July 1 Deadline for Overtime Rule Is Nearly Here: What All Employers Need to Know

As the July 1, 2024, deadline for the updated U.S. Department of Labor (DOL) overtime rule nears, employers in various industries face significant uncertainties. This rule change, which raises the salary threshold for overtime eligibility, will impact millions of workers and necessitate major adjustments in workforce management for businesses of all sizes, including nonprofits and faith-based organizations.

Background of the 2024 Overtime Rule

The DOL has announced that the Fair Labor Standards Act (FLSA) overtime salary threshold will increase in two stages: initially to $43,888 annually ($844 weekly) starting July 1, 2024, and then to $58,656 annually ($1,128 weekly) effective January 1, 2025. This marks a significant increase from the current threshold of $35,568. These adjustments aim to expand overtime protections, ensuring that workers who exceed working 40 hours per week are compensated fairly, unless they meet specific exemption criteria under the executive, administrative, and professional (EAP) exemptions. This initiative reflects an ongoing effort to adjust compensation practices to more closely align with today's economic reality and cost of living.

Under the guidelines provided by the U.S. Department of Labor, Wage and Hour Administration, the compensation thresholds for highly compensated employees (HCEs) are scheduled for significant updates. Before July 1, 2024, the threshold was $107,432 per year. On July 1, 2024, this threshold will increase to $132,964 per year. Subsequent adjustments will occur on January 1, 2025, when the threshold will rise to $151,164 annually. Further updates are anticipated from July 1, 2027, and every three years thereafter, with specific figures to be determined closer to those dates.

A highly compensated employee (HCE) is someone who earns a significantly higher salary than the average employee, exceeding a specific threshold set by regulations such as those under the Fair Labor Standards Act (FLSA) in the United States. For instance, under certain regulations, employees earning more than $107,432 annually may be considered highly compensated. These positions typically include roles that require specialized skills or high levels of responsibility, such as executives like CEOs, CFOs, and other senior management roles, as well as highly specialized professionals such as senior lawyers, physicians, and top-tier consultants. Sales executives with substantial commission-based earnings may also fall into this category. Identifying highly compensated employees is crucial for ensuring compliance with employment laws and strategic HR management, including benefits administration and crafting targeted retention strategies.

?For more detailed information about this rule and to determine how it might affect your company, you can refer to the U.S. Department of Labor's fact sheet .

Importance of Determining Exempt vs. Nonexempt Status

Understanding whether a position is exempt or nonexempt is crucial for compliance with the FLSA. Exempt employees, who typically hold managerial, professional, or administrative roles, are not eligible for overtime pay regardless of the hours they work beyond the standard 40-hour workweek. This status is determined not just by salary, but also by the specific job duties the employee performs.

On the other hand, nonexempt employees must be paid overtime at 1.5 times their regular hourly wage for any hours worked beyond 40 in a week. Note that non-worked hours used in a given week, such as sick and vacation leave, would be deducted to determine the total hours worked in a given week.

The upcoming changes to the salary threshold may mean that some employees previously classified as exempt might now qualify for overtime unless their salaries are adjusted above the new thresholds. Employers can find additional guidance on determining if a position is exempt or nonexempt by visiting the DOL Wage and Hour Division's website .

Legal Challenges and Employer Concerns

Like past updates, this rule faces legal challenges that could impact its implementation. Various business organizations have contested the increase in a Texas federal district court, arguing that the DOL exceeded its authority. Given the history of legal disputes over such regulations, some employers are hesitant to make changes until the legal landscape becomes clearer. Employers must consider the risk of doing nothing, as July 1, 2024, is just a few days away.

Preparing for Possible Outcomes

Despite these legal uncertainties, employers must prepare for all possible outcomes. Should these changes become law, being proactive and ready for them will ensure smoother transitions and compliance.

Operational Adjustments and Employee Communication

Anticipating the rule's enforcement, many businesses are reviewing their employees' salaries to decide whether to increase pay to maintain exemption status or to reclassify employees as nonexempt. Employers must communicate clearly about these changes, explaining why they are necessary and how they will impact individual employees.

Impact on Business Operations

If implemented, the rule could substantially affect business operations, potentially leading to layoffs or delayed hiring due to increased payroll costs.

Compliance Checklist

To help employers navigate these changes effectively, here's a compliance checklist:

Review Current Salaries and Classifications:

Assess which position descriptions and employees are close to the new salary thresholds and might need a raise to maintain their exempt status.

Identify position descriptions and employees who will need to be reclassified as nonexempt and determine appropriate hourly rates.

Examine highly compensated employee salaries to ensure compliance.

Update Payroll Systems:

Ensure that your payroll system can handle changes to employee classifications and is ready to calculate overtime for any newly nonexempt employees.

Communicate Changes:

Prepare clear communications for all affected employees explaining the changes, their implications, and how they will be implemented.

Hold informational meetings or workshops to address employee questions and concerns.

Adjust Operational Budgets:

Review your labor budget to account for potential increases in overtime payments.

Consider the impact on staffing and whether adjustments in workforce planning are necessary.

Consult HR or Legal Experts:

Engage with a human resources expert or legal advisor to ensure that all changes comply with the new rule and to understand any potential legal implications.

Monitor Legal Developments:

Stay informed about the progress of any legal challenges to the rule and be prepared to adjust your compliance strategy accordingly.

Conclusion

The upcoming overtime rule presents significant changes and challenges but also offers an opportunity for employers to reassess and realign their workforce management practices. Despite the legal uncertainties, proactive preparation and open communication with employees are vital to effectively navigating this complex regulatory update. By staying informed and prepared, employers can ensure they remain compliant while minimizing disruption to their operations.

About Deborah Stallings, MA, SHRM-SCP; HR, DEI, and Workplace Expert

As the founder and leader of HR Anew, a seven-figure, nationally certified minority woman-owned small business (WOSB), Deborah is dedicated to servant leadership and transforming workplaces into inclusive environments where every organization, leader, and team member thrives. With over two decades of expertise in recruitment and hiring, diversity, equity, inclusion, belonging, justice, human resources management, workplace training, and equal employment opportunity, Deborah's mission is to embed these essential principles into organizations to drive success and create workspaces where leaders and teams flourish. Her message is clear: "Together, we dream of and create workplaces where every employer succeeds, and their teams thrive."

About HR Anew

At HR Anew, we collaborate with organizations, share best practice advice and guidance to optimize their human resources operations, and strategize on employment best practices, helping you easily navigate complex HR challenges. Our team, led by Deborah Stallings, is dedicated to creating inclusive, effective workplace environments through expert guidance in HR, DEIBJ strategies, recruitment and hiring, leadership and team training, and compliance. Whether you are adjusting to new regulations like the overtime rule or enhancing your overall workplace culture, HR Anew provides the tools and support necessary to thrive in today's ever-changing business landscape. For personalized strategic guidance and support on implementing the new overtime rule, contact us at [email protected] .