Even as the regulation faces legal challenges, business leaders must maintain compliance and consider the implications for their company’s finances.
By Maggie Mancini
A new rule under the Fair Labor Standards Act (FLSA) is expanding the right to overtime pay for millions of previously exempt workers. The first portion of the Department of Labor’s new overtime regulation, which went into effect on July 1, makes salaried workers earning less than $844 per week or $43,888 per year eligible for overtime pay. The second portion of the rule, which will go into effect on January 1, increases the salary threshold even higher to include workers earning less than $1,128 per week or $58,656 annually. Beginning in 2027, these earning thresholds will be updated every three years to ensure that overtime regulations keep pace with changes in employee salaries.
Additionally, the total annual compensation threshold for highly compensated employees—who are not entitled to overtime pay under the FLSA if certain requirements are met—has risen from $107,432 per year to $132,964 per year. That number will increase again to $151,164 per year on New Year’s Day.
The FLSA’s more than 350-page ruling is extensive and covers a wide range of topics related to overtime pay, classification of workers, and the standards through which employees may be considered exempt from overtime, says Meg Ferrero, vice president and assistant general counsel at ADP. She adds that it’s important for employers to understand the implications of all these changes, including the new dollar limits and what they mean from a company finance perspective.
“Employers must consider the human impact of any change in an employee’s classification and the impact to the employee of moving from an exempt classification to a nonexempt classification,” Ferrero says. “Classifying employees as exempt or nonexempt can have significant implications, not just financially, but also in terms of employee morale and perception.”
For employers grappling with how to address the changes included in the new FLSA overtime rules, Ferrero recommends the following.
- Analyze the changes and how they will impact company finances. HR leaders should consider whether it makes sense to maintain an employee’s current exempt status and adjust their salary to meet the new thresholds or reclassify the employee as nonexempt, begin tracking their work time, and paying them overtime when it’s due.
- Be ready to have sensitive conversations with employees. In some cases, HR leaders will need to discuss the impact that the changes will have on employees’ classification and what any potential changes to their exempt status means for their day-to-day work. Ahead of and after the rule goes into effect, employers should make sure they plan as much as they can, considering both the financial and human aspects of these changes. HR leaders can utilize tools like dashboards to identify who will fall below the new threshold and what actions need to be taken as a result.
- Maintain compliance with additional state regulations. In addition to federal rules, state requirements can pose additional compliance challenges, so HR leaders should be aware of and account for any state-specific rules that may apply. Current law in California requires that employers pay nonexempt employees one and one-half times their pay rate for working more than eight hours per day or 40 hours per week. Additionally, nonexempt employees in California are entitled to double their pay rate for working more than 12 hours in a day or for working more than eight hours on a seventh consecutive day of work.
- Keep employees informed and engaged. HR leaders can conduct financial analyses to compare the cost of raising an employee’s salary to meet the new thresholds versus converting the salary to an hourly rate, considering the number of hours the employee works in a week. It’s important that HR leaders consider the human impact of these changes and strive to keep employees in a good place, both emotionally and professionally.
“Salary threshold changes require careful planning and thoughtful communication,” Ferrero says. “Employers should conduct a thorough analysis of their current practices and consider how these changes will impact their organization and their employees.”
Even as the new rule is set to go into effect, it still faces a bevy of legal challenges that have impacted previous efforts to raise the salary thresholds for overtime pay eligibility. One of those legal challenges—filed by the state’s Attorney General—was successful, as a district court in Texas has temporarily halted implementation of the FLSA rule specifically for employers in Texas. Employers outside of Texas, however, must maintain compliance with the rule changes.
The U.S. Supreme Court has also agreed to review a case that will determine how difficult it should be for employers to prove that their employees are exempt from overtime pay under the FLSA. The Court will hear that case during its next term, which begins in October.
