New overtime exemption rule: What you need to know

On April 23rd, 2024, the U .S. Department of Labor, the DOL, released a final rule that will increase the minimum salary required to qualify for exemptions from the federal overtime requirements for executive, administrative, professional, and highly compensated employees. The final rule increases the minimum salary requirements for these exemptions first on July 1st, 2024, and then again on January 1st, 2025.

In this podcast, we'll cover key details about the upcoming changes and discuss what employers need to know. Welcome to HRpreneur. I'm Jim Duffy. From Main Street to your street, the HRpreneur podcast is centered around helping small businesses like yours gain the knowledge you need from HR, payroll and hiring to time, taxes, benefits and insurance. Today, we'll talk with our guest, Michael Grosso, about what you need to know to navigate the new overtime exemption rules.

Michael is senior counsel with ADP's Human Capital Management Group. Hello there, Michael. It's great to have you on our podcast. Welcome to the show. Thanks, Jim. It's good to be here with you.

All right. Let's dig in here. So before we dive into the changes, can you please provide us some background on what it takes to be exempt from overtime under current federal law? Sure. That's a great place to start.

To fall within the executive, administrative, professional employee exemptions from overtime under federal law, An employee generally must one, be paid a salary, meaning that they are paid a predetermined and fixed amount that is not subject to reduction because of variations in quality or quantity of work performed. This is known as the salary basis test. Two, they must be paid at least a specified weekly salary level.

And finally, three, primarily perform executive, administrative, or professional duties as provided in the DOL's regulations. This is known as the duties test. Highly compensated employees performing office or non -manual work and paid a total annual compensation of a specified amount are exempt from overtime if they customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee identified in the standard test for exemption.

The duties test and salary basis test won't change under the recent rule, which is more centered around the minimum pay requirements for these exemptions. Michael, thank you for that refresher.

Let's move on to the upcoming changes. What's the first change you would like to discuss today? Well, effective July 1st, 2024, the minimum salary required for the executive, administrative, and professional employee exemptions from overtime will increase from $684 per week to $844 per week.

This means that to qualify for exemption from the overtime requirements under federal law beginning July 1st, 2024, employees will be required to be paid a minimum weekly salary of $844 and continue to perform the applicable job duties.

Under federal law, employers will continue to be permitted to use non -discretionary bonuses, incentive payments, and commissions to satisfy up to 10 % of the minimum salary requirement, for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least annually.

By the way, I'd like to hold off on discussing changes to the pay requirements to the exemption for highly compensated employees until later, because it works a little bit differently. Yeah, Michael, that sounds great. We'll get to that in a few minutes.

For the executive, administrative, and professional employee exemptions, Employers will see another increase to the minimum salary requirement relatively soon, correct? Yes. Effective January 1st, 2025, the minimum salary required for the executive, administrative, and professional exemptions from overtime under federal law will increase from $844 per week to $1,128 per week.

Again, employers will continue to be permitted to use non -discretionary bonuses, incentive payments, and commissions to satisfy up to 10 % of the minimum salary requirement as long as these forms of compensation are paid at least annually. Michael, are there any scheduled increases after January 1, 2025?

The final rule includes a mechanism to automatically update the minimum salary requirements every three years to be determined by the DOL using earnings data published by the US Bureau of Labor Statistics. The next update... will take place on July 1, 2027. Thank you for clarifying that.

So what options do employers have if they currently have one or more employee who earn a weekly salary of less than the new minimum requirement? Well, if employers exempt employees fall below the new salary threshold, they will generally have two options. One, reclassify employees as non -exempt and pay them overtime whenever they work more than 40 hours in a work week. Or two, they could raise their salary to meet the new requirement.

So what are some steps impacted employers should consider taking as soon as possible if they haven't done so already? Well, first, employers can review the final rule and guidance. The DOL has published a copy of the final rule and answers to frequently asked questions. Also, they can review their current employee classifications. Take this opportunity to review all exempt classifications, to ensure that employees still qualify under the existing duties tests.

Then, an employer can evaluate the impact on their business. This includes identifying those employees who currently earn less than $844 per week and $1,128 per week and are classified as exempt from overtime. Finally, they can watch for potential updates. The final rule will likely face legal challenges. we will be monitoring the status of the rule closely and updating our content as any developments unfold.

Excellent. So Michael, let's turn to the exemption from overtime for highly compensated employees. I know that exemption is used less often than the others we've discussed, but will the pay requirements for that exemption also be changing? Yes. On July 1st, 2024, the minimum total compensation required for the highly compensated employee exemption will increase to $132,964 per year, including at least $844 per week that must be paid on a salary basis.

And then on January 1, 2025, the minimum total compensation required for the highly compensated employee exemption will increase to $151,164 per year, including at least $1,128 per week, that must be paid on a salary or a fee basis. These figures will also be updated every three years. So what are the options for complying with the new pay requirements for the highly compensated employee exemption?

If an exempt highly compensated employee's weekly salary is less than $844 as of July 1st, 2024, the employer must either raise their salary to $844 per week or reclassify them as non -exempt. If an exempt, highly compensated employee's weekly salary is at least $844, but their total annual compensation is less than $132 ,964 per year, the employer generally has three options.

First, raise their total annual compensation to $132,964 per year, but if they elect this option, they should review the employee's job duties to ensure that they continue to qualify for the highly compensated employee exemption. Second, they could reclassify the affected employees as non -exempt and pay them overtime whenever they work more than 40 hours in a work week. Or finally, apply the full duties test for the administrative, professional, or executive exemptions.

If the employee satisfies the full duties test of one of these exemptions, they can classify them as exempt under one of these exemptions and keep the compensation costs the same by simply meeting the new weekly salary requirement for those exemptions rather than raising their total annual compensation to $132,964 per year. If the employee cannot fully satisfy one of the duties tests, then select one of the first two options. Another decision will have to be made before January 1st, 2025.

based on the minimum total compensation requirements that take effect on that date. Thank you for that.

Michael, how will the new federal rule affect employees in states that have their own rules on exemption from overtime? Generally, if a state law is more protective, in other words, requires a higher salary amount or has duties tests that are more difficult to satisfy, then the state law must be followed. Currently, only a few states such as Alaska, California, Colorado, New York, and Washington have minimum salary requirements for exemptions that exceed $844 for one or more of the exemptions.

Therefore, employees in most states will be affected by the federal changes. Now keep in mind that state rules may prohibit employers from using bonuses to satisfy part of the salary requirement. So to maintain the state exemption in these locations, employers must satisfy the state's requirement with a salary alone. Employers should be careful to check their state law to ensure compliance. Michael, excellent. This is tremendously helpful information. This brings us to the end of our episode.

Again, I'd like to thank you for stopping in. We enjoyed having you here. During your conversation, Michael, I took a few notes. And if you don't mind, I'll just kind of give a quick recap. But keep me honest, all right? First of all, the minimum salary required for the executive, administrative, and professional employee exemptions from overtime under federal law will increase from $684 per week to $844 per week as of July 1, 2024.

The minimum salary required for these exemptions will increase to $1,128 per week effective January 1, 2025. Next item here, the minimum total compensation requirement for the highly compensated employee exemption will also be increasing on those dates. The final rule includes a mechanism to automatically update the minimum salary and compensation requirements every three years. The next update will take place on July 1, 2027.

Another point here is if exempt employees fall below the new salary threshold, employers will generally have two options. The first one being reclassify the employees as non-exempt and pay them overtime whenever they work more than 40 hours in a work week or two, to raise their salary to meet the new requirement. Another point here, employers should begin evaluating the cost and impact of these options as soon as possible. And lastly, state laws should also be considered.

So I covered a lot there. How did I do? You nailed it, Jim. Okay, perfect. Thank you, Michael. So presented by ADP. HRpreneur focuses on the entrepreneurs and business drivers who are shaping the growth of their companies and positively impacting the lives of their employees. With each episode, we'll bring the experts to you, answer your questions, and help you think beyond today so you can discover more success tomorrow. Thanks also to our listeners for joining us for today's episode.

Be well, and we hope you'll join us again soon. This content is based on generally accepted HR practices, is advisory in nature, and does not constitute legal advice or other professional services. ADP does not warrant or guarantee the accuracy, reliability, and completeness of the content. Employers are encouraged to consult with legal counsel for advice regarding their organization's compliance with applicable laws. This content is current as of the published date.    Copyright © 2024 ADP, Inc. All Rights Reserved. The ADP logo, ADP, RUN Powered by ADP, and HR{preneur} are registered trademarks of ADP, Inc. and its affiliates. All other marks are the property of their respective owners.