Updated DOL Overtime Rule Expands Overtime Eligibility to Millions

In a significant update to its regulations, the U.S. Department of Labor (DOL) Wage and Hour Division has announced a finalized rule that substantially increases the salary thresholds for overtime eligibility.

This change mandates new compensation standards for executive, administrative, professional (EAP), outside sales and computer employees, bringing millions of salaried workers into the eligibility fold for overtime pay. Prior to this, the DOL overtime rule hadn’t been updated since 2019.

Understanding and preparing for the new DOL overtime rule is critical, especially given the short timeframe until the first phase takes effect on July 1. This rule poses significant financial and operational impacts for small and mid-sized businesses.

Let’s dive into the specifics of the DOL overtime rule, explore its effects on the broader business landscape and particularly on smaller enterprises and provide strategic advice to navigate these changes efficiently to ensure compliance and optimize financial management.

Overview of the Updated DOL Overtime Rule

The updated DOL overtime rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, will be introduced in a structured approach with phased increases allowing businesses to plan and adapt gradually.

This phased implementation is designed to help businesses, especially small to medium-sized enterprises, manage transitions without abrupt financial strain. Here’s a detailed breakdown:

Initial Change: Effective July 1, 2024

• Standard Salary Level

Increases from $684 per week ($35,568 annually) to $844 per week ($43,888 annually)

• Highly Compensated Employee Threshold 

Increases from $107,432 annually to $132,964 annually, maintaining a weekly payment basis that matches the new standard salary level

Subsequent Adjustment: Effective January 1, 2025

• Standard Salary Level

Rises further to $1,128 per week ($58,656 annually)

• Highly Compensated Employee Threshold

Adjusts to $151,164 annually, aligning with the increased standard salary level

Future Updates: Every Three Years from July 1, 2027 

• Salary thresholds will be updated using a set methodology that applies current earnings data, ensuring thresholds reflect economic realities and labor market changes.

RELATED: What You Need to Do Now to Prepare for the Upcoming FLSA Overtime Rule >>

Understanding Exemption Criteria: An Overview

Under the Federal Fair Labor Standards Act (FLSA), most employees are entitled to an overtime rate of 1.5 times their standard pay for any hours worked over 40 in a week—unless they qualify for an exemption.

It’s important to remember, the salary threshold is just one component necessary to qualify for a “white-collar” overtime pay exemption. Employees must meet all three of the following key tests:

• Salary Basis Test 

Employees must be paid a predetermined and fixed salary that is not subject to reductions based on the quality or quantity of work performed. This ensures that the pay is consistent regardless of variations in work output.

• Salary Level Test

The salary paid must meet or exceed the minimum specified threshold. The new thresholds are designed to reflect a more realistic living wage and are set to adjust every three years to keep pace with economic changes.

• Duties Test

Employees must primarily perform executive, administrative, or professional duties. These categories are defined in the Department’s regulations and include tasks that generally require higher levels of responsibility, decision-making and oversight.

RELATED: Exempt vs Nonexempt - What's the Difference >>

Implications for Businesses

The DOL estimates that about 4 million more workers will qualify for overtime by January 2025. In its first year, the rule is projected to facilitate an income transfer of approximately $1.5 billion from employers to workers, achieved through a combination of new overtime payments and salary adjustments to maintain exempt status for certain employees.

While the updated DOL overtime rule aims to correct disparities where lower-paid salaried workers, performing similar duties to their hourly counterparts, receive no additional compensation for extended work hours, it has been met with resistance from various business groups, particularly the restaurant and construction industries. 

Critics argue that the increases could significantly burden small businesses, potentially leading to job cuts, increased consumer prices or even business closures, particularly in regions like the South and Midwest, where income levels typically vary from the national average.

The updated DOL overtime rule will likely result in the following for many businesses: 

• Increased Labor Costs

All businesses will see changes in their payroll expenses. Small businesses, in particular, might experience more strain as they generally have tighter budgets and a larger proportion of employees potentially affected by the new DOL overtime rule threshold.

• Budgetary Revisions

It will be crucial for all businesses to reassess their financial strategies to accommodate these higher labor costs. Small businesses may need to be particularly agile, possibly recalibrating their workforce management and project financing to maintain profitability.

• Operational Adjustments

The new automatic adjustment feature in the DOL overtime rule demands vigilant compliance from all businesses. Smaller businesses, lacking dedicated compliance resources, should be especially proactive in updating their payroll systems and administrative processes.

Strategies for Effective Compliance and Management

As businesses prepare to navigate the complexities of the updated DOL overtime rule, strategic approaches that ensure compliance while optimizing operational efficiency are crucial. 

Here are some key strategies that can help your organization effectively manage the transition and maintain regulatory alignment:

• Comprehensive Payroll Review

Businesses should undertake a detailed review of their current payroll structure. For small businesses, this step is crucial to identify employees newly eligible for overtime and estimate the potential increase in payroll expenses.

• Salary Adjustments

Raising salaries to maintain exempt status might be a viable strategy for employees near the new threshold, particularly in small businesses where controlling overtime expenses is critical.

• Policy Updates

Establishing or refining overtime policies can help manage this new cost variable. Small businesses should consider implementing pre-approval processes for overtime to tighten budget controls.

• Technological Integration

Upgrading payroll and HR systems, or partnering with a certified PEO, can greatly benefit businesses of all sizes by improving efficiency and ensuring compliance. For smaller businesses, this investment can also help level the playing field against larger competitors with more resources.

RELATED: When to Consider Switching Employees from Salaried to Hourly >>

Streamlining Compliance: Your Path Forward with Axcet HR Solutions

As businesses navigate the complexities of the updated DOL overtime rule, strategic adjustments in payroll management and compliance protocols become paramount. This is especially true for small and medium-sized businesses, which may feel the impacts more distinctly. 

Partnering with Axcet HR Solutions, an IRS-certified professional employer organization (PEO), can provide the expertise and support necessary to adapt to these changes effectively. Let us help you optimize your strategies and ensure your business thrives under the new regulatory landscape. Schedule a consultation with our PEO services experts today to safeguard your operations and seize new opportunities for growth.