Employers Should Prepare Now for DOL’s Overtime Expansion

Businesses are facing a short window of time to identify and implement changes necessary to comply with the new final rule governing the Fair Labor Standards Act regarding overtime exemptions for employees in executive, administrative, and professional, or EAP, positions, as well as highly compensated employees, or HCEs. This final rule is set to go into effect July 1.

As a result, on May 9 nearly 90 organizations asked the Wage and Hour Division of the Department of Labor to delay implementation of its final rule for 60 additional days to allow them time to prepare for its impact on millions of workers.

It’s unclear if the DOL will grant the extension, but either way employers should prepare now.

What Does the New Rule Require?

Released in April, the final rule will increase the standard salary level for the EAP exemptions, as well as total annual compensation threshold for exemption for HCEs.

Initially, the minimum salary for the EAP exemptions will increase from $684 per week ($35,568 annually) to $844 per week ($43,888 annually) effective July 1. The minimum compensation for the HCE exemption will also increase on July 1, from $107,432 to $132,964 per year.

Effective Jan. 1, 2025, the minimum thresholds will further increase for both the EAP and HCE to, respectively, $1,128 per week ($58,656 annually) and $151,164 annually, representing a whopping 65% and 41% increase from the current salary thresholds.

In addition, the new rule will require the earnings thresholds be automatically updated every three years, based on then-current earnings data. Therefore, employers will need to re-examine their exempt employees’ compensation every three years.

There is a strong likelihood that employers will challenge the viability of the DOL’s new salary thresholds in court. However, it’s unclear whether any such challenge will be successful, or if it will even be heard before the July 1 effective date.

What Does This Mean for Employers?

The July 1 deadline leaves employers with less than two months to determine what they should do. Starting immediately, employers should:

Identify exempt employees affected by the new salary thresholds. This means identify exempt EAP employees earning less than $844 weekly and exempt HCE employees earning less than $132,964 annually. Employers should review non-discretionary pay beyond salary, which can account for 10% of the salary threshold for EAP employees, or the difference between the minimum weekly salary for HCE employees ($844 as of July 1) and the annual exemption threshold.

Decide whether to increase salaries or reclassify employees. To preserve exempt status, employers will need to increase their compensation to satisfy the new thresholds for affected employees. Otherwise, employers will need to reclassify affected exempt employees as non-exempt.

Determine the hourly rate for reclassified employees. Employers will need to establish hourly rates for reclassified employees. Employers should consider the impact that overtime hours and wages will have on the employees’ overall compensation (and the employer’s payroll budget), and whether to reduce hourly rates to account for anticipated overtime. To do so, employers may want to discuss work schedules with managers to know who typically works more than 40 hours and by how much.

Establish proper recordkeeping processes. Employers must keep a record of a non-exempt employee’s time worked. Therefore, employers must make arrangements to add reclassified employees to the timekeeping system.

Adjust scheduling. Employers will likely need to start providing schedules for reclassified employees, paying particular attention to overtime, meal periods, and rest periods. Employers will also need to consider whether to modify current work schedules to avoid overtime work for reclassified employees.

Establish training programs. Reclassified employees should be trained to accurately record their time, including all hours worked and meal periods. Managers should be trained in what the non-exempt status means for scheduling, recordkeeping, break time, and payroll purposes.

Adjust payroll. Employers should coordinate with internal and third-party payroll providers to ensure the reclassified employees are paid overtime wages, have accurate regular rate calculations under state and federal law, and receive accurate wage statements.

Review company policies. Employers should determine whether the reclassification requires company policies to be adjusted. This would include examining the difference in policies for exempt and non-exempt employees.

The current rule doesn’t provide much time for employers to identify and implement changes, so employers should begin this process immediately, including speaking with qualified counsel to ensure that they are complying with the final rule.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Julie Dunne is partner at DLA Piper and represents leading employers and management.

Garrett Kennedy is partner at DLA Piper and represents employers and senior executives in all aspects of employment-related litigation.

Melody Lilazy is an associate at DLA Piper.

Write for Us: Author Guidelines