The highly anticipated U.S. Department of Labor (DOL) rule to expand overtime protections is under review at the White House Office of Management and Budget (OMB), meaning that the release of the DOL’s final review is likely imminent. The proposed rule, announced in September 2023, would increase the required salary threshold for employees to be considered exempt from overtime requirements as executive, administrative, professional, or highly compensated employees.  The rule is anticipated to affect overtime eligibility for over three million workers. While employers have yet to see the final version of the rule, there are steps employers can take now to prepare for its release, which may impact how they classify and pay employees.

The Fair Labor Standards Act (FLSA) requires that overtime be paid to employees for hours worked over 40 in a week unless the employee meets a certain exemption. Employees exempt from overtime include those employed as bona fide executive, administrative, or professional employees – commonly referred to as the “white collar” exemptions. To qualify, employees generally must meet: (1) a salary threshold test, that is, they are compensated on a salary ¹ basis at a rate of $684 per week, or $35,568 annually; and (2) a job duties test. Additionally, “highly compensated” employees performing office or non-manual work and paid a total of $107,432 or more (which must include at least $684 per week paid on a salary or fee basis) are also considered exempt if they customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee.

The proposed rule does not change the duties test for the current exemptions, but the new rule would increase the salary threshold for executive, administrative, and professional employees to $1,059 per week, or $55,068 annually. A footnote to the proposed rule also indicates that by the time the final rule would be released, the updated salary threshold may be closer to $60,209 based on a review of 2024 wage data. For highly compensated employees, the salary threshold would increase to at least $143,988 annually (which must include at least $1,059 per week paid on a salary or fee basis). Furthermore, the proposed rule includes an automatic escalator clause, meaning that every three years, automatic increases to the salary threshold requirements would take effect.

On March 1, 2024, the OMB received the final rule for review. The DOL has indicated that the rule will go into effect 60 days after it is announced. Legal challenges to the rule are anticipated, but the outcome of those challenges remain uncertain. ²

What will the rule mean for employers? For certain employees classified as exempt, but do not meet updated salary thresholds, employers will need to either increase their salary, or, alternatively, start paying them overtime for hours worked over 40 in a week. And employers may not have much time to implement changes once the rule is released.

To prepare for the final rule, there are steps employers can take now. The first step is to identify those employees classified as overtime-exempt who are potentially impacted by this rule. For those classified as exempt as executive, administrative, or professional employees, a suggested range would be to flag positions making $60,500 or less.

For those identified, start thinking about whether the employer will increase the employee’s salary to comply with the final rule or, alternatively, convert them to non-exempt status and pay them overtime. In making this determination, one major question will be cost – which option is more expensive? To help answer that question, if possible, employers may want to start monitoring hours worked by those employees now, to ascertain how many hours in excess of 40 those employees typically work each week.

Cost is not the only consideration. Employers should also consider:

• How would conversion to non-exempt status affect employee morale? Would employees view it as a demotion? Many employees feel that exempt status carries a certain meaning – that as exempt employees, they carry a certain level of importance and prestige within the company. Exempt status also comes with flexibility that non-exempt employees may not have.
• Will the employee be converted to hourly/non-exempt or salaried/non-exempt? 
• How will the employee’s hours be tracked? Relatedly, how will the employer ensure the employee is not performing “off the clock” work?
• How will the employer calculate overtime and the regular rate of pay?

This process also provides an opportunity to evaluate whether the position truly meets the duties test of the exemption rules, and whether the position meets the requirements of any applicable state law that may be stricter.

Finally, employers should determine how these changes will be communicated to employees. In addition to communicating the change, this process may include developing a training plan for those employees who will need to start tracking time, and for supervisors of employees who are being reclassified.

We will be monitoring implementation of the final rule and will provide updates. If you have questions on this topic or preparing a plan for your employees, please contact Kayla Ernst or any member of Ice Miller’s Workplace Solutions team.

^{[1] Administrative and professional employees may also be paid at least this amount on a “fee” basis. Additionally, the salary requirement does not apply to specific professions, such as employees practicing law or medicine.}

^{[2] Arguments that are likely to be advanced in legal challenges include: (a) that the DOL has overstepped its authority in increasing the salary thresholds, and (b) that the automatic escalator clause is improper because those changes would not involve a notice and comment period.}

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.