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05.06.24   |   Insights

Understanding the Impact of the Department of Labor’s New Overtime Pay Rule

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The Department of Labor has again announced a new rule that changes when salaried workers may be entitled to overtime pay. Here is why it matters:

Overtime Pay

Workers paid by the hour are likely familiar with the federal regulations in place for overtime pay or the pay an employee receives when he or she works more than 40 hours in a given week. When hourly workers take on these additional work hours, they enjoy 1.5 times their typical hourly pay for each hour of overtime that they work. Salaried employees can only enjoy this 50% bump in pay if they earn below a certain amount for their yearly salaried earnings. Full-time, salaried employees who earn above $684 per week, or $35,568 per year, are considered exempt from the federal regulation governing overtime pay, meaning that they do not get time-and-a-half pay for their additional hours worked.

Changes Under the New Rule

The new rule from the Department of Labor raises the threshold used to determine if a salaried worker is exempt from overtime pay. The new rule does this in a two-step process, initially raising this threshold to earnings of more than $844 per week or $43,888 per year beginning on July 1, 2024. The second part of this new rule then raises the threshold again on January 1, 2025, up to $1,128 per week, or $58,656 per year for a full-time, full-year worker. The intent of structuring the threshold increase this way is to make it gradual so businesses can better adjust to additional overtime pay obligations for salaried employees. These changes are expected to bring millions of workers throughout the country under the new threshold, securing time-and-a-half pay for many salaried workers for their overtime work.

The new rule also puts a methodology in place to ensure adjustments are made to the threshold over time by automatically updating it every three years. Prior to this change, there was no automatic adjustment feature in place, meaning the exemption threshold could only be updated when specific rules or regulations were issued. This last occurred in 2019 when the Department of Labor set the threshold at its current level, which is significantly lower than the level set by the new rule. Since this time, inflation has reduced the sufficiency of this threshold as prices and wages have risen over time. Automatically updating the threshold provides a mechanism to address these issues. The automatic updates also provide a more predictable framework that helps both employers and their workers better understand a worker’s terms of employment. By knowing what the threshold adjustment looks like in advance, employers can make more informed decisions on how to structure their staffing and hours. Meanwhile, workers can get a better picture of what they can expect from the additional hours they work.

While the increase in threshold is significant, it is only one of many factors used to determine whether an employee is exempt from overtime regulations. In addition to being paid on a salary basis and at an appropriate salary level, the employee must pass the job duties test, which considers factors such as certain types of required job duties and the employee’s level of authority in their position.

Potential for New Challenges

This new rule is expected to be challenged by business groups that may want to push back in the interests of employers that may not be able to pay out additional compensation needed to be paid to salaried workers previously treated as exempt from overtime pay. The Department of Labor saw similar legal challenges back in 2016 when it proposed a significant increase to the overtime exemption threshold, similar to the new rule. The rule was later walked back after extensive legal challenges, which ultimately led to the current threshold amount.

This new rule could have significant consequences for workers and employers throughout the country. If you have any questions about this new rule or other concerns regarding your business or employment matters, please contact one of our offices, and our experienced attorneys can help you.

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