Will the New Overtime Rule be Implemented?

Probably not. The U.S. Department of Labor (DOL) issued its final rule updating the salary thresholds for exemption from overtime pay under the Fair Labor Standards Act (FLSA) on April 23, 2024. If implemented, this long-anticipated change will significantly impact employers' compensation practices and overtime obligations.

First, here's what employers need to know about the rule:

1. New Salary Threshold The minimum salary level for the executive, administrative, and professional exemptions increased from $684 a week ($35,568 annually) to $855 a week ($43,888 annually) in July 2024 and will increase to $1,128 per week ($58,656 annually) on January 1, 2025. At least three million workers who would otherwise be exempt based on their job duties will qualify for overtime because of the increase in the salary threshold.
2. Highly Compensated Employee (HCE) Threshold The annual compensation level for HCEs rose from $107,432 to $132,964 and will also rise again to $151,164 in January 2025. There is an abridged job duties test for this HCE exemption. It is important to remember here that highly compensated employees are more likely to be considered exempt from overtime because they must customarily or regularly perform only one bona fide exempt duties of an executive, administrative or professional employee, as described in the regulations, whereas non highly compensated employees must perform all bona fide exempt duties of an executive, administrative or professional employee. For example, an employee may qualify as an exempt highly compensated executive if the employee customarily and regularly directs the work of two or more other employees, even though the employee does not meet all of the other requirements in the standard test for exemption as an executive.
3. Automatic Updates The rule establishes a mechanism for automatically updating the salary thresholds every three years, starting in 2027.

Of course, the rule has been challenged. It's worth noting that a similar rule proposed in 2016, which would have raised the threshold to $47,476, was blocked nationwide by a federal judge in Texas just days before it was set to take effect. Now, three lawsuits seeking to invalidate the 2024 rule have been filed in Texas, with one in front of the same judge who ruled against the DOL last time around. The arguments made by the challengers this time around are the same, namely that the rule improperly makes salary the primary factor in determining exempt status and effectively invalidates the job duties test. One of the challengers, the state of Texas, has already won injunctive relief staying the overtime rule, and we can expect a final merits-based ruling later this year. Notably, the injunctive relief only applies to one employer: the State of Texas. However, this ruling bodes well for other employers because the argument that the DOL overstepped its authority to effectively eliminate the duties test applies to private employers too. Before 2024 ends, we are likely to see a merits-based ruling on the rule in several cases.

Employers should monitor these legal developments closely as they prepare for the potential implementation of the new thresholds. It may be prudent to develop contingency plans that can be quickly implemented or rolled back depending on the outcome of legal challenges. Some things employers can do right now while awaiting a merits-based ruling on the DOL’s overtime rule:

1. Identify potentially exempt administrative, executive, professional, and highly compensated employees based on the implemented rule;
2. Consider alternative payment methods for the affected employees; the EAP and HCE exemptions only apply to salaried or fee basis workers, and overtime is to be paid only if these workers work more than 40 hours a week;
3. Consult Andrews Myers to develop a strategy