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New FLSA Overtime Rule: Should You Raise Salaries or Reclassify Employees?

The Fair Labor Standards Act, a cornerstone of employee protection, was enacted in October 1938. Its primary aim was to safeguard employees from unfair pay practices, a mission it continues to uphold more than 85 years later. 

As the law continues to evolve with the changing times, the U.S. Department of Labor recently announced a new overtime rule to further the mission of the FLSA and ensure a fair work environment. While these rules pose challenges, they also present an opportunity to enhance the welfare of employees. 

These new guidelines apply specifically to exempt employees who are not subject to the law’s requirements for minimum wage and overtime pay due to their salaried status. The guidelines raise the weekly and yearly pay thresholds for certain employees to be classified as exempt:

  • Starting July 1, 2024, those meeting the threshold at $684/week ($35,568/year) will need to receive $844/week ($43,888/year) to remain exempt
  • Starting January 1, 2025, the salary threshold for exempt employees will increase again to $1,128/week ($58,656/year)
  • The salary threshold for highly compensated exempt employees will increase to $132,964/year on July 1, 2024, and then to $151,164/year on January 1, 2025

As guardians of the workforce, HR professionals are now at the forefront of reevaluating pay practices. You’ll be tasked with making crucial decisions about whether to reclassify some employees as non-exempt or raise wages for exempt employees whose pay no longer meets the new eligibility thresholds. 

Employers should consider several factors when making that decision. These include administrative and time costs, financial impact, effects on employee morale and turnover, and the need for regulatory compliance. 

Potential Impacts of the FLSA’s New Overtime Rule

Undoubtedly, the new FLSA rule has important implications for employers and their teams. Here are just a few of the ways organizations may be impacted by these changes.

Administrative Burdens

This new rule will likely create an administrative burden, as the two-part threshold raise may require two adjustments to salaries or classifications. This was done to give employers time to adjust their budgets and policies and provide training to reclassified employees.

However, it creates additional work for HR departments. Be aware that HR managers can simply make one adjustment now that sufficiently covers both the July and the January increases, if their budget supports these changes. In doing so, employers and HR managers need to be mindful of state-based rules governing salary thresholds.

Financial Implications

The financial impacts on employers cannot be ignored. Between now and January 1, 2025, companies must either extend a nearly 65% salary increase to keep certain employees exempt or be prepared to pay for overtime increases. Both options could severely impact budget allocation. 

Additionally, employers must think about the fact that this wage increase will be re-evaluated and automatically increased every three years.

Effects on Employees

With these changes, employers might see a shift in employee satisfaction if employees don’t view reclassification as favorable. This may be especially true if reclassified employees also have their wages reduced to mitigate budget impacts.

Deciding to reclassify employees means that some will need to get used to timekeeping rules. Employers will need to meet with employees to explain their new classifications and what changes may come to their work schedules and paychecks as a result. Developing a solid communication plan that explains the benefits of a reclassification will help with this change.

Increase Pay or Reclassify Employees? Considerations for Compensation Audits

Whether an employer decides to increase salaries or reclassify employees will be completely up to HR managers and senior leadership. Though each company must do what works best (as long as it complies with the new FLSA rules), HR departments should consider a few things.

First, consider the nature of the employee’s work, as not all exempt employees are impacted by the rule. Teachers, physicians, lawyers, outside sales, and inside retail sales employees are not included. 

Additionally, you should examine your budget and decide whether you have the means to meet the salary increase requirement. Those who do not should calculate whether it will be more cost-effective to reclassify employees and pay overtime. Keep in mind that you can restrict an employee from working over 40 hours per week but, if they exceed 40 hours, you must still pay overtime for the difference (note that some states have their own overtime thresholds), regardless of whether they received permission to do so.

When the budget cannot accommodate either the salary increase or the overtime pay, employers may consider introducing automation, applying lean principles, or implementing overtime caps to reduce overtime pay costs. They may also have to retrain reclassified employees on how to work more efficiently since many will be used to working more than 40 hours per week.

Finally, you may need to change your policies concerning benefits and bonuses. Though you might want to modify your eligibility rules for these incentives, don’t forget that they are factored into an employee’s overall pay, which in turn affects overtime calculations.

Preparation Makes Way for Success

While the new overtime rule will be disruptive to many workplaces, HR professionals can mitigate problems by preparing well in advance. Fortunately, VirgilHR can help. On June 20, 2024, the CEO of VirgilHR will host a webinar with two special guests to discuss the implications of the overtime rule and what it means for classification and compensation. 

Not only will you get an overview of the rule, but you’ll also walk away with some strategic considerations for your organization. The VirgilHR tool also offers a classification audit that allows you to determine what roles should be exempt or non-exempt, as well as what roles can be contractors versus employees. With the help of the VirgilHR team, you’ll have exactly what you need to work with stakeholders as you all move into the future.