Back to Basics: What to do when salaried employees fall below the new overtime threshold

Editor’s note: The Back to Basics column serves as an accessible way to understand employment law. If you’re new to HR (or just need a little refresher), follow along as the HR Dive team speaks with legal experts, peruses federal guidance and lays out the basics of federal employment law. Feel free to send tips, questions and feedback to [email protected].

An outside sales professional makes an annual salary of $43,000. Because her compensation exceeds $35,568 per year, she is not eligible to earn overtime pay under the Fair Labor Standards Act’s regulations as amended in 2019.

That will change in less than one month, however, thanks to a recent announcement by the U.S. Department of Labor. The agency published its final rule updating overtime pay eligibility, which increases the FLSA’s minimum annual salary threshold via a pair of changes set to take effect over the next several months.

July 1 marks the first increase from the current minimum of $35,568 per year to $43,888 per year. After that, the threshold will next increase to $58,656 per year on Jan. 1, 2025, roughly 65% higher than the present-day mark — and will automatically increase every three years thereafter using a formula outlined by the DOL.

The HR department for our hypothetical sales professional’s employer now has a series of choices to make. The employee could be kept at her current pay level and converted from exempt to nonexempt status, making her eligible to earn overtime pay. Alternatively, the employer could increase her pay so as to exceed the new threshold so that she may remain exempt.

Assuming the latter choice, however, should the employer increase the employee’s pay to meet the July threshold, or should it go further? For example, the employer could opt to increase her pay beyond the January threshold in anticipation of the 2025 rule change. Or it could wait things out to see if some — or all — of the rule gets struck down in court.

There is more to that decision than employers might realize, with considerations ranging from the financial ability of an organization to raise pay to the degree to which employees value being considered a salaried professional. To help readers better contextualize such decisions, HR Dive spoke with employment law attorneys who broke down the process step by step.

Step #1: Identify affected employees

Employers should first identify the population of employees who, based on their salary level, would no longer be classified as exempt, said Brett Coburn, partner at Alston & Bird.

It is a basic step, but employers need to know how many salaried employees have pay that would fall below the coming increases in order to assess the size of any potential pay increases, Coburn said.

As an aside, an employee’s pay is only one component for determining whether that person meets the criteria for exemption under the FLSA. There is also the FLSA’s “duties test,” under which an employee’s job duties must also meet certain requirements for exemption.

“That’s still a critical part for me,” said Deanna Kempinski, senior manager with Baker Tilly’s HR advisory practice, who added that employers may overlook the duties aspect of overtime eligibility. “It’s a great opportunity to level set with positions and job descriptions, and employers need to take the time to evaluate each role.”

DOL’s most recent overtime rule did not make changes to the FLSA’s duties test, but a change in overtime regulations can nonetheless present an opportunity to identify potentially misclassified employees whose duties do not meet those requirements.

“Some of these people may not be comfortably exempt,” Coburn said. “It may be a gray area.”

Step #2: Run the numbers and analyze potential effects

Next, employers will need to determine what it would take to keep an employee’s pay above the new threshold, Coburn said, whether the difference is in the hundreds or thousands of dollars.

One aspect that should be considered is how an affected employee’s pay compares to others in the same role. If the employee’s pay is below that of their comparators, that may indicate a deeper pay equity issue. “You may have an opportunity to mitigate or solve some equal pay concerns by giving those employees a raise,” Coburn said.

In some cases, employers may find that they already had plans to give pay increases to salaried employees who fall below the new threshold. But even planned wage increases can create wage compression concerns, said Jeff Brecher, co-chair of Jackson Lewis’ wage and hour practice group.

Specifically, if an employer decides to increase an employee’s pay to maintain overtime exemption, others who currently make more than that employee could become disgruntled, Brecher said. And given that future overtime exemption threshold increases are planned for 2025 and beyond under the new rule, employers might need to think about what an increase today could mean for its future pay policies, he added.

Another approach toward increasing pay may be to reconfigure the employee’s total compensation, particularly if their compensation package is heavy on bonuses or other incentives, according to Coburn. In that case, employers may be able to “front load some of that into regular salary,” he said, though this kind of change could come with productivity concerns if the incentive structure is viewed as contributing to employee productivity.

The alternative is to keep the currently exempt employee at their current pay and convert them to nonexempt status in time for the July 1 rule change, after which they would be eligible to earn overtime pay at time-and-one-half their regular rate of pay.

Aside from the need to train converted employees on timekeeping logistics, there are also morale implications. While some salaried employees may welcome the change, others may feel that they are being demoted or may no longer be able to take advantage of any job flexibility that their previously exempt status allowed them, Brecher said.

“An exempt employee’s workflow may be fluid, and the employee has flexibility depending on what their circumstances are to decide how they want to complete their work for that month,” he continued. “You lose a little bit of that flexibility.”

Nonexempt status conversion also can affect other benefits and perks, Brecher said. Exempt employees, for example, may have access to more vacation time than nonexempt employees due to the structure of their jobs. Employees who are reclassified may lose those benefits.

Salaried roles are not always compatible with nonexempt status, Coburn said. Currently exempt employees may perform jobs that require, for instance, frequent checking of messages or emails during the late evening hours or on weekends. Such work can be difficult to track for timekeeping purposes, Coburn said, and employees in currently exempt roles may not be in the frame of mind to accurately record it.

Step #3: Make preparations — even with lawsuits on the horizon

DOL’s overtime rule faces legal action that could delay it from taking effect. Business groups filed a lawsuit in a Texas federal court on May 22 asking the court to block the rule from taking effect.

In an email to HR Dive, Coburn said that news of that lawsuit did not change any of his guidance to employers on the subject and added that employers “should definitely be in wait-and-see mode” while continuing to prepare for the July 1 threshold update.

This in part because a court may not issue a ruling before the effective date, but Coburn also said that the January 2025 threshold was the main focus of the May 22 filing, with “very little discussion” about the July 1 update.

“So, in short, I think employers should be preparing for the July increase and considering all of the factors that we discussed earlier this week, but I would not roll out any changes to employees until we get a better sense of when the Court might issue a meaningful ruling in the new case,” Coburn wrote.

There is a higher likelihood that the Texas federal court will enjoin the January 2025 increase than the July increase, Brecher said. Large employers may find it particularly difficult to reverse any changes made in advance of the deadline, and there may not be much time for employers to do so in the event of an injunction anyway, he added. A federal court’s 2016 injunction of the Obama administration’s final overtime rule came just days before the rule was set to take effect.

Step #4: Have your communications strategy ready to go

The way in which an employer communicates changes related to the overtime rule is dependent on the number of employees affected as well as the geographic distribution of those workers, according to Coburn.

If the total number of employees is very small, HR teams could announce the changes to employees in one-to-one meetings with a manager present. But for large groups of affected employees, “I think it’s probably going to start with a written communication to those groups that is then followed up with specific training,” Coburn said.

He added that those communications should be sent to every single affected employee and should include an explanation of why any changes are happening as well as the organization’s expectations around accurate timekeeping, if applicable.

“All that stuff needs to be conveyed in writing and also followed up through a real-life training so that people are clear on what the expectations are and then follow up with documentation that the training happened,” Coburn said. “You want to avoid people saying, ‘No one ever told me.’”

HR should be ready to field any questions employees have, Brecher said, and a more robust option may be to host a webinar or similar presentation explaining the changes.

Employers also might want to consider creating a question-and-answer document for employees to reference as the change approaches, Kempinski said. Those documents can be crafted so as to cover as many bases as possible, but they may not be able to cover every individual circumstance.