Authors: Kenya Spann Charlotte Jensen
The US Department of Labor (DOL) announced on April 23, 2024 its final rule that details increases to employee salary requirements for overtime as part of the Fair Labor Standards Act (FLSA).1 Organizations across numerous industries face potential compliance and monetary impacts.
Criteria for overtime exemption
As a refresher, the FLSA uses two tests — the duties test and the salary test — to determine whether an employee is exempt from receiving overtime pay. The employee must pass both the tests.
The duties test
The first test centers on the employee's responsibilities in the organization. Employers must consider the duties test, which is critical to the classification of a particular role.
The following roles are those an employer most commonly exempts from overtime and are directly affected by the rule:
- Executive — Roles focused both on managing people and managing the enterprise, with the authority or ability to influence decisions related hiring, firing and changes in employee status
- Administrative — Office-based roles using judgment and discretion focused on management, business operations and interacting with customers
- Professional — Roles that require either advanced knowledge (often associated with a college degree), typically considered intellectual in nature, or that require invention, imagination or talent in a recognized field of artistic or creative endeavor
- Computer professional — Advanced computer roles that require designing, developing, documenting, analyzing, creating, testing or modifying computer systems or programs
- Highly compensated — Roles that perform office or non-manual work, including regularly performing at least one of the primary duties in the Executive, Administrative, or Professional exemption, who are also paid a higher salary, as defined in the rule
The Outside Sales exemption listed in the title of the DOL's final rule isn't impacted by the salary threshold changes the final rule addresses.
The duties test includes extensive rules with many nuances. Generally, however, the employee enjoys wide latitude and independent decision-making authority on matters of significance and isn't merely adhering to established procedures and protocols.
The salary test
The new rule changes the salary test. An employee who passes the duties test also must receive a weekly salary that meets or exceeds the DOL's established threshold. With a few exceptions, employers typically must guarantee that salary for any week in which an employee performs any work, regardless of the number of hours the employee works.
Background
In 2016, a similar proposed change would have moved the salary threshold from $455 per week ($23,660 annualized) to $913 per week ($47,476). Courts blocked this proposal shortly before it was scheduled for implementation.
DOL addressed the topic again in 2019 and enacted changes on January 1, 2020. These changes moved the threshold to $684 per week ($35,568 annualized) and allowed for up to 10% of non-discretionary bonuses to satisfy threshold requirements. Now the salary test has changed again.
As outlined in the DOL table below, the revised salary test now includes several changes in application threshold for standard and highly compensated employee total annual salaries, beginning July 1. Further updates go into effect on January 1, 2025, with changes to the calculation methodology. As earnings data evolves, the final rule allows for updates of these level every three years.
| Date | Standard weekly/annual salary | Highly compensated employee total annual compensation threshold2 |
| Before July 1, 2024 | $684/$35,568 | $107,432, including at least $684 per week paid on a salary or fee basis |
| July 1, 2024 | $844/$43,888 | $132,964, including at least $844 per week paid on a salary or fee basis |
| January 1, 2025 | $1,128/$58,656 | $151,164, including at least $1,128 per week paid on a salary or fee basis |
Note that the FLSA rule states the salary threshold in weekly terms. The annualized amounts assume a 40-hour workweek, but employers cannot average the minimum weekly amounts over time or prorate them if an employee works fewer than 40 hours per week. The employee must receive the minimum weekly salary threshold amount in order to pass the salary test.
Additionally, final rule applies to the salary for the Computer Professional exemption. However, it's the only exemption that allows qualifying exempt employees to be paid hourly instead of salaried, as long as their hourly rate is at least $27.63. The hourly rate threshold wasn't increased as part of the rule, but changes to that hourly rate can be expected in time as the updated salary amount creeps closer to the $27.63 hourly equivalent.
As is the case with minimum wage requirements, it's critically important to be aware that some states, including California and New York, have established salary thresholds higher than those outlined in the final rule. Employers must comply with the salary thresholds that are the most generous to affected employees.
Act now
As with the 2016 rule change, legal challenges to the revised rule will arise, and we don't know how those challenges will play out in court. The implications of this change may be significant to some employers and may involve several moving parts. Meantime, employers must prepare now rather than take a wait-and-see approach. Here's how:
- Conduct a thorough review of exemption and classifications, estimated cost to threshold, or even compensation/ classification structure redesign. Such a review can provide guidance as to whether jobs satisfy the minimum duties for exemption.
- Develop a well-constructed compensation and classification framework to address FLSA changes and inform total rewards, learning and development plans, talent acquisition strategies, and more.
- Prepare a comprehensive and connected HR strategy based on a review of compensation and classification — as impacted by changes to regulations — positioning the HR team to influence and help lead the organization.
- Work with your team to develop a communication strategy.
Gallagher can help
Gallagher supports employers with comprehensive solutions, including exemption review, compensation and classification structures, and implementation strategies. We help organizations develop a comprehensive understanding of the laws and regulations that apply to them, to inform decisions across people strategies and operations.
Learn more about our HR Consulting services or ask to speak with a consultant about your specific needs.
