Updated: 4/26/2024

On April 23, 2024, the United States Department of Labor (DOL) released a final rule on overtime exemption. This final rule will increase the minimum salary amount required to be paid to executive, administrative and professional (EAP) employees and the required annual compensation to be paid to highly compensated employees (HCEs) in order for these employees to be considered exempt from the Fair Labor Standards Act (FLSA) overtime pay requirements.

The final rule does not include any changes to the standard duties test that is also used to distinguish between FLSA exempt and non-exempt employees.

Background

Currently, to fall within the executive, administrative and professional (EAP) employee exemptions, an employee generally must:

  • Be paid a salary, meaning that they are paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed (the "salary basis test");
  • Be paid at least a specified weekly salary level; and
  • Primarily perform executive, administrative or professional duties, as provided in the DOL's regulations (the "duties test").

Highly compensated employees (HCEs) performing office or non-manual work and paid total annual compensation of a specified amount are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

Read this fact sheet for more information on the EAP exemptions.

Changes effective July 1, 2024

Effective July 1, 2024, the minimum salary required for the EAP exemptions from overtime will increase from $684 per week to $844 per week (equivalent to $43,888 per year).  

Employers continue to be permitted to use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the minimum salary requirement ($84.40 per week in the second half of 2024) for the administrative, professional and executive exemptions, as long as these forms of compensation are paid at least annually.

Effective July 1, 2024, the minimum total compensation requirement for the HCE exemption will increase to $132,964 per year, including at least $844 per week that must be paid on a salary or fee basis.

Changes effective January 1, 2025

Effective January 1, 2025, the minimum salary required for the EAP exemptions from overtime under federal law will increase from $844 per week to $1,128 per week (equivalent to $58,656 per year).

Employers will continue to be permitted to use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the minimum salary requirement ($112.80 per week) for the administrative, professional and executive exemptions, as long as these forms of compensation are paid at least annually.

Effective January 1, 2025, the minimum total compensation requirement for the HCE exemption will increase to $151,164 per year, including at least $1,128 per week that must paid on a salary or fee basis.

Future updates every three years

The final rule includes a mechanism to automatically update the salary and total compensation thresholds every three years to be determined by the DOL using earnings data published by the U.S. Bureau of Labor Statistics. The next update will take place on July 1, 2027.

Steps to consider now

Here are some steps you might want to consider taking now.

Review the final rule and guidance.

The DOL has published a copy of the final rule (PDF) and answers to frequently asked questions.

Register for our complimentary webinar: Overtime and Time Rounding Laws are Changing: What Employers Must Know to Prepare

Register to watch and learn more.

 

The webinar is available on-demand by clicking the registration link. Register and watch at a time that is convenient for you.

Review current classifications. 

Take this opportunity to review all exempt classifications to ensure that employees still qualify under the existing duties tests.

Evaluate the impact on your business. 

This includes identifying those employees who currently earn less than $844 per week (second half of 2024) and $1,128 per week (2025) and are classified as exempt from overtime.

Evaluate the potential impact on your business by comparing the costs of raising an exempt employee's salary to reclassifying the employee as non-exempt and paying them overtime when they work more than 40 hours in a workweek.

If an employee's salary is well below the new minimum and they rarely work overtime, it may be more cost-effective to reclassify them as non-exempt. Conversely, if an employee's salary is closer to the new proposed minimum or they frequently work overtime, you may want to consider raising their salary to maintain the exemption.

These options are covered in further detail below.

If you have exempt employees who are paid less than the new minimum salary, you can raise their salaries to meet the new requirement. If you elect this option, it is a best practice to review their job duties to ensure they continue to qualify for an exemption. Additionally, make sure exempt employees' job descriptions accurately reflect current responsibilities.

If exempt employees don't meet the new salary requirement, you can reclassify them as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek.

If these employees rarely work more than 40 hours per week, simply convert their salary to an hourly wage (divide their weekly salary by 40 hours). However, if these employees regularly work more than 40 hours per week and you want to keep your compensation costs the same, then you would need to account for the overtime premium when you reclassify them as non-exempt. To see an example, visit our FAQs and select “Would these options increase my compensation costs?" in the Options to Consider section.

If you reclassify employees as non-exempt, ensure that managers are prepared to manage overtime costs and understand what hours are considered hours worked. For example, under certain circumstances, travel time and time spent performing preliminary or postliminary activities can be deemed compensable work time.

Keep in mind that an employee’s “regular rate of pay” for FLSA overtime calculation purposes is the average hourly rate calculated by dividing the total pay for employment (except the statutory exclusions) in any workweek by the total number of hours actually worked. Total pay includes for example, commissions and non-discretionary bonuses.

If employees are reclassified as non-exempt, then their pay frequency might also need to be changed depending on state law.

Note: Employers have the option of paying non-exempt employees on a salary basis as long as the employee is paid at least the minimum wage for all hours worked and overtime when they work over 40 hours in a workweek. If you pay non-exempt employees on a salary basis, you must ensure that all time worked is accounted for and that the employee is paid overtime when due. 

Consider state rules.

Some states have their own rules on overtime exemptions. Generally, if state law is more protective (i.e., requires a higher salary amount or has duties tests that are more difficult to satisfy), then state law must be followed. Currently, only a few states (Alaska, California, Colorado, New York, and Washington) have minimum salary requirements for exemption that exceed $844 for one or more of the exemptions. More states could join the list in the future. 

Keep in mind that state rules may prohibit employers from using bonuses to satisfy part of the salary requirement. Therefore, to maintain the state exemption in these locations, employers must satisfy the state's requirement with a salary alone. Check your state law to ensure compliance.

Watch for potential updates. 

The final rule will likely face legal challenges. We will be monitoring the status of the rule closely and updating this page as any developments unfold.