New DOL Overtime Rules: How to Ensure Your Organization Remains in Compliance

After months of waiting, the Department of Labor (DOL) has finally announced a new overtime rule with the potential to impact countless organizations and workers across the country. The first phase of the new rule is set to go into effect on July 1, 2024. This means employers have to move fast to review their current pay practices and prepare for potential changes.

This ruling is the latest change in an ongoing series of adjustments to the salary thresholds. In 2016, the Department of Labor attempted to increase the salary threshold but was ultimately blocked in the courts. Following this, the threshold was adjusted to its current level in 2019.

As of today, the minimum salary threshold sits at $35,568. This threshold is now set to change twice:

1. On July 1, 2024, the threshold will increase to $43,888, or $844 per week
2. On January 1, 2025, the threshold will increase to $58,656, or $1,128 per week

Needless to say, these changes will affect many organizations: nonprofits, healthcare organizations, construction companies, retailers, hospitality businesses and more. DOL estimates project that these changes will affect 4 million workers from 2025 onwards.

In this overview, we share the steps that organizations must take to remain in compliance with these changing regulations.

Looking for a deeper dive? Watch a one-hour on-demand webinar with Julie Kniseley, President of James Moore HR Solutions to explore this topic in more detail. Access the webinar now. 

New DOL Overtime Rules Explained: What’s Changing?

Before we cover exactly what’s changing with this new rule, it’s important to understand exactly how the rule works in the first place. Under the Fair Labor Standards Act (FLSA), there are two categories of employees: exempt employees and non-exempt employees.

An exempt employee is exempt from overtime and is typically paid a salary above the current threshold of $35,568. If an exempt employee works over 40 hours per week, their employer is not required to pay them overtime.

However, the salary threshold is not the only determining factor of whether an employee is considered exempt. The employee’s job duties, as described in the job description, must primarily involve executive, administrative or professional duties. In other words, they are a white-collar employee rather than a blue-collar employee.

Non-exempt employees are typically paid on an hourly basis, although some are paid on a salary basis. If these employees work over 40 hours a week, they are eligible for overtime pay of 1.5x their standard hourly rate.

We explained above that the minimum salary for an exempt employee is currently $35,568. We’ve also covered that this minimum will rise to $43,888 effective July 1, 2024, and $58,656, effective Jan. 1, 2024. So what does this mean for your organization?

It means if you have employees who currently earn anywhere between $35,568 and the new thresholds, you have a major decision to make about how to classify these employees on an ongoing basis. Should their salaries be raised to the new thresholds? Should they be converted to hourly employees that are eligible for overtime?

Below, we’ll walk through what those options look like and highlight the factors that must be considered.

Note: Salary thresholds differ by state. The thresholds described above are the federal thresholds. While Florida and many other states follow these standards, some do not. In California, for instance, the current minimum threshold is $66,560.

Other Changes

The ruling also introduced two other changes which, while less impactful than the change to the salary threshold, are still notable:

1. The rule updates the Highly Compensated Employee threshold from $107,432 per year to $132,964 per year effective July 1, 2024, and then $151,164 per year, effective Jan. 1, 2025.
2. The rule also specifies that the salary thresholds shall be updated every three years in line with changes to worker compensation tracked by the Bureau of Labor Statistics.

Steps to Take to Prepare for Compliance

With little time between now and July 1, employers must start taking steps to prepare for these changes. There are several possible courses of action, and it’s crucial to put in the work now to understand which avenue is best for your business — both from July onwards, and from January 2025 when the threshold increases significantly.

Start by building an understanding of your business’s current pay practices. Identify the employees that fall in the range between the current threshold and the new threshold effective July 1. Consider your best course of action for these employees, modeling how different scenarios might affect your budget.

Employers have many options available. Here are three possible approaches:

1. Raise employee salaries. The simplest approach is to raise the salary of all employees who fall in the range to the new minimum threshold. While this is straightforward, remember that a far more significant increase is coming Jan. 1, 2025.
2. Convert affected exempt employees to non-exempt employees. Employers might choose to convert affected employees to non-exempt status, with employees receiving an hourly wage and overtime. If your employees work a lot of overtime, they might make more in this scenario.
3. Convert affected exempt employees to non-exempt employees on a lower hourly rate: To ensure employees don’t make more as a result of the overtime available to them once they are converted, employers could make this move to ensure employees make roughly the same as before. Be warned that employees will likely not be receptive to this option since they will not receive any of the intended benefits of this rule.

To understand the financial impact of these options, track employee hours or perform a lookback calculation to assess how the above scenarios might have affected your budget.

Setting aside the financial implications of these changes, there are several other questions that employers must answer before deciding on the most appropriate approach.

Consider the impact this might have on employee benefits. Many organizations provide different benefits to exempt and nonexempt employees — for example, contributing more to an exempt employee’s health plan. Consult your employee handbook to determine how a change of status may impact employees.

There’s also the question of employee morale. Many employees enjoy the relative prestige and flexibility of being an exempt employee. Altering their status to a nonexempt employee may be negatively received not only on an emotional level, but also on a practical one. For instance, as a nonexempt employee, individuals will not be paid for lunch, breaks or taking a couple of hours off to attend their child’s ballet recital.

Prepare for Compliance with James Moore HR Solutions

Ensuring your organization is prepared for these changes is vital. Wages and hours issues are some of the most costly issues that an organization could have with the DOL. The agency takes employee allegations seriously and will thoroughly investigate companies alleged to have violated these rules.

Starting to prepare today is crucial, but be aware that it’s likely this new ruling will be challenged in the courts. This happened in 2016; an eleventh-hour ruling from a Texas court struck down the proposed changes, and nothing changed until 2019.

It’s impossible to say if something similar will happen this time around. However, one thing is clear: Organizations cannot afford to wait until the end of June to prepare for these changes. Start assessing your approach and prepare for what’s next, but consider holding off on any announcements until closer to the effective date of the ruling.

If you need advice defining your organization’s approach, reach out to the James Moore HR Solutions team. Our HR consultants bring decades of experience navigating complex issues and are well-equipped to help you understand the impact of these changes on your organization and plan the best path forward.

Reach out today to schedule an initial consultation.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.