[Co-author: Cassandra White, Paralegal]
On April 23, 2024, the Biden administration announced a final rule that impacts overtime protections by increasing compensation thresholds. The rule is intended to assist lower-paid salaried workers by expanding their overtime protections.
The Fair Labor Standards Act (“FLSA”) requires employers to pay overtime to employees who work more than 40 hours per week unless they are exempt. Employees who meet the Executive, Administrative, Professional, Computer & Outside Sales Employees exemption are not required to be paid overtime. To be exempt, such employees must meet a duties test and a salary test. No changes are being made to the duties test. Employees currently meet the salary test if their salary is greater than $35,568 annually ($684 per week). The final rule increases the salary threshold for overtime eligibility from an annual salary of $35,568 to an annual salary of $43,888, effective July 1, 2024. There will be another increase on January 1, 2025, to $58,656. Beginning July 1, 2027, the salary threshold will increase every three years to reflect changes in earnings and to protect the effectiveness of the rule. Updated wage data will be used to establish these increases.
Currently, employees who perform office or non-manual work and are paid a total of $107,432 or more per year meet the exemption for highly compensated employees if they customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee. Effective July 1, 2024, the final rule will raise the threshold for highly compensated employees from $107,432 to $132,964 annually. The threshold will increase again on January 1, 2025, to $151,164 annually. Beginning July 1, 2027, the salary threshold for highly compensated employees will increase every three years to reflect changes in earnings and to protect the effectiveness of the rule. Updated wage data will be used to determine these increases.
Additionally, there are no exemptions for nonprofit organizations under the final rule: nonprofit organizations with revenues of $500,000 or more, excluding revenue related to charitable activities, must comply with the final rule. While a nonprofit organization may not be subject to FLSA, individuals employed by such nonprofit employers may be covered by the Fair Labor Standards Act if the individual is engaged in interstate commerce such as the production of goods for interstate commerce, or a closely related process or occupation essential to the production of goods for interstate commerce. For example, an individual would be covered if they make/receive interstate telephone calls, ship goods or other items to another state, or provide transport to another state. Individuals who, on rare occasions, spend an insubstantial amount of time engaged in interstate commerce are not covered by FLSA.
It is anticipated that there will be numerous challenges to the final rule. On February 16, Rep. Eric Burlison (R-Mo.) filed a bill that would prohibit the final rule from going into effect; this bill has not yet received a committee vote. Additionally, various associations such as the HR Policy Association have supported an extended compliance window to assist employers in adapting to the change. To date, no delay or extension has been granted. As a result, employers should begin to plan for the final rule.
In light of this new final rule, employers should be mindful that employees previously viewed as “exempt,” including office professionals making six-figure salaries, may no longer be exempt. Employers should perform an analysis to determine which positions would be impacted by the threshold increases. Employees who meet the duties test, but not the new salary thresholds should be treated as non-exempt employees. However, employers may find that it will be more cost-effective and less administratively burdensome to increase salaries for certain positions so that employees continue to meet the FLSA exemption for executive, administrative and professional employees.
Nonprofit organizations should perform an analysis to determine if they are subject to FLSA as an organization. Nonprofit organizations that are not subject to FLSA should perform a review to determine if any individual employees are subject to FLSA.
A review of state law should also be performed to determine what impact, if any, the new thresholds may have on determinations of exempt employee status at the state level.
If a decision is made to increase salaries, some employers may want to consider increasing salaries only once by applying the January 1, 2025, thresholds on July 1, 2024, to minimize disruption. Other employers may prefer to increase salaries on July 1, 2024, and January 1, 2025, because it would be more cost-effective. Employers should also consider how salary increases necessary to maintain exempt status will impact annual raises.
The changes to the thresholds and the impact on employees need to be carefully communicated. Consequently, employers should also draft and send a notice to affected employees explaining: (i) why they are now eligible for overtime or why their salaries are being increased, and (ii) any additional impact the changes may have on the employees (e.g., non-exempt employees must get authorization before working overtime). The distribution of the notice should be carefully timed in case the final rule is delayed.
