New Overtime Rule Raises Salary Level in Two Phases

The U.S. Department of Labor’s (DOL’s) two-part approach to implementing its new overtime rule—establishing one raise of the salary-threshold level on July 1 and another on Jan. 1, 2025—gives employers options for adjusting the pay of their exempt employees.

Effective July 1, the Fair Labor Standards Act’s (FLSA’s) annual salary-level threshold for white-collar exemptions to overtime requirements will increase from $35,568 to $43,888. As of Jan. 1, 2025, the annual salary threshold will rise to $58,656.

The final rule, which will affect millions of workers, is, as of 2025, an increase of nearly 65 percent. “It’s a very big jump,” said Natalie Bare, an attorney with Duane Morris in Philadelphia.

“Although SHRM and its membership support reasonable increases to the EAP [executive, administrative and professional] salary threshold that reflect the modern economy, the nearly 65 percent increase from the current level may not be in line with local wage rates for employees holding administrative, professional, and executive positions in some areas of the country,” said Emily M. Dickens, SHRM chief of staff, head of government affairs and corporate secretary, in a statement. “For this reason, SHRM advocated for a more nuanced, geographically tailored approach to any increase in the EAP salary threshold. 

[Related Resource: SHRM Annual Conference & Expo 2024 concurrent session “Wage and Hour Compliance: A DOL Update and Ways to Avoid Common FLSA Overtime Liability Landmines”]

Two-Part Approach

On one hand, the two-part approach gives employers the opportunity to avoid having to implement the entire jump in salary level in a short period, Bare said. On the other hand, many employers won’t want to go through this process twice for the same employees, so practicalities may call for addressing both updates at the same time, she added.

“The optics of two smaller gradual increases may appear more reasonable than a single larger increase, but I don’t think this will soften the impact to businesses who are already looking ahead to Jan. 1,” said Jeff Ruzal, an attorney with Epstein Becker Green in New York City.

Automatic Adjustment

In addition, the final rule includes a three-year automatic adjustment mechanism for updating the salary threshold.

In public comments submitted to the DOL on Nov. 7, 2023, SHRM said it supports regular and reasonable increases to the overtime salary threshold but opposes automatic increases.

“SHRM supports regular and reasonable increases to the salary threshold to ensure certainty for budgeting, as well as attraction and retention of EAP employees. However, SHRM believes that any future adjustment should follow a notice-and-comment period and a comprehensive analysis of worker earnings and economic trends,” Dickens said in the statement in response to the final rule. “SHRM urges that any future increases as contemplated in the regulation be reviewed before a final proposal is presented and that any such increase be subject to notice and comment to ensure that it includes considerations of the current economic landscape and other relevant labor and business factors.”

Who Is Affected

Workers who fall under the FLSA’s “white-collar” executive, administrative and professional exemptions are not eligible for overtime pay. To qualify for white-collar exemptions, employees must be paid a salary of at least the threshold amount and meet certain duties tests. If they are paid less or do not meet the tests, they must be paid 1.5 times their regular hourly rate for hours worked in excess of 40 in a workweek.

[Questions about the new rule? SHRM members can contact SHRM’s HR Knowledge Advisors to learn more.]

In a news release, the DOL said its final rule would expand overtime protections “to lower-paid salaried workers.” The opportunity to be paid overtime could be meaningful for some workers.

A veteran and widow in Arizona who identified herself only as Y. Hernandez and who earns $50,000 a year told WorkMoney, a nonprofit organization advocating higher incomes for all workers, “I advocated for this change because I believe in the principle of hard work. My husband and I were both Marine Corps veterans. Since he died in 2020, I’ve had to work harder than ever to survive. As a salaried support supervisor, I work an average of 45 to 48 hours every week, even though I’m only paid for 40 hours. I am constantly overwhelmed with the thought of how I would pay my bills. Now that I’ll be fairly compensated for my time, I can finally relax a little and not be so stressed about how I would afford utilities, rent, car payments and food.”

However, House Education and the Workforce Committee Chairwoman Virginia Foxx, R-N.C., said the overtime rule “is a bad deal for American employers and workers. This administration thinks it’s a good idea to dust off an Obama-era proposal that was scuttled in court and pitch it as a win for the workforce. The reality is employers—including nonprofits and colleges—are staring down the barrel of billions in annual costs to comply with the rule. At the same time, many salaried workers will be forced into hourly positions—undermining their financial security and putting benefits and workplace flexibility at risk.”

The raised salary-level thresholds may particularly burden small businesses, forcing some to choose between cutting jobs and raising prices, said Ted Hollis, an attorney with Quarles & Brady in Indianapolis.

“Some businesses that cannot do either may be forced to close, resulting in unintended but predictable side effects of this government action,” he said.

Proceed Cautiously

“In light of the near-certainty that the final rule will be challenged in court, and in light of the successful challenge in 2016, in my view, employers should start preparing their plans now for how to comply,” said Brett Coburn, an attorney with Alston & Bird in Atlanta. “But they should proceed with caution in terms of actual rollout or implementation, and they should prepare for uncertainty.”

The starting point to comply should be to look at the exempt employees whose salaries fall between the current salary threshold ($35,568) and the proposed new thresholds, he said. For each of those employees, employers should decide whether to increase their salary to keep them exempt or convert them to nonexempt, he said.

Approximately 1 million exempt workers are between the new $43,888 salary threshold level ($844 a week) and the current $35,568 threshold ($684 per week), said Keith Kopplin, an attorney with Ogletree Deakins in Milwaukee, citing DOL estimates. Another 3 million earn at least $43,888 annually but less than $58,656 ($1,128 per week).

Coburn said employers will need to:

• Budget for increases in salary and overtime expenses.
• Plan for how to roll out reclassification decisions. This will include training reclassified employees on timekeeping requirements and rules against off-the-clock work and managing employee relations concerns that employees might raise if they are upset about losing their salaried status.
• Decide, given the interim and 2025 salary-level thresholds, whether employers will accomplish this in two steps or jump straight to the 2025 threshold.

Fresh Look

Employers might use the rule as an opportunity to take a fresh look at their exemption determinations, Coburn said. The rule “might provide some amount of cover for employers who might need to reclassify employees whose duties might not meet the requirements to be exempt.”

While reclassified employees might ask why they weren’t getting overtime pay before the change, an update in the exemption rules at least gives employers some explanation to provide for reclassification, Coburn said.

“For employees whose duties fall in a gray area—not comfortably exempt or nonexempt—but who are also impacted by the increased salary threshold, this might be a good time to move them to nonexempt on the basis of the salary threshold increase,” he noted.

Employers should also be mindful of state and local wage and hour laws that may impose additional requirements for exempt status beyond federal requirements under the FLSA, Hollis said.