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Everything You Need to Know About the New Overtime Exemption Rule

As a business owner, you may already know that certain employees at your company are exempt from overtime pay requirements.

The Fair Labor Standards Act (FLSA) has built-in exemptions for executive, administrative, and professional (EAP) employees who meet certain income thresholds. These exemptions are commonly referred to as the “white-collar” or “EAP” exemptions.

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If you’ve got employees who meet these criteria, you’ll need to get acquainted with the overtime exemption rule changes that took effect on July 1st, 2024.

BBSI’s got you covered. In this post, we’re going to explain:

  • The details of the rule change implemented by the Department of Labor (DOL).
  • Which of your employees will be affected.
  • What options you have to respond to the changes.

Under the changes, approximately 4 million workers will gain overtime protection under the law. If one or more of those work for your company, here’s what you need to know moving forward.

What is the Overtime Exemption Rule?

The overtime exemption rule is a section of the FLSA that exempts employees “in a bona fide executive, administrative, or professional (EAP) capacity” from required overtime as long as they meet certain income requirements.

Who Qualifies for the Overtime Exemption?

For employees who work in an EAP position, qualification for the exemption hinges on three factors. An employee must:

  1. 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;
  2. be paid at least a specified weekly salary level (factors A and B are referred to collectively as the “salary basis test”), and
  3. primarily perform executive, administrative, or professional duties as provided in the Department of Labor’s regulations (the “duties test”).

There are various exceptions and nuances to these requirements. For example, doctors, lawyers, teachers, and outside sales employees are not subject to either salary test. There is also an alternative category of exempt employees for what the law calls “highly compensated employees” (HCEs), with its own requirements.

Since 2020, the weekly salary threshold has been $684 per week (equivalent to a $35,568 annual salary), and the HCE total annual compensation threshold has been $107,432 per year. However, that’s all changed as of July 1st, 2024.

What Are the Changes to the Overtime Exemption Rule?

Since 2019, the employees most affected by the white-collar exemption have seen exceptional wage growth. Recognizing this, the Department of Labor has made adjustments to the earnings thresholds in order to reinforce the FLSA’s intended overtime protections.

New Salary Threshold for 2024

Beginning on July 1st, 2024:

  • The weekly salary level for EAP employees to be exempt from overtime has risen from $684 per week to $844 per week ($43,888 per year).
  • For HCEs, the annual compensation level to be exempt from overtime pay will increase from $107,432 to $132,964.

How the Overtime Exemption Salary Threshold is Determined

The 2024 salary threshold increase is based on the following methodology:

  • The $844 per week standard salary level is equivalent to the 20th percentile of salaried earnings in the lowest-wage Census Region and/or in the retail industry nationally.
  • The $132,964 HCE threshold is equivalent to the annualized weekly earnings amount of the 80th percentile of full-time salaried workers.

These are the same rules that were used to determine the last salary threshold increase that occurred in 2019.

This will also change starting in 2025.

Changes for 2025 and Beyond

Starting on January 1st, 2025, the salary threshold will increase to the following:

  • The weekly salary level to be exempt from overtime will be $1,128 per week (equivalent to $58,656 per year).
  • For highly compensated employees, the compensation level will be $151,164 per year.

These levels will be calculated using the new salary methodology, which is as follows:

  • The standard salary level is set to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South).
  • The HCE threshold will be set at the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally.

Going forward, future updates will occur every three years. The DOL will rely on salary and compensation data at the time of each successive update. After 2025, the next update is set to take place on July 1st, 2027.

How Employers Can Respond to the New Overtime Exemption Rules

For your hourly workers, you’ll need to take note of the changed salary thresholds, pay close attention to employee time tracking, and ensure you’re meeting obligations under the law to pay each qualified employee overtime.

However, if you have exempt employees who are affected by the changing thresholds, you should consider one of the following actions:

  • Increase the employee's salary to exceed the new threshold amounts. Remember that these levels are set to change again on 01/01/2025.
  • Where the employee’s salary will remain below the new salary thresholds, implement appropriate time tracking and overtime pay.

Stay Up to Date on Overtime Exemptions and Other Compliance Rules with BBSI

The latest changes to overtime exemptions are designed to help protect employees by expanding the exempt salary threshold. This means more employees than ever will have access to overtime protections. The changes in methodology also mean that going forward, you can expect to see more regular updates to the thresholds.

However, the long-term impact on businesses remains to be seen. Increasing overtime protections is necessary in a world of rapidly rising wages, but smaller businesses may experience a rough adjustment period.

If you’re a small business owner with questions about adjusting to the change or unsure whether some of your employees might be subject to any exemptions under the rule, BBSI can help.

BBSI is more than just a PEO. We’ve got decades of experience helping small and medium-sized businesses in every industry predict and adjust to changes in compliance rules. We’ve also got dedicated HR experts standing by ready to provide the guidance your company needs to navigate changes in wage laws.

Contact your local BBSI expert today.

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