweek and could be subject to a misclassification lawsuit. The DOL estimates that four million employees will be impacted.

What Are the Minimum Salary Changes?

The final rule includes the following salary minimum increases:

  1. EAP Salary Increase. Currently, employees under the EAP classification must earn at least $684 per week, $35,568 annually. 

By July 1, 2024, EAP salary must increase to at least $844 per week, $43,888 annually. 

By Jan. 1, 2025, EAP salary must increase to at least $1,128 per week, $58,656 annually.

  1. HCE Salary Increase. Currently, employees under the HCE exemption must earn at least $107,432 annually. 

By July 1, 2024, HCE salary must increase to at least $132,964.

By Jan. 1, 2024, HCE salary must increase to at least $151,164.

  1. Automatic Updating for Salary Minimums Every Three Years. The rule implements an automatic increase every three years to align with shifts in worker salaries and provide employers with a predictable timetable for future adjustments. The first automatic increase will occur on July 1, 2027. 

What Should Employers Do Now?

Employers of impacted employees must determine whether to increase base salaries to meet these new thresholds or reclassify these employees as non-exempt and pay overtime hours.

Though some legal pundits predict legal challenge attempts to block all or part of the new DOL final rule, employers should begin to assess which employees may be impacted and how to comply since the first effective date (July 1, 2024) is less than two months away. Expecting the DOL rule to be blocked by July 1 and taking no action could result in hefty misclassification suits and millions in liability exposure for even a few misclassified employees.

Employers should consider taking the following actions:

1) Perform a classification audit. The company should audit job roles for employees classified as exempt to ensure compliance. The audit should involve assessing each exempt employee’s “primary duties” (i.e. main job duties) against those outlined by the DOL

In this audit, employers should confirm whether the employee works in a state like California that has more restrictive exemption requirements than the FLSA. If that state follows a quantitative test, then the employee must be performing qualifying exempt duties over 50% of the time. Again, states with more restrictive tests may also have higher minimum salary thresholds. Employers need to ensure compliance with both federal and state law.

2) Perform a cost-benefit analysis to maintain exemption. Employers considering converting an exempt employee to non-exempt instead of raising their base salary to comply with the new minimum should consider whether anticipated overtime will be more costly than the salary increase.

It will likely be more costly to convert exempt employees to non-exempt if they frequently work more than 40 hours per workweek than by increasing their salary to meet the new DOL final rule minimum thresholds. 

3) Audit current time tracking policies for exempt employees. In misclassification lawsuits, employers often face the greatest exposure when they are unable to present any data or timekeeping records for employees classified as exempt. Employers should consider implementing efficient and accurate time entry practices for exempt employees in order to better defend for any anticipated misclassification suits. The added timekeeping practice will also help companies audit whether conversion to non-exemption at an hourly rate matching the employees’ salary will be particularly costly.

Misclassification lawsuits tend to focus on how the employer can rebut the Plaintiff’s allegations that they should have been classified as non-exempt and worked countless overtime hours. Often, exempt employees are not expected to contemporaneously record their time and employers have little objective record to rebut the Plaintiff’s assertions. Employers can mitigate liability exposure risk by implementing timekeeping procedures for exempt employees.

Published on HR Dive.

Firm Highlights

Publication

Employment Law Update for Nonprofits With Holly Sutton

Welcome to  EO Radio Show - Your Nonprofit Legal Resource . Charities, foundations, and their founders often request help addressing employment practices and compliance questions. In this episode, host Cynthia Rowland is joined by Holly...

Read More
Publication

Navigating Cannabis in the Workplace: A Guide for California Corporations

The landscape surrounding cannabis in the workplace is rapidly evolving, posing challenges for California corporations and businesses to establish effective policies and procedures. As the use of cannabis, both medical and recreational, becomes more...

Read More
Publication

Important Changes and the Impact of California Industry-Specific Minimum Wage Laws

In the ever-evolving landscape of California labor laws, the minimum wage has once again taken center stage. With the recent state-wide increase to $16 per hour, the Golden State continues to lead the nation...

Read More
Publication

The Components of Effective and Defensible Workplace Investigations

Harassment, discrimination and retaliation are serious workplace threats that demand vigilant attention from employers under state and federal laws. This article explores some high-level yet essential components of effective workplace investigations. By understanding the...

Read More
Publication

California’s Estrada Decision and Impact on Employers and PAGA Claims

Following Estrada v. Royalty Carpet Mills, Inc. , the California Supreme Court’s employee-friendly Private Attorneys General Act (PAGA) ruling earlier this year, employers must remain more diligent than ever to prevent and mitigate costly...

Read More
Publication

Navigating California's Evolving Legal Landscape Governing Leaves of Absence

California’s employment laws are no stranger to change, and recent years have witnessed the introduction or modification of various protected leaves by employees. In this article, we will delve into three significant leave categories...

Read More
News

Ex-DraftKings Exec Seeks Fast Trial To Test Noncompete Law

Holly Sutton, chair of Farella's Employment Law Group, provided expert commentary to Law360 for the article "Ex-DraftKings Exec Seeks Fast Trial To Test Noncompete Law." Read the article here (subscription required).

Read More
Publication

How to Navigate California Wage Statement Penalties After Naranjo v. Spectrum

On May 6, 2024, the California Supreme Court, in Naranjo v. Spectrum Security Services Inc. , clarified that an employer is not liable for statutory penalties for inaccurate wage statements when it had a...

Read More
Publication

Navigating California's New Rebuttable Presumption Law

The ever-evolving landscape of employment laws in California has introduced a notable change with the implementation of a new law that establishes a rebuttable presumption of retaliation in some circumstances. This law, which took...

Read More
Publication

Navigating California Wage Statement Penalties After Naranjo v. Spectrum Security Services, Inc.

On May 6, 2024, the California Supreme Court, in Naranjo v. Spectrum Security Services, Inc. , clarified that an employer is not liable for statutory penalties for inaccurate wage statements when it had a...

Read More