By Rutu Ruparel

The U.S. Department of Labor recently announced a significant update to the Fair Labor Standards Act (FLSA), introducing a new final rule that raises the minimum salary for most workers exempt from overtime pay. This change will impact how and when businesses must compensate employees for working overtime.

Key Changes to the Overtime Rule

Previously, salaried workers in certain executive, administrative, and professional roles earning less than $35,568 annually were generally exempt from overtime pay. However, starting July 1, 2024, businesses must deliver overtime pay to salaried workers who earn less than $43,888 a year. This threshold will further increase to $58,656 on January 1, 2025.

Impact on Small Businesses

Employers will now be required to pay salaried employees at least time-and-a-half for working beyond 40 hours in a single workweek. For highly compensated employees, the new salary threshold for exemption from overtime will increase from $107,432 to $132,964 starting July 1, 2024. That threshold will rise again to $151,164 on January 1, 2025. Additionally, salary thresholds will update every three years starting July 1, 2027.

Options for Small Employers

Small employers have several options to consider in response to the new overtime rule:

  1. Reduce or Eliminate Overtime Hours: Limit the amount of overtime worked to control costs.
  2. Increase Salaries: Increase employee wages to meet the new threshold to maintain their exempt status..
  3. Use Annual Bonuses: Employers can use annual bonuses to satisfy up to 10% of the salary threshold for highly compensated employees.
  4. Adjust Base Salaries: Decrease the portion of the employee’s base salary, ensuring they still earn at least the applicable hourly minimum wage, to cover the increased overtime pay.
  5. Combination Approach: Implement a mix of the above strategies to manage costs effectively.

Exemptions from the New Overtime Threshold

Although the FLSA does not offer explicit exemptions for small businesses, the updated salary thresholds typically encompass employees working for enterprises with an annual gross volume of $500,000 or higher in sales. Additionally, it applies to employees covered under the law due to their involvement in interstate commerce or the production of goods for commerce. For businesses operating in states with more protective overtime standards than those outlined in the FLSA, the higher standard applies in that state.

Steps for Employers

To comply with the new rule, employers should:

  1. Review Salaries: Ensure that exempt employees’ salaries meet or exceed the new thresholds.
  2. Adjust Compensation: Consider increasing salaries, paying overtime, or limiting overtime hours.
  3. Communicate Changes: Explain the new requirements to employees, emphasizing the mandatory nature of the changes and promoting them positively.
  4. Regulate Timekeeping: Train newly non-exempt employees on accurate time tracking.

The new DOL overtime rule will significantly impact small businesses, requiring adjustments to salary structures and employee classifications. By proactively reviewing and modifying compensation strategies, small business owners can navigate these changes effectively while maintaining compliance with the FLSA.

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