Earlier this year, the U.S. Department of Labor updated the overtime rule under the Fair Labor Standards Act (FLSA). The update increased the amount of pay required for certain employees to be exempt from having to be paid time and a half if they work more than 40 hours a week. An initial increase took effect on July 1, 2024. But another increase happens on January 1, 2025.
Here’s what you need to know
Overview of exemptions from the overtime rule
The overtime rule requires an employer to pay an employee who is not exempt 1.5 times the usual hourly rate for hours worked beyond 40 within the work week. There are 2 exemptions from the overtime rule: one basic exemption (referred to as the EAP exemption) and other for highly-compensated employees (HCEs).
- EAP exemption: Certain so-called “white-collar” workers do not receive overtime pay regardless of the number of hours worked if 3 conditions are met:
1) They are paid on a salary basis (not an hourly basis).
2) Their duties must be executive, administrative, or professional (EAP).
3) Their salary must be at least a set amount.
- HCE exemption: Workers in this category must be paid a salary or on a fee basis of least a set amount and perform at least one exempt duty.
Changes that took place on July 1, 2024
The minimum amounts of salary were adjusted for the EAP exemption and the HCE exemption. The EAP salary level went from $684 per week ($35,568 annually) to $844 per week ($43,888 annually). The HCE salary level went from $107,432 annually to $132,964 annually.
Change effective January 1, 2025
Starting on January 1, 2025, the EAP salary level rises to $1,128 per week ($58,656 annually) and the HCE salary level jumps to $151,164 annually.
The levels are set to be adjusted every 3 years. This begins on July 1, 2027, and every 3 years thereafter.
What to do
There’s no escaping the fact that it’s going to cost you more for your workers starting in 2025 if they work long hours. Here are a couple of things to think about.
- Handle new salary levels. Do you want to maintain current exempt workers as exempt? Obviously, where needed, you can raise their salary. Of course, this likely requires raises across the board to avoid “wage compression” (what occurs when there’s little difference in pay for employees with different levels of qualifications, skills, job titles, etc.). If previously-exempt workers become subject to the overtime pay rule, be sure you can handle this in your budget.
- Watch for court challenges. As reported in an earlier blog, a federal district court in Texas (Texas v. U.S. Dep’t of Labor) granted a temporary injunction to the higher pay thresholds, but only for state employees. But then an appellate court said the DoL can set the salary floor. This may not be the end to court challenges; there could be additional legal challenges from the private sector and in other parts of the country.
Paycor has an overtime pay calculator that you can use to see the impact of extra hours on your costs.
Final thought
Adjusting to the rule change won’t be easy for some businesses, such as restaurants, retail businesses, and especially those in rural areas. Be sure to adjust your business budget and policies to factor in the overtime rule starting on the first of the new year.
Additional blogs published concerning payroll issues can be found here.
