Most employers will soon find a much larger percentage of their workforce coming under the federal overtime law due to a final rule issued in April by the Department of Labor (DOL), assuming that the regulation withstands anticipated court challenges—and they only have until July 1 to get ready.
Regardless of these legal challenges, “employers are encouraged to consider the implications of the new rule and prepare for any necessary adjustments to their compensation plans and/or exempt classifications, while closely monitoring the legal landscape,” recommend attorneys from the DLA Piper law firm as well as other lawyers who have analyzed the new rule.
It is estimated that if the changes are left to stand, they will impact millions of working Americans and their employers by extending overtime payment requirements to many workers previously excluded from overtime under the current limits. An independent study conducted last November estimated that that the then-proposed rule could impact more than 7.2 million workers.
Expanding the definition of who qualifies for overtime and raising the dollar amount to be paid to workers under the law has long been a goal of labor reformers. An Obama -era attempt at a similar significant expansion was finalized in 2016 but was blocked by court actions before it could go into effect and was later dropped by the Trump Administration.
The U.S. Chamber of Commerce, which sued to block the Obama-era rule, argued that by converting a big number of salaried workers to wage earners the new rule may not be as popular among workers as advocates believe because many will no longer be able to work at home, a practice that has become popular since the COVID lockdowns.
“Increasing the cost of labor even further through this regulation will add to their burdens and will be felt particularly severely among small businesses, municipalities and charitable nonprofits, who can’t just increase prices because they are dependent on contributions to maintain operations,” notes Marc Freedman, vice president, employment policy for the Chamber.
He noted that during the Obama rulemaking proceeding, Operation Smile, which provides cleft palate surgeries to children in impoverished nations, estimated it would have to reduce the number of operations it performed by more than 4,000 per year because of the increase in the salary threshold. “In what universe is a regulation that limits worker-employee flexibility, raises costs, and forces charities to cut back on their operations a good idea?” Freedman asks.
The National Retail Federation (NRF) told DOL it was concerned that there is not adequate time for retail employers to implement changes imposed by the first phase of the rule, which will increase the minimum salary threshold from $35,568 to $43,888 by July 1. Because of this, NRF urged the department to push the deadline forward to at least Sept. 1 to allow retailers the time needed to implement the change.
A Complicated Formula
The new rule finalizes the proposed rulemaking that was issued last August by the DOL’s Wage and Hour Division (WHD). Comments were gathered from the public on the proposal, although the outcome was pretty much preordained given the division’s previous actions interpreting how and what it could change under the Fair Labor Standards Act (FLSA) written by Congress to create new overtime standards and set their limits.
The new rule redefines the executive, administrative and professional (EAP) and the highly compensated employee (HCE) exemptions available to employers under the FLSA and sets new dollar amounts on the wage limits, creating potential grounds for legal challenges in the process, the DLA Piper attorneys point out.
The minimum salary level for EAP exemptions will rise in two steps. As of July 1, 2024, the minimum salary for exemption will increase from the current $684 per week ($35,568 per year) to $844 per week ($43,888 per year). Next, effective Jan. 1, 2025, the minimum salary will increase again to $1,128 per week ($58,656 per year). The Jan. 1, 2025, salary level represents a roughly 65% increase from the current minimum salary for the EAP exemptions.
Also increased is the minimum compensation for the HCE exemption, which will take place in two stages. Effective July 1, 2024, the minimum compensation for the HCE exemption will increase from the current $107,432 to $132,964. Then, as of Jan. 1, 2025, the minimum compensation for the HCE exemption will rise again to $151,164 annually. The Jan. 1, 2025, compensation level represents about a 41% increase from the current minimum compensation for the HCE exemption.
In addition, the new rule also establishes automatic increases regarding the minimum salary and minimum compensation thresholds for the EAP and HCE exemptions to take place every three years, starting from July 1, 2024, as a base.
DOL determined that the amount of the increase will be tied to the salary rate for the 35th percentile of weekly earnings for full-time, salaried employees in the lowest earning census region (currently the South) for the EAP exemptions, and the 85th percentile for the HCE exemption.
Because of these changes, the Piper and other attorneys encourage employers to analyze whether and how to raise the salaries of any currently-exempt employees whose salaries would not meet the updated minimum salary level (i.e., $844 per week by July 1, 2024 and $1,128 per week by Jan. 1, 2025) to maintain their exempt status.
They also urge employers to reclassify currently exempt employees whose salaries would not meet the updated minimum salary level and provide all requisite training regarding how to accurately record work time and comply with scheduling requirements applicable to non-exempt employees.
The attorneys also suggest that employers consider coordinating with internal and third-party payroll providers to make regular rate calculations, pay overtime compensation and issue wage statements for any employees who are reclassified from exempt to non-exempt.
“At the same time, employers are encouraged to remain strategic when making decisions about increasing salaries or reclassifying employees in response to the new rule, including by monitoring anticipated legal challenges to the rule,” the attorneys advise.
If legal challenges are mounted, they could be based on the argument that only Congress has the authority to set the dollar limits involved—the same issue that was raised earlier already when the Obama rules were challenged. Some members of Congress have raised the issue this time around.
In addition, attorneys for the Littler Mendelson law firm said that legal challenges might also be mounted that rely on an opinion to a Supreme Court decision written last year by Justice Brett Kavanaugh in which he suggested that DOL has no legal authority to set minimum salary thresholds.
