Jan. 1 Deadline Is Approaching for OT Final Rule; Will You Be Ready?

Unless you have been living or working under a rock, you are aware that the U.S. Department of Labor (DOL) updated requirements for minimum-wage exemption and overtime pay in an April 23 final rule.

Step 1 in that rule called for covered organizations to ensure all employees who are classified as exempt from overtime make at least $43,888 in annual base salary ($844 per week) beginning on July 1 (up from the previous $35,568 annual [$684 per week] standard outlined in the DOL’s 2019 final rule).

In September, questions about the DOL’s ability to set such salary thresholds under the Fair Labor Standards Act (FLSA) were resolved (for now) when the U.S. Court of Appeals for the Fifth Circuit sided with the agency in the case Mayfield v. U.S. Department of Labor and, in its determination, considered recent Supreme Court guidance on the authority delegated to — and historically used by — federal agencies (from the adjoined cases Loper Bright Enterprises v. Raimondo and Relentless v. Department of Commerce).

So … that worked to confirm (again, for now) Step 2. Consider this your reminder that Jan. 1, 2025, is the deadline for covered employers (likely yours) to ensure exempt employees make at least $58,656 in annual base salary ($1,128 per week).

The clock is ticking. Total rewards professionals:

Is your organization in compliance?
If not, will it be compliant come Jan. 1?

A Caveat and Critical Considerations

Before we proceed, let’s address the “for now” caveat in the previous section. The Mayfield ruling doesn’t fully protect agencies such as the DOL from further legal challenges (on setting salary thresholds and related overtime/exemption eligibility, and more), so keep tabs on the status of pending lower-court litigation challenging the Jan. 1, 2025, increase. A delay/injunction could occur, but plan for the rule and its requirements to go through.

Also, consider requirements at both the federal and state/municipal levels. Five states (Alaska, California, Colorado, New York and Washington), three New York counties as well as New York City have their own salary thresholds. Organizational compliance must reflect the stricter standard (which, as of publication, is the one at the state, county or city level — even with the raised federal bar). Also, the Mayfield decision applies to regulations at the federal level, not to those specific to a state.

In the meantime, developing and implementing strategies to comply with the DOL final rule (and supplement existing work in this area) may help you and your organization:

Budget for any affiliated labor cost increases;
Identify and address instances of pay inequity;
Identify and address issues within individual and collective job descriptions and job architectures; and
Avoid penalties, fines and legal disputes.

To-Dos and Due Diligence

Assuming Jan. 1 is a go, legal experts shared several tasks HR and TR professionals need to plan for and accomplish in the days and weeks to come.

Primary is a review and, perhaps, updating of job descriptions to fully reflect the duties and responsibilities affiliated with each organizational position. If such work was performed in anticipation of the Step 1 deadline, it’s time for a refresher now that the $58,656 threshold is in play. During this exercise, verify that each position is correctly classified as exempt or nonexempt based on FLSA guidance and/or the criteria within state and local employment laws. (The DOL’s fact sheets that outline overtime exemption requirements can prove helpful here.)

Audit and tax advisory firm CliftonLarsonAllen reminded HR/TR pros that for employees to be eligible for overtime exemptions, the job and employee must pass three tests.

Salary basis: The employee must be paid a predetermined, fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
Salary level: The amount of salary paid must meet the minimum required weekly salary (again, $1,128 per week as of Jan. 1).
Job duties: The employee’s job duties must primarily involve executive, administrative or professional (EAP) duties as defined in the DOL fact sheets.

In cases where the classification of individual employees is called into question, law firm Brownstein Hyatt Farber Schreck advised to strategize on the best way to handle the matter (i.e., by reclassifying such workers as hourly or increasing their salaries to meet the new thresholds). In a website post, it recommended to account for budgetary and other business considerations, and consider questions such as:

How many hours per week does the employee normally work?
If the employee is reclassified as nonexempt and overtime-eligible, what will that mean to the bottom line?

Assuming the employee meets the duties test for the applicable exemption, does it make more sense to increase the employee’s compensation to meet the new salary thresholds? Or, is it better to make the employee nonexempt and adjust staffing to minimize overtime costs?

In situations where payroll changes are needed to comply with the upcoming deadline, payroll solutions company ADP encouraged employers and their HR/TR pros to provide formal notices to affected employees as not only a leading practice but, in some cases, a deference to employment law requirements.

In a post on its website, ADP advised, “Many states and local jurisdictions require employers to provide advance notice about pay changes. Several of these laws specify the amount of notice required. ... Some states require advance notice but don’t specify how much time is required. Check your state and local law to ensure compliance. In the absence of a specific notice requirement, consider providing notice at least seven days before the change becomes effective.”

ADP noted that some states require employers to provide a notice (often called a “wage theft” notice) at the time of hire to employees that contains information about their employer, pay and, in some cases, whether they are classified as exempt or nonexempt from overtime. “Typically, an updated wage theft notice must be provided when any of its information changes,” ADP shared. “Check your state and local law to ensure compliance.”

For notices and more, training is likely a critical component of effective communication. Toward that, ensure proper training is developed for — and delivered to — managers and newly nonexempt employers.

Employment law website JD Supra recommended that all training occur before any changes take effect. In a recent news release, it stated, “The specifics may vary from business to business, but you’ll want to cover scheduled hours, OT approval policies, timekeeping procedures, rules about meal and rest breaks, and more.”

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