The Department of Labor (DOL) has issued the final rule revising the Fair Labor Standards Act (FLSA) Overtime Rule (OT Rule). The new rule will become effective on July 1, 2024. The OT Rule mandates that overtime wages must be a minimum of 150% of applicable wages (time-and-a-half) for time worked over 40 hours in a week.
The new final rule made only one significant change to the OT Rule, which is to increase the salary level. The Salary Level Test is one of the three primary determining factors of whether an employee must be paid overtime compensation after 40 hours of working in a week. The OT Rule determines how to categorize workers as either “Exempt” from overtime wages or “Non-exempt” from overtime wages. Often people believe that an hourly-wage employee is the only category of worker who must receive overtime pay. However, a salaried employee can be categorized as non-exempt – which means that they must be paid overtime – if they do not fulfill the Salary Level Test and the Duties Test set out in the OT Rule. Those tests are discussed in this article.
If a salaried employee is NOT exempt, they will receive overtime pay for time worked beyond 40 hours a week. The required “time and a half” will be based on an hourly rate, which is calculated by dividing their weekly salary by the number of hours they are expected to work each week (generally 40 or 37.5). That is their hourly pay, which will then be increased by 50% to reach the required minimum overtime pay.
To be exempt from overtime, the employee’s situation must fulfill all three tests. The tests are:
- Salary Basis – The employee is salaried, which means that they receive a predetermined amount of pay each week that is not reduced based on the quality of quantity of their work.
- Duties – The employee fulfills at least one of the categories of employee duties (see below) that exempt them from overtime pay.
- Salary Level – Does the employee’s salary meet the threshold requirement for the exemption from overtime pay (see below).
THE SALARY BASIS TEST
If an employee has a set salary and their pay is not reduced if they work that week, even if the work is minimal or poorly done, then they fulfill the salary basis test. It is important to note that an employee can pass the Salary Basis test, but they must also pass the Duties test and the Salary Level test if they are to be exempted from overtime pay.
THE DUTIES TEST
The Duties test has three primary exemption categories: Executive, Administrative, and Professional (EAP). In addition, three other categories of employees are potentially exempt from overtime pay: Computer-Related Employees, Outside Sales Employees, and Highly Compensated Employees.
In the printing industry, one category of employees who must always qualify for overtime pay are “blue-collar” workers. Blue-collar employees do not fulfill the EAP duties test exemptions.
Blue-Collar Workers:
- Blue-collar employees perform work that involves repetitive operations with their hands, and physical skill and energy. Blue-collar employees are not in management. They work in production, maintenance, construction, and similar work. If an employee is in a blue-collar role, they must be paid at least time-and-a-half for time worked over 40 hours in a week.
To qualify for one of the EAP exemptions, the following characteristics must exist:
Executive:
Must receive at least the threshold salary;
- Primary duties must be to manage the company, a department, or subdivision of the company;
- Must direct the work of at least two or more other full-time employees or their equivalent;
- Has the authority to hire, fire, promote, or make other significant personnel decisions, or directly influence such decisions through suggestions and recommendations.
Administrative:
- Must receive at least the threshold salary;
- Primary duties must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers;
- The employee can use their own discretion and independent judgment with respect to matters of significance in their job.
Professional:
- Has two parts, the “Learned Professional” and the “Creative Professional” employee exemption;
- Must receive at least the threshold salary;
- Primary duties must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
- The advanced knowledge must be in a field of science or learning;
- Advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
Computer-Related Employee Exemption:
- Must receive at least the threshold salary;
- Must be employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field performing the following primary duties:
- Primary duties must be
- The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
- The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
- The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
- A combination of the aforementioned duties, the performance of which requires the same level of skills.
Outside Sales Exemption:
- Primary duty must be to make sales or obtain orders or contracts for services for the company;
- Must customarily and regularly be working away from the employer’s place (or places) of business.
OTHER EMPLOYEES WHO MAY BE EXEMPT
Highly Compensated Employees (HCE):
- Must earn at least the HCE salary required by the OT Rule;
- Must perform at least one of the duties of the listed exemption roles of Executive, Administrative, Professional (EAP) employees (listed above). However, the HCE test is meant to “streamline” the exemption analysis because the DOL believes that a very high level of compensation is a strong indicator of an employee’s exempt status and eliminates the need for a detailed duties analysis. So, unless the HCE is a “ghost” worker, then it is likely that you can safely assume that the DOL will accept the HCE employee as exempt.
THE NEW SALARY LEVEL TEST
The Salary Level in the new OT Rule has two increases in quick succession – one as of the effective date, July 1, 2024, and the second increase on January 1, 2025.
First, for employees who fulfill the Duties Test for EAP, Computer-Related Employees, or Outside Sales, the new Salary Level requirement is:
- As of July 1, 2024, a weekly salary of $844, which is $43,888 annually.
- As of January 1, 2025, the Salary Level increases to $1128 each week, which is $58,656 annually.
For HCE employees that pass the Duties Test, the threshold salary will be:
- As of July 1, 2024, $132,964 annually
- As of January 1, 2025, the HCE threshold salary will increase to $151,164 annually.
The new final OT Rule also requires that the threshold salaries increase every three years. The first of these tri-annual increases will be on July 1, 2027. The new threshold salary amount will be announced 150 days before the increase, which is February 1, 2027. This will repeat three years later in the year 2030.
The final rule does not change existing salary levels for U.S. territories such as Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands – all which are at $455 weekly or $23,660 annually. It also leaves in place the threshold salary for American Samoa, which is $380 weekly or $19,760. The motion picture producing industry also remains the same at $1,043 weekly or $54,236 annually.
LEGAL CHALLENGES TO THE NEW OVERTIME RULE
Lawsuits will be filed in federal court challenging the OT Rule and seeking to prevent it from going into effect. This tactic was used successfully in 2016 and blocked that version of the OT Rule from ever going into effect. The federal court’s injunction stopped the OT Rule implementation. After the administration changed parties with the November 2016 election, the 2016 revision was rescinded it. A new revision was made, and it went into effect in 2019. That is the version of the OT Rule currently in place. It is possible that the same scenario will play out with this revision of the OT Rule if the political party controlling the executive branch changes in the November 2024 election.
PREPARING FOR THE NEW OT RULE
In anticipation of the federal litigation, companies should not feel compelled to immediately implement salary increases to keep certain employees exempt from overtime, or to create newly exempt positions.
The first step is to evaluate the status of employees that are currently exempt and see how their salary compares to the new threshold salary, because they may not remain exempt. The next step is to determine the financial impact of either paying the increased threshold salary to the employees who will need raises to remain exempt from overtime pay or paying their existing salary with overtime for any hours worked exceeding 40 hours each week. The salary does not have to be changed to hourly wages – it is acceptable to calculate the hourly equivalent pay and then pay time-and-a-half of those hourly equivalents as the overtime wages.
The review also needs to consider the employee position classification. In the printing industry, production, finishing, mailing, and warehouse employees will not be exempt and will need to be paid overtime for any time exceeding 40 hours of work per week. Customer Service Representatives (CSRs) and people in equivalent positions should be reviewed to see if they fulfill the three tests – Salary Basis, Duties, and Salary Level. If a CSR cannot independently make a significant decision about a business matter – for instance, stopping a job – then they may not fulfill the duties test and may not be exempt from overtime pay.
To perform the financial calculations, the Alliance has two simple Excel worksheets available to download. One of the worksheets has a formula for salaries based on a 40-hour workweek, and the second worksheet has a formula for salaries based on a 37.5-hour workweek. Just plug in the salaries in column “C” and the projected weekly overtime hours in column “H.” The formulas programmed in the worksheet will determine the cost to the company above or below the threshold salary in column “O.” Based on that number, the company can determine the financial impact of increasing an employee’s salary or paying the overtime, instead.
The worksheets also have a calculation for those employees who classified as HCE to determine the impact of raising their wages to continue to classify them as an HCE exempt employee.
In addition, companies should consider the wage compression that will occur if salaries are raised to maintain exempt status for certain employees. It may result in a less senior employee being paid a salary that is very close to their supervisor. While on its face this is not a problem, it may require raising the supervisor’s salary proportionately to be equitable in the eyes of the more senior employee.
STATE LAW MAY VARY AND REQUIRE HIGHER PAY THAN THE OT RULE
Several states, local cities, and counties have higher threshold salary requirements than the current FLSA. Some of them are higher than the new OT Rule threshold salary requirement. It is unknown whether the others will be raised proportionately when the new OT Rule goes into effect. The locations where the threshold salary is currently more than the FLSA requirement are:
- Alaska
- California
- Colorado
- Maine
- New York
- Washington
In addition, many states do not recognize the HCE test, so employers in those places do not have to meet the FLSA standard. Those states include:
- California
- Colorado
- Connecticut
- Hawaii
- Illinois
- Maine
- Maryland
- Minnesota
- New Mexico
- Oregon
- Pennsylvania
- Rhode Island
- Washington
- Wisconsin
FUTURE OF THE OVERTIME RULE
Even if the new final OT Rule is blocked by a federal court and does not become effective, a different proposal will likely be made for the OT Rule. It will be worthwhile to spend time looking at the positions in your company and determining whether they could be exempt, and if so, performing the three different tests. Then, when and if a new OT Rule goes into effect, your company will be ready and will have planned for the financial changes that will accompany the new rule.
PRINTING United Alliance will keep you up to date on the status of the OT Rule and any legal challenges.
In this article Adriane Harrison, Vice President, Human Relations Consulting, PRINTING United Alliance, addresses the new federal overtime rule. More information about labor and employment laws and regulations can be found at the Center for Human Resources Support or reach out to Adriane directly if you have additional questions specific to how these issues may affect your business at: aharrison@printing.org.
To become a member of the Alliance and learn more about how our subject matter experts can assist your company with services and resources such as those mentioned in this article, please contact the Alliance membership team: 888-385-3588 / membership@printing.org.