On April 23, 2024, the U.S. Department of Labor (DOL) issued a final rule raising the salary threshold for so-called “white collar” exemptions to overtime regulations.  The rule goes into effect July 1, 2024.  Here’s what you need to know. 

What do the current regulations require?

The default rule of course is that employers are required to pay 1.5 times the regular hourly rate to employees for every hour worked over the standard 40-hour work week. There are exemptions to this rule, including the white collar exemptions, the most common of which apply to executive, administrative and professional employees.  Each of these exemptions has its own criteria (including a description of the employee’s “primary duty”), but common among them is a requirement that employees make a certain salary. The current salary threshold is $684/week, equivalent to $35,568/year.  

Employees who earn even larger salaries (“highly compensated employees”) are subject to white-collar exemptions under a more relaxed test than their lower-compensated colleagues.  Highly compensated employees need only meet one of the applicable criteria (in addition to the salary threshold) to be considered exempt.  At present, the salary threshold for highly compensated employees is $107,432/year.

The new thresholds.

The new rule changes the existing salary thresholds.  That’s been done before.  What makes this latest version unique is that not only does it change existing thresholds, but it provides for automatic upward adjustments moving forward.  Here’s what you need to know.

• Beginning July 1, 2024, the salary threshold for white-collar exemptions will go from $684/week to $844/week, the equivalent of $43,888/year.

  The salary threshold for highly compensated employees will go from $107,432/year to $132,964/year,

• On January 1, 2025, the salary threshold for white-collar exemptions will increase again, this time to $1,128/week, the equivalent of $58,656/year.

  The salary threshold for highly compensated employees will increase again to $151,164/year.

• Beginning July 1, 2027, and every three years thereafter, the salary threshold for both white-collar exemptions and highly compensated employees will be adjusted in accordance with then-current earnings data.

What does this mean for your business?

On July 1, 2024, many employees who are exempt under the white-collar exemptions will no longer meet the required salary threshold, thus losing exempt status. Employers have several options for addressing the change.  Such options include:

• Adjust hours so employees do not work more than 40 hours a week. An employee who works less than 40 hours in a week is simply not due overtime. So, an employee who loses exempt status but works less than 40 hours in a week will see no change in pay.

• Raise salaries. For employees on the cusp of the new salary thresholds, it might be more cost-effective to raise salaries to maintain exempt status rather than pay overtime.

• Convert salaried employees to hourly employees, and pay overtime for hours over 40. This is the safest, and probably the easiest, method of tracking hours and paying overtime. Many employees, however, are less than thrilled to learn they’re being switched from salaried to hourly. Employers can help to “sell” the change to employees by explaining that it is a result of new DOL regulations and by paying at an hourly rate that will have a minimum impact on the affected employees’ net pay.

• Continue paying a salary, but track hours and pay overtime in addition to the salary. The concepts of salary and overtime are not mutually exclusive. Salaried employees who lose their exemption can still receive a salary, but employers will need to track hours and pay overtime in addition to that salary. The overtime calculation in this instance can get tricky, but there are certain payment methods, such as the “fluctuating workweek” method, that can result in substantial savings to employers.