July 1 Deadline for Overtime Rule Is Nearly Here

Ten days before the 2016 overtime rule took effect, a Texas federal district court blocked the regulation. Betting that legal challenges of the 2024 overtime rule—which will be heard in that same court—will prevail, some employers are postponing compliance with the first July 1 deadline to either raise workers’ salaries so that they remain exempt or start paying them overtime. But even if a district court blocks the rule, litigation to keep the rule alive likely will continue, at least during the Biden administration.

If the rule is blocked at the district court level, a challenge at the federal appellate court level and perhaps eventually before the U.S. Supreme Court could ensue. Other possibilities: The district court may not block the rule. Or it could uphold the July 1 increase but strike down the second salary increase scheduled for Jan. 1, 2025.

“One of the greatest challenges is the unknown,” said David Epstein, SHRM-SCP, director of human resources and talent strategy at Mobilization for Justice Inc. in New York City. “You still must prepare for the changes and their impact on salaries, fiscal, and so on. But at the same time, prepare for a court challenge that causes a delay or change in implementation.”

Employers should be ready to make needed changes on July 1, said Fanny Ferdman, an attorney with BakerHostetler in New York City.

“But don’t have anything go into effect until July 1, in the event that it’s blocked by a court before then,” she said. “And the same goes for the Jan. 1 deadline.”

Background on the Rule

On April 23, the U.S. Department of Labor (DOL) announced an update to the Fair Labor Standards Act (FLSA) overtime rule that increases the salary threshold in two phases: first to $43,888 ($844 a week) on July 1 and then again to $58,656 ($1,128 a week) as of Jan. 1, 2025. Employees covered by the FLSA, unless they are exempt, must receive at least 1.5 times their regular pay rate for all hours worked over 40 in a workweek if their salaries are below these thresholds.

To be exempt from overtime under the FLSA’s executive, administrative, and professional exemptions—the so-called white-collar exemptions—employees must be paid a salary of at least the threshold amount and meet a duties test. 

Starting July 1, 2027, the DOL also will automatically increase the overtime threshold every three years, according to the final rule.

There also has been an increase to the minimum salary for the highly compensated employee exemption to $132,964 a year (effective July 1) and then $151,164 a year (effective Jan. 1, 2025). That is an increase from the $107,432 threshold for the exemption under the Trump administration’s rule.

Business groups sued the DOL in a Texas federal district court on May 21 over the 2024 overtime rule, claiming that the department went beyond its authority under the FLSA and that the rule violates the Administrative Procedure Act.

Overtime Rule History

In 2015, the minimum salary for the white-collar exemptions was $23,660 annualized.

The following year, the Obama administration issued a new rule doubling the minimum salary to $47,476, said Anthony George, an attorney with Bryan Cave Leighton Paisner in Denver. The U.S. District Court for the Eastern District of Texas, the court that is hearing the challenge of the 2024 rule, struck down that rule and issued a nationwide injunction blocking its implementation. The court reasoned that “the new salary was so high that it would swamp the duties test and require overtime pay to employees who should be exempt under the act,” George explained.

In 2019, the Trump administration issued a rule that raised the minimum salary by a more modest 50% to $35,568 annually, where it remains today, George said.

The Biden administration’s rule’s increase of the salary threshold to $43,888 on July 1 is an 85% increase over 2015’s minimum, he noted. And the Jan. 1, 2025, boost of the salary threshold to $58,656 is a 148% increase over 2015’s threshold, George said.

He characterized this increase of the salary threshold as “a poke in the eye to the federal courts. [The] DOL is basically saying to the federal district court in Texas, ‘We know you said that a 100% increase was contrary to the act, so how about a 148% increase? How do you like that?’ ” George said. “I think the new rule will probably be struck down. But we’ll see.”

The update to the salary threshold effective Jan. 1, 2025, of $1,128 per week represents the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census region—currently the South—based on data from the U.S. Bureau of Labor Statistics. In 2016, the DOL under the Obama administration tried to set the standard minimum salary level for the white-collar exemptions at the 40th percentile, explained Natalie Bare, an attorney with Duane Morris in Philadelphia.

By comparison, the Trump administration set the standard minimum salary at the 20th percentile, which resulted in the current salary level test of $684 per week ($35,568 a year) and is the methodology for the first update to $844 effective July 1, she said. The 20th percentile was also used to set the 2004 rule of $455 per week.

With regard to the salary threshold update to $1,128, “while the DOL is not using the exact methodology that resulted in invalidation of the 2016 proposal, at the 35th percentile, they are not that far from the invalidated 40th percentile. And they are nowhere near the previously adopted 20th percentile,” Bare said.

In addition, because the Trump administration’s salary threshold was finalized in 2019 and took effect Jan. 1, 2020, the Biden administration’s increase doesn’t seem as compelling, according to Brett Coburn, an attorney with Alston & Bird in Atlanta.

“Such a significant increase really highlights the flip-flopping that occurs between administrations from different parties, which can often rankle judges evaluating these kinds of challenges,” Coburn said.

By setting up an interim threshold based on the methodology used for prior successful threshold increases but then a different and more aggressive methodology for the Jan. 1, 2025, threshold, the DOL “is in some sense conceding” that the Jan. 1, 2025, threshold and its methodology “are subject to attack on the same basis that the court used to strike down the 2016 rule,” he said.

Preparing for Rule’s Implementation

In preparation for the rule’s possible implementation, employers have been reviewing their workforces’ salaries and deciding if they need to raise any exempt employees’ salaries or reclassify any workers as nonexempt in time for the upcoming effective dates, Ferdman said.

She said that as part of that process, employers have been:

• Finalizing the list of exempt employees whose salaries will be increased.
• Determining the appropriate hourly rate for the reclassified employees.
• Making arrangements to add the reclassified employees to the timekeeping system.
• Adjusting schedules for reclassified employees, paying attention to overtime, meal periods, and rest periods.
• Ensuring that reclassified employees understand how to accurately record their time and that managers understand what the nonexempt status means for scheduling, timekeeping, break times, and overtime.
• Coordinating with payroll to ensure the reclassified employees are paid overtime in accordance with applicable law.

Reclassifications will feel like a demotion, so employers should educate employees about why reclassification matters and how it affects them, said Joyce Chastain, an employment law consultant with The Krizner Group in Tallahassee, Fla.

If implemented, the rule will impact budgets, Epstein noted. “There may be unintended consequences of companies having to adjust, such as layoffs or delaying hiring, depending on the bottom line,” he said.

Steps to Take if the District Court Blocks the Rule

Even if legal challenges of the 2024 overtime rule succeed at the district court level, the rule may be upheld on appeal.

“Litigation shouldn’t paralyze preparation,” said Kevin Young, an attorney with Seyfarth in Atlanta. “Litigation is uncertain. The successful challenge to the Obama rule is no guarantee that the Biden rule meets the same fate.”

Employers can use this moment to take a fresh look at their exemption determinations, he said. The rule provides an opportune time for employers to reclassify employees whose duties may have evolved into gray areas of exemption, apart from any salary threshold concerns, Young noted.