You’ve probably heard by now about the Department of Labor’s changes to thresholds for salaried employees. These changes will have a significant financial and cultural impact on many businesses and yours could very well be one of those. So let’s break down what these changes are, what impacts they have, and suggestions on how to adapt to them.
Department of Labor’s Increase to Compensation Threshold for Exempt Employees
On April 23, 2024, the Department of Labor (DOL) finalized a rule that sets the standard salary level for exemptions under the Fair Labor Standards Act (FLSA) at $844 per week as of July 1, 2024 (up from the current $684 per week). But that’s not all. The weekly salary requirement for exempt employees will increase again to $1,128 per week on January 1, 2025. So, by the beginning of next year, all employees who are not overtime eligible must earn a salary of at least $58,656. There are also increases for highly compensated roles which you can read more about here. Keep in mind that up to 10% of this new threshold can come from variable pay (commissions, bonuses, etc.) The good news is that the DOL has given us a bit of grace so long as we true up within the first pay of the new year. Future updates will occur every three years starting January 1, 2027.
It’s important to remember that paying the minimum salary alone does not establish that an employee is properly classified as exempt. For many roles, employees must also satisfy the duties test under the FLSA. Spoiler alert: this is where we see most of the issues in terms of compliance.
The Bottom Line
Some of your employees that are in roles currently classified as exempt from overtime may be in roles that make them eligible for overtime compensation starting July 1, 2024.
Big (Expensive) Misconceptions, Demystified
In our practice, we hear a lot of common misconceptions about FLSA. Some of the biggest FLSA myths:
Myth: Salary is the same thing as exempt from the overtime provisions of the FLSA.
Reality: It’s not. A position can be classified as salary, non-exempt.
Myth: Employees can choose to be paid a salary or not.
Reality: The FLSA classification is based on the role, not the individual in that role.
Myth: Employees get a raise and are promoted to salary for the same job.
Reality: This is not a thing. Now, if they take on a new role, or the role changes to now qualify for the exemption, that’s different.
Myth: So long as we pay our exempt people at or above the salary threshold, we’re in compliance.
Reality: The position must also pass the duties test (for most, but not all roles).
Myth: If a role qualifies for the exemption, that role must be classified as exempt.
Reality: There is no requirement that because a role is exempt, you must classify it as such. If you want to pay everyone, from the CEO on down, on a non-exempt, hourly, overtime eligible basis, go for it!
What to Do Now
Now, there’s a chance that legal battles could temporarily halt the regulatory changes. That’s why most attorneys are urging employers to act promptly and get ready in advance. Follow these easy steps to get the wheels in motion:
- Ensure that your head of people, finance and ops are aware of this new regulation and the potential financial and cultural impacts.
- Determine who is currently classified as exempt. Don’t forget to do the often overlooked process of ensuring the job descriptions (particularly for administrative roles, which is a pretty broad group) meet or exceed those duties tests as well. You may find that some of the positions (read: not people) currently classified as exempt do not actually qualify for that exemption right now, based on the duties test.
- Review your list of exempt employees to determine which individuals fall below the new salary threshold. If you have employees that will fall below the new threshold, you will need to determine an appropriate course of action. There are largely two options:
- Raise the wages of your salaried employees to meet the new threshold, or
- Reclassify the affected roles as nonexempt hourly or nonexempt salary, which will allow them to be eligible for overtime pay. (Note: Keep in mind that some states have overtime (OT) pay requirements that begin after 8 hours per day). It’s important to try to estimate the overtime cost so you have a clear illustration of the additional expense, unless you decide to lower an employee’s rate of pay to cover the cost for their OT (which comes with a whole host of other considerations).
What to Prepare for in the Future
Remember, this threshold increases again on January 1, 2025, then every three years starting January 1, 2027. You will need to review your employees’ statuses again at the end of 2024 (if not sooner) and going forward to ensure you’re classifying each role in compliance with the law. So when the time comes to review your employees again, if you find that any of them fall below the latest upcoming threshold, you will have to determine your course of action in accordance with the two options mentioned above.
Cooper People Group Can Help
Having to potentially reclassify your employees may sound like a daunting task – and truthfully, it can be. There can be legal, reputational, and financial repercussions if your employees are classified incorrectly. If you need an extra set of hands when conducting an FLSA classification analysis to help reduce that risk and make a good-faith attempt to comply with the law, give us a call at Cooper People Group. Our team of HR experts will fine tooth comb your employees’ roles, duties, and incumbent pay to help ensure your business is on the right track. We can also lead your team through the reclassification process and the important communication and change management process that comes along with it.
